Q2 2025 Annaly Capital Management Inc Earnings Call

Operator: Live Annaly Capital Management Earnings Conference. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Good day and welcome to the Q2 2025 annaly Capital Management earnings conference call.

All participants will be in listen-only mode.

Operator: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then. Please note this event is being recorded.

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Today's presentation, there will be an opportunity to ask questions.

to ask a question, you may press star then 1 on your telephone keypad,

To withdraw your question. Please. Press star. Then 2

Sean Kensil: I would now like to turn the conference over to Sean Kensil, Director Investor Relations. Please go ahead.

Please note this event is being recorded.

I would now like to turn the conference over to shun Kenfield director investor relations. Please go ahead.

David Finkelstein: Good morning, and welcome to the second quarter 2025 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 filing. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual files. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information.

Speaker Change: Good morning and welcome to the second quarter 2025 earnings call for annaly Capital Management.

Speaker Change: Any forward-looking statements made during today's call are subject to certain risks and uncertainties which are outlined in the risk factor section in our most recent annual and quarterly SEC filings.

Speaker Change: actual events and results May differ materially from these forward-looking statements,

Speaker Change: We encourage you to read the disclaimer, in our earnings, release in addition to our quarterly and annual filings.

Speaker Change: Additionally, the content of this conference call may contain time-sensitive information. That is accurate only as of the date hereof.

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

Speaker Change: We do not Undertake and specifically, disclaim any obligation to update or revise this information.

David Finkelstein: A reconciliation of gap to non-gap measures is included in our earnings.

Speaker Change: During this call, we may present both gaap and non-gaap financial measures.

David Finkelstein: Content referenced in today's call can be found in our second quarter 2025 investor presentation and second quarter 2025 financial supplement, both found under the presentation section of our website. Please also note this event is being recorded.

Speaker Change: A Reconciliation of gaap to non-gaap measures is included in our earnings release.

Speaker Change: Content reference in today's call can be found in our second quarter, 2025, investor presentation. And second quarter of 2025 Financial supplement, both found under the presentation section of our website

Sean Kensil: Participants on this morning's call include David Finkelstein, Chief Executive Officer and Co-Chief Investment Officer, Serena Wolfe, Chief Financial Officer, Mike Fania, Co-Chief Investment Officer and Head of Residential Credit, V.S. Srinivasan, Head of Agency, and Ken Adler, Head of Mortgage Services.

Speaker Change: Please also note, this event is being recorded.

David binkle: Participants on this morning's call include David binkle chief executive officer and co-chief investment officer.

David binkle: Serena wolf, Chief Financial Officer.

Mike FIA: Mike FIA co-chief investment officer and head of Residential Credit.

David Finkelstein: And with that, I'll turn the call over to David. Thank you, Sean. Good morning, everyone. And thank you all for joining us for our second quarter earnings call. Today, as usual, I'll briefly review the macro and market environment, as well as our performance for the quarter.

Speaker Change: Head of mortgage servicing rights.

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

David binkle: Thank you, Sean. Good morning everyone and thank you all for joining us. For our second quarter earnings call.

David Finkelstein: Then I'll provide an update on each of our three businesses, ending with our outlook.

David Finkelstein: Serena will then discuss our financials before opening up the call to Q&A. Now, starting with the macro landscape, the U.S. economy has persevered through considerable trade-related uncertainty and resulting market volatility in recent months. Growth is likely to run around 1% annualized for the first half of the year, well below the pace of recent years, but is arguably outperforming post-Liberation Day expectations. Employers hired nearly 450,000 workers in the second quarter, which has lowered the unemployment rate marginally to 4.1%. Overall hiring has slowed compared to recent years, but the labor market is relatively balanced and layoffs have been somewhat muted.

David binkle: Today, as usual, I'll briefly review the macro and Market environment, as well as our performance for the quarter, then I'll provide an update on each of our 3, businesses ending with our Outlook Serena will, then discuss our financials before opening up the call to Q&A.

David binkle: Now, starting with the macro landscape, the US economy is persevered through considerable trade related, uncertainty and resulting Market volatility in recent months.

