Q4 2024 Annaly Capital Management Inc Earnings Call

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Speaker Change: Good morning, everyone, and welcome to the Q4 2024 Annaleigh Capital Management Earnings Conference Call. All participants will be in a listen-only mode. If you need assistance, please see your conference specialist by pressing the star key, followed by zero.

Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then 1 on your touch-tone telephones. To withdraw your questions, you may press star and 2.

Speaker Change: Please also note today's event is being recorded and at this time I'd like to turn the floor over to Sean Kensil, Director of Investor Relations. Sir, please go ahead.

Sean Kensil: Good morning and welcome to the fourth quarter 2024 earnings call for Annaly Capital Management. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the risk factors section in our most recent annual and quarterly SEC filings.

Sean Kensil: Actual events and results may differ materially from these forward-looking statements.

Sean Kensil: We encourage you to read the disclaimer and our earnings release in addition to our quarterly and annual filings.

Sean Kensil: Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date you're of.

Sean Kensil: We do not undertake and specifically disclaim any obligation to update or revise this information.

Sean Kensil: During this call, we may present both GAAP and non-GAAP financial measures.

Sean Kensil: A reconciliation of GAAP to non-GAAP measures is included in our earnings release.

Sean Kensil: Content referenced in today's call can be found in our fourth quarter 2024 investor presentation and fourth quarter 2024 supplemental information, both found under the presentation section of our website.

Please also note this event is being recorded.

Sean Kensil: Participants on this morning's call include David Finkelstein, Chief Executive Officer and Co-Chief Investment Officer.

Speaker Change: Serena Wolfe, Chief Financial Officer Mike Fania, Co-Chief Investment Officer and Head of Residential Credit Svea Srinivasan, Head of Agency and Ken Adler, Head of Mortgage Servicing Rights

And with that, I'll turn the call over to David.

Thank you, Sean.

David Finkelstein: Good morning and thank you all for joining us on our fourth quarter earnings call. Today I'll briefly review the macro and market environment along with our performance during the fourth quarter and the full year and then I'll provide an update on each of our three businesses and end with our outlook for 2025. And Serena will then discuss her financials after which we'll open the call up to Q&A.

David Finkelstein: Now, starting with the macro landscape, the U.S. economy continued to perform well in the fourth quarter, recording strong growth on the back of healthy consumption. The labor market strengthened in November and December, reducing concerns of a more meaningful slowdown.

David Finkelstein: Given the health of the economy and the consumers' continued willingness to spend, inflation remained elevated in Q4, though the most recent December data did show signs of improvement.

David Finkelstein: During the quarter, interest rates moved contrary to market expectations from September when the onset of the Federal Reserve cuts was seen as supportive of rates markets.

David Finkelstein: The yield curve subsequently bear steepened in Q4, with 10-year treasury yields rising nearly 80 basis points, as the stronger economic growth and inflation data combined with increased attention to the long-term budget outlook led to a meaningful rise in term premium.

David Finkelstein: An additional factor contributing to higher yields was the shift in tone from the Fed during the quarter, as officials argued that after 100 basis points and cuts, the Fed funds rate is now less restrictive than during the summer, and further downward adjustments will depend on incoming data and progress towards lower inflation.

David Finkelstein: Available for sale housing supply continues to slowly increase, with current levels of inventory now only 25% lower than pre-pandemic averages. But despite these factors, home prices on a national level continue to increase modestly.

David Finkelstein: Against this backdrop, our portfolio generated an economic return of 1.3% for the 4th quarter, with all three businesses contributing positive returns.

David Finkelstein: And Annalise Foyer, 2024 economic return of 11.9% underscores the strength and diversity of our housing finance portfolio in light of volatile fixed income markets.

David Finkelstein: Economic leverage decreased to five and a half turns on the quarter driven by increased capital deployment within our lower levered credit and MSR businesses including positioning the portfolio for 385 million in market value of MSR than is anticipated to settle in Q1.

David Finkelstein: And lastly, we raised over $400 million of accretive common equity through our ATM in Q4, bringing the total capital raised in 2024 to $1.6 billion.

David Finkelstein: Now, turning to our investment strategies, and beginning with agency, the portfolio ended the year at roughly $71 billion in market value, with $7.4 billion of dedicated equity representing 59% of the firm's capital.

David Finkelstein: Our allocation of TBAs remain minimal given elevated implied role financing rates that prevailed in Q4 and a preference for better convexity with specified pools.

David Finkelstein: It spreads reverse course post-election and tightened as agency MBS participated in a positive risk sentiment displayed across fixed income and equities.

David Finkelstein: MBS spreads on average ended the quarter a couple of basis points wider but performance varied significantly across the coupon stack.