David binkle: Growth is likely to run around 1% annualized for the first half of the Year. Well, below the pace of recent years but is arguably outperforming post-liberation day, expectations.

David Finkelstein: Inflation, meanwhile, likely ran at the slowest level in the past three quarters as the continued decline in service sector inflation offset firming and goods prices, some of which likely tariff related. The economy and the labor market's resilience has affirmed the Fed's current wait-and-see stance, with the majority of policymakers indicating a preference for more data to assess the impact of tariffs on inflation. We do expect the Fed to ultimately deliver on the two interest rate cuts projected for 2025 at the last FOMC meeting, given the consensus view among policymakers that current interest rate levels remain somewhat restrictive.

David binkle: Employers hired nearly 450,000 workers in the second quarter, which is lowered. The unemployment rate marginally to 4.1% and overall hiring has slowed compared to recent years but the labor market is relatively balanced and layoffs have been somewhat muted.

David binkle: Inflation. Meanwhile likely ran at the slowest level in the past 3 quarters as they continued decline in service sector inflation, offset firming and goods prices some of which likely tariff related.

David binkle: The economy and the labor markets resilience has affirmed the fed's, current wait and see stance with the majority of policy makers. Indicating a preference for more data to assess the impact of tariffs on inflation.

David Finkelstein: As it relates to markets, the positive reversal in sentiment as the second quarter progressed helped risk assets recover from their sharp underperformance in early April, and financial conditions have reached some of the most accommodative levels since the onset of the hiking cycle in 2022. Despite improvement in markets, longer-term treasury yields remain elevated as the market will need to continue to fund large deficits, particularly with the passage of the recent tax and spending bill. Swap spreads have also been unable to reverse the majority of their April tightening, which left agency MBS spreads five to ten basis points wider on the quarter.

David binkle: We do expect the FED to ultimately deliver on the 2 straight cuts projected for 2025 at the last fomc meeting given the consensus view among policy makers. The current interest rate levels, remain somewhat restrictive,

David binkle: As it relates to markets, the positive reversal in sentiment. As the second quarter, progressed helped risk assets recover from their sharp underperformance, in early, April, and financial conditions had reached some of the most accommodative levels since the onset of the hiking cycle in 2022.

David binkle: Now, despite Improvement in markets longer term, treasury yields remain elevated, as the market will need to continue to fund. Large deficits, particularly with the passage of the recent tax and spending bill.

David Finkelstein: Now, against this backdrop, we delivered an economic return of 0.7% for the second quarter while generating earnings available for distribution of 73 cents, once again out-earning our dividends. Q2 marked the 7th consecutive quarter of generating a positive economic return for our shareholders, demonstrating the diversification benefit of our three fully-scaled housing finance strategies. Year-to-date, we've delivered a 3.7% economic return, with a total shareholder return of over 10% through quarter end. And further to note, we raised just over $750 million of accretive capital in the second quarter through our ATM program, which was predominantly deployed in the agency sector and leverage increased modestly to 5.8 terms in light of the increased allocation to agency.

David binkle: Swap spreads have also been unable to reverse. The majority of their April tightening which left agency MBS spreads, 5 to 10 basis points wider on the quarter.

David binkle: Now against this backdrop, we delivered an economic return of 7% for the second quarter while generating earnings available for distribution of 73 cents. Once again out, earning our dividend in Q2 marked the seventh consecutive quarter of generating a positive economic return for our shareholders demonstrating, the diversification benefit of our 3, fully scaled Housing, Finance, strategies year to date. We've delivered a 3.7% economic return with a total shareholder return of over, 10% through quarter end.

David binkle: And further to note, we raised just over 750 million of accretive capital in the second quarter through our ATM program, which was predominantly deployed in the agency sector and leveraged increased modestly to 5.8 terms in light of the increased allocation of agency.

David Finkelstein: Now turning to our investment strategies and beginning with agency, our portfolio ended the quarter at nearly $80 billion in market value, up 6% quarter over quarter. After the early April volatility, market conditions for Agency MBS improved. Rates were range-bound, the yield curve remained relatively steep, implied volatility declined, and comparable fixed income assets tightened given the favorable risk sentiment in markets. Agency MBS did lag in the recovery as demand from overseas and the bank community has remained muted, but we do think that these participants could become more active should the Fed resume cutting or as expected regulatory reform materializes.

David binkle: now, turning to our investment strategies and beginning with agency, our portfolio ended the quarter at nearly 80 billion in market value up 6%, quarter over quarter

David binkle: After the early, April volatility market conditions for agency MBS improved rates were range bound, the yield curve. Remained relatively steep complied, volatility decline in comparable, fixed income assets. Titan given the favorable risk sentiment in markets,

David Finkelstein: With respect to our activity, early in the quarter, we managed our duration through the tariff-driven volatility with little adjustment to our agency portfolio. And as markets normalized, we steadily added agency MBS to detract from spreads in line with our capital raising, growing our agency portfolio by roughly $4.5 billion in notional terms. Purchases were fairly evenly split across 4.5s, 5.5s, and 6s, and we marginally preferred pools over TBAs as repo financing was slightly more attractive than dollar roll carry. We continue to operate within a narrow interest rate risk band given the volatility we've experienced thus far this year.

David binkle: Agency MBS did lag in the recovery as demand from overseas. And the bank community has remained muted, but we do think that these participants could become more active. Should the FED, resume, cutting or as expected regulatory reform materializes?

David binkle: With respect to our activity. Early in the quarter, we managed our duration through the Tariff, driven volatility with little adjustment to our agency portfolio and as markets normalized, we steadily added agency MBS and attracting spreads in line with our Capital raising growing. Our agency portfolio by roughly 4 and a half billion in notional terms.

David binkle: Purchases were fairly evenly split across 4 and a halfs 5 and a halfs and sixes. And we marginally preferred pools over. Tbas, as repo, financing was slightly more attractive than dollar, roll carry

David Finkelstein: And in Q2, all asset purchases were hedged and duration extension was prudently managed due to the rise in long-end rates. Within our hedge portfolio, we remain in favor of holding swaps against shorter term risk due to the positive carry profile, while maintaining a more balanced mix of treasury and swap exposure in the intermediate and long end. Swap spreads tighten significantly during the quarter, and forward markets are signaling further tightening in the months ahead. If that changes, however, we can nimbly adjust our hedges between swaps and treasury risks. But for now, maintaining a roughly 60-40 hedge allocation between swaps and treasuries is more favorable in our view.

David binkle: Extension was prudently managed due to the rise in long-end rates.

David binkle: Within our hedge portfolio, we remain in favor of holding swaps against shorter term risk. Due to the positive carry profile, while maintaining a more balanced mix of Treasury and swap exposure in the intermediate long end.

David binkle: Swap spreads tighten significantly during the quarter and forward markets are signaling further tightening in the months ahead.

David Finkelstein: Overall, we remain optimistic on the agency sector as fundamentals are sound and there are several potential catalysts out there rising to improve agency MBS technicals. Additionally, we're encouraged by the administration's recent statements regarding GSE reform, noting that any privatization efforts will preserve the implicit guarantee and aim to tighten MBS spreads, removing a significant market concern.

David binkle: That changes. However, we can nly adjust our Hedges between swaps and treasury risks. But, for now maintaining a roughly 60/40 hedge, allocation between swaps and treasuries is more favorable in our view.

David binkle: Overall, we remain optimistic on the agency sector, as fundamentals are sound and there are several potential catalysts out there Horizon to improve agency. MBS technicals.

David Finkelstein: Shifting to residential credit, our portfolio was relatively unchanged at $6.6 billion in market value and $2.4 billion of capital. The Resi credit sector broadly tracked corporate credit over the quarter, widening in sympathy with other risk assets in early April, only to finish the quarter with spreads roughly unchanged. Now, despite the turbulence in the first half of the quarter, the non-agency market demonstrated its durability with over 43 billion of gross issuance on the quarter. Our Anzalo Bank platform had its highest quarterly securitization activity to date, closing 3.6 billion across seven transactions, and we priced an additional two securitizations in July, bringing cumulative 2025 activity to 7.6 billion across 15 transactions, generating 913 million of high-yielding proprietary assets for Annaly and our joint venture.