David Finkelstein: 5.5s and higher outperformed, while intermediate coupons, the primary outperformers in the third quarter, widened by half a point.

David Finkelstein: Accordingly, our portfolio benefited in Q4 from our ongoing up in coupon allocation as approximately 50% of our holdings are five and a half and higher.

David Finkelstein: Now, as it relates to our hedging strategy, the portfolio's duration extension was proactively managed by increasing hedges at the long end of the yield curve, predominantly through Treasury futures.

David Finkelstein: The hedge position remains skewed toward the long end, where we anticipate a greater risk of yields moving higher, while the front end appears to be more anchored at current levels.

David Finkelstein: As interest rate volatility has remained elevated, we plan to maintain a conservative hedge profile while preserving a mix of swap and treasury hedges across various points on the yield curve, leveraging the advantages of a diversified liquid hedge portfolio.

David Finkelstein: And it's worth noting that agency MBS proved much more resilient during the fourth quarter than other recent periods of similar increases in rates. This dynamic was driven by lower supply and increased demand for MBS as the reduction in financing rates improved MBS carry.

David Finkelstein: And the combination of better technicals coupled with an ongoing cutting cycle should support a narrower range of MBS spreads going forward, which remain attractive.

David Finkelstein: As we settled $3 9 billion through the channel at 32% increase quarter over quarter.

David Finkelstein: Strong momentum within our lock volumes also continued as we processed $5 4 billion of locks on the quarter, a 24% increase over Q3 on.

David Finkelstein: On the year, we closed $11 7 billion of residential whole loans through the correspondent channel with total loan acquisitions 13 billion.

David Finkelstein: Our locked pipeline remained robust at year end as we had $2 3 billion of high credit loans in the pipeline with a weighted average FICO of 757, and a C. L T be 68%.

David Finkelstein: As our whole loan production continues to increase credit discipline remains a top priority as evidenced by the Ob ex shelf continuing to report the lowest delinquencies out of the top 10 largest non QM issuers.

David Finkelstein: And our Onslow Bay positioning in the market as an industry, leading non agency correspondent and one of the largest most liquid residential credit securitization sponsors should allow us to continue to manufacture high quality assets with double digit roe's, despite tighter credit spreads.

David Finkelstein: Now turning to the MSR business, our portfolio ended the fourth quarter at $3 3 billion in market value, including unsettled commitments, which is roughly 25% increase year over year.

David Finkelstein: MSR ended the year, representing 19% of the firm's capital with $2 5 billion of dedicated equity.

David Finkelstein: During the quarter, we committed to purchase nearly 425 million market value with a 28 billion, our principal balance and a weighted average coupon of 367%.

David Finkelstein: We on boarded 58 billion U P. B of MSR throughout the year, ending 2024 is the third largest buyer of conforming MSR in the market well.

David Finkelstein: Well supply declined by nearly 40% in Q4, we anticipate that MSR bulk activity will stay elevated relative to historical levels as the origination market remains challenged with high mortgage rates tepid origination volumes and compressed gain on sale margins.

David Finkelstein: Valuation on our MSR portfolio increased 3% to a $5 seven eight multiple on the quarter, resulting from the rise in mortgage rates, a steeper yield curve and modestly tighter spreads.

David Finkelstein: Fundamental performance within the MSR portfolio continues to outperform our expectations with actual realized prepayments speeds and delinquencies lower than initially modeled while the competition for deposits and resulting flow income it's been higher than anticipated.

David Finkelstein: Portfolio paid $3 seven CPR in the quarter with current serious delinquencies approximately 50 basis points.

David Finkelstein: And with a weighted average note rate of three 2% our portfolio's cash flows should remain durable.

David Finkelstein: While we continue to find lower coupon MSR more attractive in the current environment the expansion of our flow business and a leading recapture relationships provide us the optionality to invest across both current coupon as well as low note rate MSR.

David Finkelstein: Now to conclude with our outlook, we believe each of our three strategies is well positioned heading into the new year.

David Finkelstein: Agency MBS continues to exhibit attractive spreads on both an absolute and relative basis to competing asset classes further supported by a better balanced supply and demand picture and improved Kerry.

David Finkelstein: Residential credit business as a clear market leader with strong momentum for continued growth after another year of record loan production and securitization volume and we expect the non QM origination market to grow in 2020 five the dawn, so very well positioned to further expand our market share capabilities within MSR.

David Finkelstein: Our deep capital base low leverage partnerships with originators and Servicers all support further growth of the portfolio.

David Finkelstein: And we expect the <unk> platform to continue to outperform in the current operating environment as our diversified strategies conservative leverage and ample liquidity are key differentiators.