David binkle: Additionally, we're encouraged by the administration's recent statements regarding GSC reform noting that any privatization efforts will preserve the implicit guarantee and aim to tighten MBS spreads removing a significant Market concern.

David binkle: Shifting to Residential Credit. Our portfolio was relatively unchanged is 6.6 billion, in market value, and 2.4 billion of capital.

David binkle: The resi, credit sector, broadly tracked, corporate credit over the quarter widening in sympathy with other risk assets and early. April only to finish the quarter with spreads roughly unchanged.

David binkle: Now, despite the turbulence of the first half of the quarter, the non- agency market demonstrated its durability with over 43 billion of gross issuance on the quarter.

David Finkelstein: Onslow Bay's expanded credit correspondent channel also remained the industry leader, generating $5.3 billion of LOCs and funding $3.7 billion of loans over the quarter. And this is despite tightening our credit standards once again, given some of the headwinds we are seeing in housing. Current Locked Pipeline has a 764 weighted average FICO, a 68% LTV, and is over 95% first lien. Regarding the housing market, available-for-sale inventory continues to increase as affordability remains challenged given elevated mortgage rates, high home prices, and increased property taxes and insurance premiums. While housing affordability has been an issue for the past three years, we've entered a buyer's market as sellers now materially outweigh prospective homeowners.

David binkle: Our Onslow Bay platform had as high as quarterly securitization activity to date. Closing 3.6 billion across 7 transactions and we priced in additional 2 sec in July bringing cumulative, 2025 activity to 7.6 billion across 15 transactions, generating 913 million of high, yielding proprietary assets for analy and our joint venture

David binkle: Onslow Bay is expanded credit correspondent Channel also, Remain the industry leader generating, 5.3 billion of locks and funding 3.7 billion of loans, over the quarter, and this is despite tightening our credit standards once again. Given some of the headwinds we are seeing in housing.

David binkle: Our current locked pipeline, has a 764 weighted average, FICO a 68% LTV and is over 95%, first lean regarding the housing market available for sale. Inventory continues to increase as affordability, remains challenged given elevated mortgage rates, high home prices, and increased property, taxes and insurance.

David binkle: Premiums.

David Finkelstein: Higher supply has led to four consecutive months of negative HPA according to Zillow and we expect the majority of the housing market to turn modestly negative year over year in the near term. Now balancing the deceleration of the housing market is a stable labor market, low consumer delinquencies, expansionary fiscal policy, and elevated asset pricing, including equity markets. We remain well positioned in this environment as we control all aspects of our loan manufacturing strategy and the resulting assets have minimal leverage. Notably, over 70% of our residential credit exposure is represented by retained OBX securities and residential whole loans collateralized with high quality borrowers.

David binkle: while housing affordability has been an issue for the past 3 years, we've entered a buyer's market, a sellers now materially outweigh prospective homeowners,

David binkle: Higher supply has led to 4 consecutive months of negative HBA according to Zillow and we expect the majority of the housing market to turn modestly, negative year-over-year in the near term.

David binkle: Now, balancing the deceleration of the housing market is a stable, labor market low consumer delinquencies, expansionary, fiscal, policy and elevated. Asset pricing, including Equity markets.

David binkle: We remain well, positioned in this environment. As we control all aspects of our low manufacturing strategy and the resulting assets have minimal leverage notably over 70% of our Residential Credit. Exposure is represented by retained OBX Securities and residential whole loans, collateralized with high-quality Borrowers.

David Finkelstein: Moving to our MSR business, the portfolio ended the second quarter unchanged at $3.3 billion in market value, comprising $2.6 billion of the firm's capital. While bulk trading activity was healthy in the second quarter, we were measured with respect to new purchases as MSR valuations remained firm, acquiring approximately $30 million in market value. Our MSR valuation improved very modestly quarter over quarter, driven by the steepening of the yield curve, lower implied volatility, and strong observed bulk execution. Solid fundamental performance, the portfolio persisted this past quarter with a three-month CPR of 4.6 percent, serious delinquencies unchanged at 50 basis points, and escrow balances up 6 percent year-over-year, which helped to drive increased floating.

David binkle: Moving to our MSR business. The portfolio ended the second quarter unchanged at 3.3 billion in market value comprising, 2.6 billion of the firm's capital.

David binkle: While both trading activity was healthy in the second quarter, we were measured with respect to new purchases as MSR valuations, remain firm, acquiring approximately 30 million in market value.

David binkle: Our MSR valuation improved. Very modestly. Quarter over quarter driven by the steepening of the yield curve lower implied, volatility, and strong observed bulk execution.

David Finkelstein: And the portfolio continued to generate well-defined, durable cash flows, given the 3.24% note rate, with the average borrower at 350 basis points out of the money. As we move forward, we remain focused on furthering the build-out of our flow servicing relationships and capabilities, and expanding our subservicing and recapture partnerships, which should allow us to capitalize on MSR opportunities across both the bulk and flow channels, as relative value dictates.

David binkle: Solid, fundamental performance of the portfolio. Persisted this past quarter with a 3-month CPR, a 4.6%, serious delinquencies unchanged at 50 basis points and escrow balances up 6% year-over-year, which helped to drive increased floating income.

David Finkelstein: Now to conclude with our outlook, we maintain conviction that our portfolio will continue to generate strong risk-adjusted returns in the current environment. We've been encouraged by declining macro volatility as of late, and we see further benefits to our portfolio in the mortgage sector should expected Fed cuts materialize. In the near term, we expect to be overweight agency given historically attractive spread levels, but over the long term, we'll strategically grow our residential credit and MSR portfolios as we look to expand onslaught-based presence across the housing finance sector. And as always, we remain flexible in the current investing climate with our historically low leverage and ample liquidity.

David binkle: Abilities and expanding our sub-servicing, and recapture Partnerships, which should allow us to capitalize on MSR opportunities across both the bulk and flow channels as relative value dictates.

David binkle: Now, to conclude with our Outlook, we maintain conviction that our portfolio will continue to generate strong risk, adjusted returns in the current environment. We've been encouraged by declining macro volatility as of late. And we see further benefits to our portfolio and the mortgage sector should expected fed Cuts materialized in the near term. We expect to be overweight agency, given historically, attractive, spread levels but over the long term we'll strategically grow our Residential Credit and MSR portfolios as we look to expand on. So based presence across the Housing Finance sector.

David Finkelstein: We're well positioned as we enter the second half of the year.

Serena Wolfe: With that, I'll turn it over to Serena to discuss the financials. Thank you, David. Today I will provide a brief overview of the financial highlights for the quarter ended June 30, 2025. Consistent with prior quarters, our earnings release will disclose both GAAP and non-GAAP earnings metrics. However, my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA. As of June 30, 2025, our book value per share decreased 3% from the prior quarter to $18.45. After accounting for our dividend of 70 cents, we achieved a positive economic return of 0.7% for the second quarter.

David binkle: And as always, we remain flexible in the current investing climate with our historically low, leverage and ample liquidity. We're well positioned as we enter the second half of the year.

David binkle: With that, I'll turn it over to Serena to discuss the financials.

Serena Wolf: Thank you, David today, I will provide a brief overview of the financial highlights for the quarter end of June 30th 2025.

David binkle: Consistent with prior quarters, our earnings release will disclose both gaap and non-gaap earnings metrics. However, my comments will focus on our non-gaap EAD and related key performance metrics, which exclude paa

David binkle: as of June 3025, our book value per share, decreased 3% from the prior quarter to 1845

Serena Wolfe: This brings our economic return to 3.7% for the first half of the year. Earnings available for distribution per share increased by $0.01 to $0.73 and once again exceeded our dividend for the quarter. Results were primarily driven by higher yields on our investment portfolio of 5.41% compared to 5.23% in the prior quarter. Additionally, we saw lower average repo rates of 4.53% during the quarter, a modest decline of three basis points in comparison to the prior quarter. These increases were partially offset by lower swap income due to very modest swap runoff in the first half of the year.