Serena: And now lastly, before I turn it over to Serena I wanted to congratulate Mike Fannie on being named co Chief investment officer over the past two years as Deputy CIO. Mike has played a critical role in our portfolio Management Committee, which oversees all three of our investment strategies and look forward to continuing to work closely with Mike and.

Serena: Our other investment leaders to manage our portfolios and further our leadership across all aspects of housing finance.

Serena: And now with that I'll hand, it over to Serena to talk about the financials.

Serena: Thank you Dan today, I will provide brief financial highlights for the fourth quarter and select food. He measures for the period ended December 31st 2024.

Serena: Consistent with prior quarters, well earnings release discusses GAAP and non-GAAP earnings metrics My comments will focus on our non-GAAP.

Serena: Related to key performance metrics, which exclude P. I.

Serena: As of December 31st 2020 for Apple Valley, you push that decreased 2% from $19.54 in the prior quarter.

Serena: $19.15.

Serena: After accounting for dividends of 65 cents, we achieved an economic return of one 3% to keep Fox.

Serena: Pleased to generate an economic return of 11, 9% full year 2024.

Serena: Our portfolio strategy to go with it sound results despite high interest rate volatility in a rate sell off.

Serena: Protocol it out we incurred losses on our agency MBS portfolio of $4.14 per share and are now ready credit portfolio 26 cents a share.

Serena: However, our hedge tradition gains of $3 74.

Serena: As well as 'twenty, one guidance from our MSR portfolio, nearly all state agency and rapid decline.

Serena: Earnings available for distribution per share increased significantly to 72 cents and exceeded our dividends in the quarter due to lower borrowing cost as our average repo rate decreased 57 basis points to 490%.

Serena: Additionally, coupon even kind of increase on higher average agency investment balances and have continued to actually show up in coupon.

Serena: The R&D credit business contributed an additional income due to the platform's continued growth at the desk Securitize chip one 2 billion in assets source at the online bank correspondent channel during the quarter.

Serena: Lower net interest income on swaps, partially offset these increases which declined due to lower average net rates given a decrease during the quarter.

Serena: Average asset yields ex PAA increased monitoring one basis point to $5 two 6% in Q4 however.

Serena: However, the 57 basis point decline in the average repo rate that I mentioned earlier.

Serena: We offset by lower swap income and highest securitize debt expense from the full securitization said quite as technical that helped fuel a 14 basis point decline in our economic cost of funds.

Serena: Based on these factors and as if we had messaged in Q3 and our recent Investor day, we saw improvement in both men and this.

Serena: Our net interest spread ex PAA improved by 15 basis points to 1.47% and our net interest margin ex PAA improved by 19 basis points to one point that I wanted to.

Serena: Our financing strategy continues to be guided by strong market demand for our agency and non agency security portfolios.

Serena: Accordingly, we have maintained a consistent with our strategy positioning them broke around third meeting dates as temporary I mean in the agency repo market remained somewhat elevated.

Serena: As a result, our Q4 reported weighted average we paid days were 32 days down two days compared to Q3.

Serena: Moreover, we have maintained a disciplined approach to diversifying our funding options in our credit businesses.

Serena: During Q4, we added 300 million and $150 million in warehouse capacity for MSR and residential credit, respectively, which brings our total warehouse capacity across both businesses to $5 2 billion, whether utilization rate up 41% as of December 31.

Serena: Nice quarter, and we Upsized, our existing MSR warehouse facility by 250 million, adding to our substantial available anywhere.

Serena: I believe financial strength evident in our unencumbered assets, which ended the fourth quarter at five 8 billion, including cash and unencumbered agency MBS at $3 9 billion.

Serena: In addition, we have approximately $1 1 billion in fair value of the MSR that has been pledged to committed warehouse facilities that remains undrawn and can be quickly converted to cash.

Serena: It's a market advance rates.

Serena: Together, we have approximately $6 9 billion in assets available for financing down approximately 509 compared to the third quarter.

Serena: Approximately 700 million a year.

Serena: Finally, turning to expenses our efficiency ratio has improved during the quarter that you just flat G&A costs and higher average equity balance at.

Serena: This resulted in our opex to equity ratio decreased nine basis points to 1.39% quarter and on a full year basis I'll I'll take the equity ratio remains in line with historical levels at 1.44%.

Serena: Now that concludes our prepared remarks, we will now open the line for questions. Thank you up right now.

Serena: We will now begin the question and answer session.

Serena: To ask a question you May press Star and then one on your Touchtone telephone if.

Serena: If you are using a speaker phone, we do ask that you. Please.

Serena: Please pick up your handset prior to pressing the keys to ensure the best sound quality.

Speaker Change: So its draw your questions you May press star two.

Once again that is star and then one to join the question queue.

Speaker Change: We will pause momentarily to assemble the roster.

Speaker Change: Yeah.

Speaker Change: And our first question today comes from Bose George from <unk>. Please go ahead with your question.

Speaker Change: Everyone. Good morning.

Bose George: I wanted to first ask about the you know the stronger earnings power. This quarter, you know that 70 72 cents E D. It looks like it equates to around that 15% net ROE would you characterize this level of E D. As in line with the current normalize economic return of your portfolio.

Speaker Change: But generally bose.

Speaker Change: Over the course of the quarter, we didn't really see much of a change in spreads and you can see our agency at 15% to 17% and probably at the higher end of that and with.

Speaker Change: <unk>, which are now lower given the equity raise that's reasonably contextual and in terms of a run Brady, we don't have a longer term guidance, but.

Speaker Change: For the first quarter, we feel like earnings with all we know today will be contextual with where we're at in Q4.

Speaker Change: Okay, Great and then just in terms of an update on the dividend just given the run rate of earnings I guess, it's fair to say the dividend it looks well covered.

Speaker Change: Yeah, I think we feel that for 2025, the dividend certainly feels safe and it's obviously a conversation we have every quarter with our board and as we evaluate the dividend we always look for durability. So we don't take those decisions lightly and we go through a thorough evaluation.

Speaker Change: Good about where things are at.

Speaker Change: Our outlook is optimistic that we'll be able to maintain this run rate.

Speaker Change: Great. Thank you.

Speaker Change: Thank you both.

Speaker Change: Our next question comes from Rick Shane from JP Morgan. Please go ahead with your question.

Speaker Change: Good morning, Thanks for taking my question look obviously, our investment in MSR is a really important part of the strategy and one of the things that Ive noted.

Speaker Change: Over the last couple of quarters is a migration from sort of low coupon two higher sort of on the run MSR.

Speaker Change: The competitive dynamics in that space are changing pretty significantly as you've got a lot of originators focused on recapture.

Speaker Change: We're now looking potentially at a.

Speaker Change: Expectations for lower origination volumes in 2005.

Speaker Change: Versus what we were looking for or even three or four months ago.

Speaker Change: Curious, how that's impacting the competitive landscape and if that sort of shapes. Your view at all in terms of that opportunity in the short term.

Ken: Yeah. Thanks for the question this is Ken.

Ken: We're actually Super excited about the opportunity because there is lower volume, there's also lower profitability within the mortgage industry.

Ken: So these lenders are less able to retain MSR. So while there might be less MSR created industry wide. There's also less industry that is retained by those by those lenders originating it. So they really are in need to kind of.

Ken: You know monetize that MSR very quickly as those loans are originated in a way that hasn't been the case in the last few years.

Ken: So we're kind of super excited to set up for that opportunity.

Ken: And.

Ken: We continually mentioned we are their strategic partner.

Ken: The lending world.

Ken:

Ken: So yeah, where we're out there growing our network of partners that will need this sort of execution yes.

Speaker Change: And Rick I'll, just add that's how we set up the business to be a capital partner for the origination community and while bulk volumes as I mentioned have slowed down there is still ample amounts of MSR on originated balance sheets and we're here to provide liquidity.

Ken: Got it.

Ken: So that's a that's a really helpful answer and in some ways.

Speaker Change: Not in some ways, but you guys answered that question from a supply perspective, and it is Ken it's really great context, and it's a good reminder.

Ken: Guess, what I would say is.

Ken: That totally makes sense, but also it does feel like the demand side has picked up a lot as well is that is the supply opportunity offsetting that demand increase.

Ken: Yeah look yeah. So it's performed well so theres a lot of capital that's there is capital which flowed in the space.

Ken: The advantage. We have is we're just a reliable source of partner.

Ken: A reliable source of capital and we are there's this great partners. So it's it really is it's not just bond trading it's really establishing this network of relationships and kind of being there on a regular basis. So we do notice you know most.

Ken: The lenders are operationally constrained and they really do limit themselves to 212 or three partners and we just showed very well given given how much capital we have and how kind of reliable we can be as an execution.

Ken: Got it I really appreciate it thank you guys.

Rick: Thank you Rick.

Speaker Change: And our next question comes from Jason Stewart from Janney Montgomery Scott. Please go ahead with your question.

Jason Stewart: Alright, Thanks for taking the question on GSE reform and the expanded credit market, maybe you can give us some thoughts on how you see that progressing and what opportunities you see emerging as we go down that path.

Speaker Change: Yeah. It's a good question Theres, obviously been a lot of talk about.

Speaker Change: The G O sees as of late Jason and you know.

Jason Stewart: Look our view.

Speaker Change: Is that the hurdles are for.

Speaker Change: More meaningful transformation of the Gse's are quite high.