David binkle: After accounting for our dividend of 70 cents, we achieved a positive economic return of 7% for the second quarter.

David binkle: This brings out economic return to 3.7% for the first half of the year.

David binkle: Earnings available for distribution per share, increased by 1 cent to 73 cents. And once again, exceeded our dividend for the quarter,

David binkle: Results were primarily driven by higher yields on our Investment Portfolio of 5.41% compared to 5.23% in the prior quarter.

David binkle: Additionally, we saw lower average repo rates of 4.53% during the quarter. A modest decline of 3 basis points in comparison to the prior quarter.

Serena Wolfe: Our rotation up in coupon and agency over the last several quarters is evident in our interest metrics due to our increase in yield. The resi credit business generated additional income due to the growth of accretive OBX securitizations on balance, as Envoy Bay experienced another quarter of record issuance. Net interest spread XPAA has increased again, reaching 1.47% in the second quarter compared to 1.24% a year ago. And net interest margin XPAA is 1.71% in Q2 compared to 1.58% in Q2 2024.

These increases were partially offset, by lower swap income due to very modest swap runoff in the first half of the year.

Our rotation up in coupon in agency, over the last several quarters is evident in our interest metrics due to our increase in yields.

David binkle: the Ready Credit business generated additional income due to the growth of accredited OBX securitizations on balance as envelope Bay experienced another quarter of record issuance

David binkle: Then into spread xpia has increased again, reaching 1.47% in the second quarter compared to 1.24% a year ago. And net interest margin xpia is 1.71% in Q2, compared to 1.58% in Q2 2024.

Serena Wolfe: Turning to our financing strategy, over the past several years, we have made deliberate and disciplined efforts to expand and diversify our funding. Today, our financing platform encompasses a diverse range of traditional and non-traditional financing arrangements, which enhance both our liquidity profile and operational flexibility. We have added substantial capacity through non-mark-to-market arrangements, second lien and HELOC lines, structured repurchase agreements and committed lines. For example, across our residential loan facilities, our non-max market capacity has grown from 150 million or 6% of total available capacity at the end of 2023 to 1.9 billion in the second quarter, now representing 45% of total capacity.

Turning to our financing strategy over the past several years, we have made deliberate and disciplined efforts to expand and diversify our funding sources.

David binkle: Today, our financing platform encompasses a diverse range of traditional and non-traditional financing Arrangements which enhance both our liquidity profile and operational flexibility.

David binkle: We have added substantial capacity, through non-market to Market Arrangements, second lean and HELOC lines.

David binkle: Structured, repurchase agreements and committed lines.

David binkle: For example, across our residential loan facilities, our non-market Market capacity has grown from 150 million or 6% of total available capacity at the end of 2023.

David binkle: To 1.9 billion in the second quarter.

Serena Wolfe: These additions complement our more traditional financing sources, including bilateral repo, our internal broker-dealer, sponsored repo, securitizations, participation interests, and warehouse financing facilities. This breadth of funding structures allows us to navigate a range of market environments more effectively, enhancing stability during periods of volatility, and positioning us to capitalize on opportunities as they arrive. During the quarter, we added approximately $5 billion of repo principal, including term, at Attractive Spread. This increase was primarily due to the growth of the agency portfolio. As a result, our Q2 reported weighted average repo days maintained a healthy position of 49 days.

David binkle: Now, representing 45% of total capacity?

David binkle: These additions complement, our more traditional financing sources, including bilateral, repo, our internal broker dealer. Sponsored, repo securitizations participation interests, and Warehouse financing facilities.

David binkle: This breadth of funding structures allows us to navigate a range of Market environments, more effectively, enhancing stability, during periods of volatility and positioning us to capitalize on opportunities as they arise.

during the quarter, we added approximately 5 billion of repo principles, including term at attractive spreads

David binkle: This increase with primarily, due to the growth of the agency portfolio.

As a result, our Q2 reported weighted average repo days maintained a healthy position of 49 days.