Speaker Change: There is still the matter of the liquidation preference whereby.

Speaker Change: Treasury, so $334 billion, which we don't see being Hum.

Speaker Change: You know going away certainly in so far as the tone to the taxpayer. In addition, you do have an ROE.

Speaker Change: Constrained amongst the Gse's, it's hard with the capital requirements that are prescribed for the for the juices to raise capital.

Speaker Change: Our Oes and also there is a considerable amount of industry pushback.

Speaker Change: With respect to the model and what could happen and it's not just the industry. It's a lot of policymakers as well I think the way we look at the GSE is is it's a it's an incredibly effective mechanism.

Speaker Change: To provide housing finance you know if you think about it private capital takes rate convexity and credit risk.

Speaker Change: The Gse's and originators do a very effective job of intermediate in that risk and the government provides catastrophic risk, which works very well government just prices that risk much more commonly than private market. So we're certainly hopeful that that's well recognized and we're having every conversation you can have.

Speaker Change: To make sure that everybody understands the criticality of the Gse's.

Speaker Change: The association with the government, but.

Speaker Change: We're watching it closely and we're eyes wide open with respect to.

Speaker Change: Opportunities in credit and that is the silver lining with respect to <unk>.

Speaker Change: Changes with this administration at the at a minimum we do feel like the footprint of the GSE will be somewhat reduced.

Speaker Change: Going forward and if you think about it roughly 20% of our.

Speaker Change: <unk> of what the Gse's guarantee is what's considered non core. So for example loans on second homes investor properties higher loan balance loans and cash out Refis, you could see higher L. L. P. As on those types of products, which opens the door for private capital.

Mike Fannie: And Mike.

Mike Fannie: His business is perfectly set up to.

Mike Fannie: To provide that liquidity and if you think about the growth of the residential securitization market. You know I think it was 140 billion last year. There has been there because there continues to be strong demand for residential credit and I think the market would welcome a reduction in the footprint because private capital is right here.

Mike Fannie: Yeah.

Speaker Change: Okay, that's helpful and Mike Congratulations on the new role well deserved.

Speaker Change: And then just a quick follow up in case I missed it I didn't hear a book value update it if it was given I apologize.

Speaker Change: No we didnt actually so heading into the week is a weekend, we were up just a fraction of a percent pre dividend accrual with the dividend call. It a little over a percent and theres been improved a little bit of improvement. This week. So as of last night, all in a little over 2%.

Speaker Change: Alright, Thanks, a lot.

Speaker Change: Thank you Jason.

Speaker Change: Our next question comes from Doug Harter from UBS. Please go ahead with your question.

Speaker Change: Okay.

Speaker Change: Thanks.

Speaker Change: Hoping you could talk about the.

Speaker Change: Outlook, you have first to your businesses and kind of how you think about the cost of volatility.

Speaker Change: That and then you know kind of in that construct you know kind of how are you.

Speaker Change: Thinking about the outlook for volatility this.

Speaker Change: This year.

Speaker Change: Sure. So I missed the first part of your question you just said the outlook for returns returns so.

Speaker Change: Karen.

Speaker Change: Yeah, sorry, just that return ranges that you gave whether that includes kind of your estimate of the cost of volatility or if that could be a drag on those returns.

Speaker Change: Well with respect to agency.

Speaker Change: I'll say as volatility does erode those returns to some extent that's the nominal return on agency MBS and our objective is to manage the portfolio in a way that that that extracts the vast majority of that nominal spread and minimize our hedging costs, which I think we've done a very effective.

Speaker Change: Job, but to the extent volatility materializes, then there's always a cost associated with it with that in <unk> and MSR given residential credit as there is negative convexity in a lot of the securities, but it's not meaningful so I wouldn't.

Speaker Change: Characterize it as material at all and then our MSR portfolio are certainly subject to some level of volatility, but when you consider the note rate of three 2%.

Speaker Change: Volatility is quite minimal associated with that so to sum it up yes, if volatility picks up agency you don't extract that entire amount of return, but I think we've done as good a job of any are managing the hedge position and dynamically hedging the portfolio to get the most of that return and then.

Speaker Change: Part of the benefit of having a diversified model is you can rely on <unk> and in our MSR portfolio to buffer a lot of that and it enables us because because really you're only talking about 60% of your portfolio roughly year over your capital being subjected to that volatility and enables us to sit on our hands a little bit more when a market is.

Speaker Change: Oscillating and not have to be reactive and I think if you look at the last couple of years of our returns that really shows up in the economic return you know, 12% last year, 6%. The prior year, we're pretty happy with how it's performed.

Speaker Change: Great and I guess, just then how do you think.

Speaker Change: About the outlook for volatility this year.

Speaker Change: Well, there's a couple of.

Speaker Change: Components to that question first of all as rate volatility and then the second is spread volatility as it relates to rate volatility some of that is uncertain, but what we've seen as of late has been somewhat encouraging in terms of in terms of ball. We we think we're in somewhat of a range bound market. The long end of the yield curve is going to stay on.

Speaker Change: Debated for.

Speaker Change: Reasons that everybody understands with respect to deficits and debt to little bit fragile, but with real yields 10 year part of the curve north of 2%, we feel like it's reasonably well priced and then the front end with the two year noted for 'twenty, just sitting right below where short term rates are we feel like there's somewhat anchored we do think that the curve.

Speaker Change: Could steepened, a little bit more but generally we think the outlook for rate volatility is better today than it has been in the past couple of years and as it relates to spread volatility and that's a that's something that's a really important point as it relates to the agency business, what we've seen over the recent past is past as much.

Speaker Change: Lower spread volatility in the agency market. The agency market is hearing well from volatility in 2022, and 2023 and we've gone from four basis points, a day of spread volatility to.

Today, it's less than a basis point, which is which is quite encouraging. So we feel like spread volatilities is contained and it gives us a lot of comfort and investing in the agency market and a lot of that has to do with the fact that the market in the agency market has just been much better balanced today from a technical standpoint, you have much broader participation.

Banks are back involved money managers are taking in a lot of AUM.

Speaker Change: Reits are growing a little bit and supplies relatively like that's still running off the portfolio, but that's reasonably predictable. So we feel like the market's in good balance and when spreads widen we see demand come in so.

Speaker Change: We feel generally good about it.

Speaker Change: Great appreciate it thank you.

Doug Harter: Thank you Doug.

Speaker Change: Our next question comes from Matthew <unk> from Jones trading. Please go ahead with your question.

Speaker Change: Hey, good morning, guys. Thanks for taking the question so turning to non agency they expected growth to kind of be 20% year over year. There how do you guys.

Speaker Change: Keep and grow your market share with increased competition in this space and then kind of as a follow up to that.

Speaker Change: Second liens and HELOC, how big of a player do you guys want to be when it comes to those kind of products.

Mike I: Sure. Thanks, Matt. This is this is Mike I. Appreciate the question I think in terms of our current market share in and where were at you know we did a $13 billion of loans that we closed on throughout 2024. If you look at our correspondent channel and was $11 7 billion and we think total origination.

Mike I: It's probably call it $75 billion to $80 billion a lot of the industry publications like under count non QM in D. C. R. <unk>.

Mike I: Nation.

Mike I: We have a fairly consistent market share them.

Mike I: I wouldn't say that we've addressed this on previous calls in terms of the competitive landscape I think what we provide our correspondence is a certainty of execution and stable capital right. So we're in the right we're in the market.

Mike I: Since April of 2021, with a stable rate sheet consistent pricing and that's from the stability of our capital.

Mike I: Lot of our peers. It is private equity there's periods of times, where they have to fund raise I have to back out there pricing and they're not providing that certainty of execution. So I think the infrastructure that we've put together the architecture that we put in place. It's led us to have a competitive advantage virtually across the majority of the market I would also say that.

Mike I: We are providing a white glove service, we have a fully staffed scenario desk, we'd respond to exceptions, we make common sense exceptions.

Mike I: Our speed to funding we think it is a you know an industry standard. So I think we're in a good position to keep our market share potentially grow our market share when we look at what's growing within the non QM and in D. C. Our market a lot of it is the large non banks the large non banks.

Mike I: Has kind of doubled down their efforts on the product they like the margins that we're getting within non QM margins are higher than the agency business.

Mike I: Our share with these large non banks it is higher than our peers. They don't necessarily want to have 567 investors. They usually only have two to three investors and given the stability of our capital on our pricing one of those investors. So I think we're well positioned as what we could be.

Mike I: Turning to the HELOC and closed on second liens, we do believe that we're gonna have a HELOC transaction in Q1, we have over $200 million of drawn balances on Helocs that is closed funded so that's something that we are looking at we're going to evaluate market conditions on our closed end seconds is incredibly competitive market.

Mike I: I would say that the pricing that we see within that market.

Mike I: <unk> leads us to believe where the pre pay speeds the longer term prepay speeds.

Mike I: I think we're feeling some of the market the market pricing in the market assumptions, but we price both of those products through our correspondent channel. We are getting we are getting some some supply, but I'll say 90, 293% of what we're what we're ultimately getting through the correspondent is first lien non QM in D. C are and that's going to continue to be the.

Mike I: The case in the near future.

Mike I: Got it that's very helpful. Thank you.

Matt: It's Matt.

Speaker Change: Our next question comes from Eric Hagen from <unk>. Please go ahead with your question.

Eric Hagen: Hi, Thanks, Good morning, maybe just building off some of these some of these previous questions. I mean do you have perspectives on the level of mortgage spreads and how youre managing leverage from a context that we have with this near term outlook for a huge supply of treasury issuance right and that having any impact on where along the yield curve you might add incremental hedges.

Speaker Change: Going forward, yes.

Speaker Change: Yeah. So look as I said, we've been very happy with how range bound spreads had been there is room for tightening, but that'll be driven by bulk coming down if it has to do so and also a pickup in bank demand as deposits grow so.

Speaker Change: Generally we think spreads are fair to inexpensive right here Theres some room for tightening, but we don't expect a lot.

Speaker Change: As it relates to treasury supply and hedges look where we're keeping our hedges at the long end of the yield curve.

Speaker Change: Assistant there is for agility out there and we expect two trillion or thereabouts of net treasury issuance and that has to be absorbed the market. As you know term premium has increased a lot in the treasury market and the market's we'll price for it but there could be an increase in rates and we're going to maintain discipline is.

Speaker Change: It relates to the to the hedge profile.

Speaker Change: Gotcha.

Speaker Change: Alright, So you know with an only being the largest mortgage REIT in the space. I mean do you guys use your stock valuation is sort of a proxy or a benchmark of any kind for like the level of MBS demand.

Speaker Change: Like how do you treat the opportunity to maybe grow from here.

Speaker Change: When you think about the macro drivers for MBS and what are the sources of demand might come from and how you're kind of retraced that back to your own stock valuation.

Speaker Change: Well look we think our valuation is a function of a number of factors first of all the economic return that we that we generate R. E D, which we've obviously just exhibited the acceleration in our low leverage and the health and liquidity of our balance sheet and the stability of the model. So that's the key to valuation.

Speaker Change: The company all of which I think we hit on all cylinders as it relates to being a proxy for the broader MBS market look it's a massive market seven odd trillion dollar market and you have many large players and we happen to be one of them. So its the collective demand from all sources of capital whether it be Reits banks money manager.

Speaker Change: Yours.

Speaker Change: I think it's it's the movement of all of those participants that drive.

Speaker Change: The valuation and right now it feels as though demand is widespread but spreads are elevated and they're going to stay elevated.

Speaker Change: We think for the foreseeable future with some again room for for some tightening in the back half of your question I'm sorry, Eric.

Speaker Change: Alright. Thank you. Thank you got it I mean that was that was really helpful. I appreciate it guys.

Speaker Change: Well, thank you Eric.

Speaker Change: Our next question comes from harsh Omani from Green Street. Please go ahead with your question.

Speaker Change: Thank you.

Harsh Omani: Have you spoken a bit about the competitive landscape in residential credit.

Harsh Omani: Maybe one more thing that I wanted to touch on that what sort of outlook on sort of the difference between whole loan spread and the spreads on private label securitization. So you mentioned that securitization have taken quite a bit.

Harsh Omani: Especially at the end of last year.

Harsh Omani: At the same time, we've sort of seen comp.

Harsh Omani: Competition on the whole loan side come in not just from private equity firms, but also insurance companies and asset managers.

Speaker Change: So that's the demand side on that front, but it seems like that Michael it could be some more private label.

Speaker Change: Corn supply because of lower footprint on the GSE. So when you sort of put that all together, what's your outlook on the difference between the whole loan spreads where you acquired these in and where you can fix all of their data.

Speaker Change: Sure. Thanks for the question I would say that the the whole loan market is incredibly efficient in terms of when securitization spreads tightened as what we've seen a whole loan spreads also will subsequently tightened. So we've issued 20 securitization since the beginning of 2024.

Speaker Change: The the spreads at which we issued those AAA securities. It's been incredibly stable its been the 115 basis points over our last deal of of 2024 to 145 basis points. So we've issued within a 30 basis point range, but when you do see that execution move up and down you do see corresponding changes to your whole loan spreads.

Speaker Change: I think that the majority of the of the competition that we face is still you know private equity. It is other reads. It it's asset managers you know, we think that 60% to 65% of the production of non QM in D. C are ultimately goes to entities like ourselves. So given the stability that we've seen within spreads it's allowed us to you know to grow the.

Speaker Change: The platform there is a lot of commentary on uninsured companies. This has been the commentary that we've heard over the past number of years. The reality is yes. They are an active participant but in terms of their size and our scale. We don't think that they drive the market. So if you look at the end of 2023 insurance companies and this is S. N L filings, it's all public.

Speaker Change: Insurance companies had 88 billion of residential whole loans on their balance sheet. If you look at Q2 of 2024. So through the first half of 2024. The number was 93 billion. So the insurance companies only net increase their residential holdings by 5 billion over that six month period and that also includes jumbo loans <unk>.

Speaker Change: <unk> loans and <unk> loans.

Speaker Change: So it certainly they are a competitor in terms of how they buy they don't really buy through correspondent theyre not willing to put out the infrastructure and the architecture that we have we now have 260 plus correspondence. So we certainly need to be reactive to market conditions and we understand.

Speaker Change: Where are you now where they come out in terms of where they are buying them, but I think we feel very good in terms of where we're positioned we also do sell loans.

Speaker Change: And you know insurance companies are one of the take outs in terms of our capital market's distributions. So we think that theyre actually accretive.

Speaker Change: And have had provide liquidity to the market.

Speaker Change: Yeah.

Speaker Change: Okay got it that's helpful commentary thanks for that.

Speaker Change: And then maybe on the relative value of your three business strategies. It sounded like at the end of the third quarter, you were maybe viewing agency MBS as more attractive relative to credit and Msr's.

Speaker Change: But the allocation over the quarter to agency MBS came down a bit.

Speaker Change: Could you maybe touch on what's driving that decision through the quarter.

Speaker Change: And how it might progress going forward.

Speaker Change: Yeah.

Speaker Change: So we did allocate capital at year end to agency, Mike did was going into the market right at the first day of the year.

Speaker Change: With the resi transactions. So we held a lot of loans unencumbered on our on our balance sheet, which took some of the capital and also to note as we onboard MSR purchase last quarter. This quarter, you'll actually see all else equal a further decrease in capital allocated to agency.

Speaker Change: We'll be some leverage put on the MSR, but generally generally it should be in the mid to upper fifty's.

Speaker Change: But look we wouldn't the marginal dollar would go to agency MBS, we did add a fair amount of agency in the third quarter with capital raised and to the extent that.

Speaker Change: We have run off or or other forms of capital agencies, where the marginal dollar goes for them for the reasons I mentioned earlier.

Speaker Change: Okay. Thank you.

Thank you harsh.

Speaker Change: Yeah.

Speaker Change: And our final question today comes from Trevor Cranston from citizens JMP. Please go ahead with your question.

Trevor Cranston: Alright, thanks, good morning.

Trevor Cranston: Another question on the MSR portfolio.

Trevor Cranston: Can you talk a little bit about the profile of bulk.

Trevor Cranston: Bulk packages you guys are seeing in the market today.

Trevor Cranston: Particularly in terms of like what kind of note rates youre seeing.

Trevor Cranston: And what.

Trevor Cranston: How do you expect that to look at.

Trevor Cranston: More packages come out in 'twenty five.

Trevor Cranston: Relative to the <unk>.

Trevor Cranston: Super loan not worried of the existing portfolio.

Ken: Yeah sure Hi, Thanks for the question this is Ken.

Trevor Cranston: Yes.

Trevor Cranston: Vast majority of bulk packages are lower note rate relative to current coupon and theyre being sold because.

Trevor Cranston: Mortgage lenders need liquidity.

Trevor Cranston: And they prefer to sell to customers that are less likely to be active.

Trevor Cranston: Refinance candidates for them and in the future.

Trevor Cranston: So you know the low note rate MSR.

Trevor Cranston: It's actually a higher price because of the prepayment profile and it's also less valuable.

Trevor Cranston: As a customer and a future revenue opportunity for a mortgage lender so.

Trevor Cranston: No.

Trevor Cranston: Yeah.

Trevor Cranston: That's really what folks look to sell first.

And then you know.

Trevor Cranston: The overall theme that's going on is.

Trevor Cranston: Mortgage lenders are holding less MSR overall so.

Trevor Cranston: When we do see higher note rate packages. They are often much smaller in size because it's it's the last one two or three months origination. So it's not quite flow, but we would use the term like mini bulk or something like that.

Trevor Cranston: And Trevor another point to note is that the average the average note rate of the overall universe is still quite low and a lot of the MSR associated with it remains on the balance sheets of originators in banks and that's likely.

Trevor Cranston: Type books, no rate that would come out with some.

Trevor Cranston: Mixing in a more current no rate MSR.

Trevor Cranston: Right that makes sense okay. Thank you.

Trevor Cranston: Thank you Trevor.

Speaker Change: And at this time, we will be concluding today's question and answer session I would like to turn the floor back over to David Finkelstein for any closing remarks.

Speaker Change: Well, thank you Jamie.

Speaker Change: Thank you everybody for taking the time today, and we will speak with you soon.

Speaker Change: Yeah.

Speaker Change: And ladies and gentlemen, with that we'll conclude today's conference call and presentation. We do thank you for joining you may now disconnect your lines.

Speaker Change: Okay.

Speaker Change: [noise].