Serena Wolfe: During the quarter, we upsized several resi credit warehouse facilities and added a new MSR line, increasing our capacity by $500 million. As of June 30 2025, our total facility capacity for the residential credit business was $4.2 billion across 10 counterparties, with a utilization rate of 40%. Our MSR business has total available committed warehouse capacity of $2.1 billion across four counterparties as of June 30, 2025. with a utilization rate of 50. Inclusive of our committed MSI warehouse facilities, our weighted average days to maturity is 56 days. Annaly's financial strength is further evident in our unencumbered assets, which ended the second quarter at approximately $6 billion, including cash and unencumbered agency MBS of $4.7 billion.

David binkle: During the quarter, we upsized several resi credit Warehouse facilities and added a new MSR line increasing our capacity by 500 million.

As of June 30th 2025, our total facility capacity for the Residential Credit business was 4.2 billion across 10 counties.

David binkle: With a utilization rate of 40%.

David binkle: With a utilization rate of 50%.

David binkle: Inclusive of our committed MSR Warehouse facilities. Our weighted average days to maturity is 56 days.

Serena Wolfe: In addition, we have roughly 1.5 billion in fair value of MSR that has been pledged to committed warehouse facilities, but remains undrawn and can be quickly converted to cash subject to market advance rates. Together we have approximately $7.4 billion in assets available for financing, a decrease of roughly $70 million compared to the first quarter.

David binkle: Analyst Financial strength is further evident in our unencumbered assets which ended the second quarter at approximately 6 billion including cash and unencumbered agency MBS of 4.7 billion.

David binkle: In addition we have roughly 1.5 billion in fair value of MSR that has been pledged to committed Warehouse facilities. But remains undone and can be quickly converted to cash subject to Market events rates.

David binkle: Together, we have approximately 7.4 billion in assets available for financing a decrease of roughly 70 million compared to the first quarter.

Serena Wolfe: Now that concludes our prepared remarks and we will open the line for questions. Thank you, operator. Thank you.

David binkle: Now, that concludes our prepared remarks and we will open the line for questions. Thank you, operator.

Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.

David binkle: Thank you. We will now begin the question and answer session to ask a question. You may press star then 1 on your telephone keypad,

David binkle: If you're using speakerphone, please pick up your handset before pressing the keys.

David binkle: some of your question has been addressed and you would like to withdraw your question, please press star then 2

Bose George: The first question is from Bose George, KBW, please go ahead. Hey, everyone. Good morning.

This question is from both George KBW. Please go ahead.

David Finkelstein: Actually, first, can I just get an update on book value quarter to date? Sure, Bose. Good morning. As of last night, pre-dividend accrual book was up about half a percent. So call it one and a half percent economically. Okay, great.

George: Hey everyone. Good morning. Um, actually first, can I just get an update on Book, value? Quarters date.

Speaker Change: Sure Buzz. Good morning as of last night, uh, pre-dividend and cruel book was up about half a percent. So, call it 1 and a half percent economic return,

David Finkelstein: And then can you just discuss your comfort level with the dividend, how that ties in with your, the economic return that you guys are seeing from the portfolio? Sure. So obviously we raised the dividend earlier this year and we make those decisions very deliberately and we did have confidence that it was certainly earnable. And that's been the case. We've out-earned the dividend and we expect to certainly cover and potentially out-earn the dividend for the remainder of the year, all else equal. As it relates to economic return, you know, the way we look at it is the portfolio should generate an economic return, you know, approximating or upwards of the dividend.

Speaker Change: Okay, great. And then, can you just discuss your comfort level with the dividend how that ties in with your, um, the economic return that you guys are seeing from the portfolio.

Bose George: There are hedging costs which could erode that economic return somewhat, but nevertheless the goal is to get as close to the dividend as is achievable, managing for hedging costs and other costs. And we feel pretty good about where our economic return is year-to-date, certainly. And as I mentioned, we have had positive economic return for the past seven quarters. And we think the environment is certainly conducive to achieving close to that dividend yield given volatility has come down and asset spreads are relatively cheap. Okay, great. Thank you, Bose.

Speaker Change: Sure. So obviously we raised the dividend earlier this year and, uh, you know, we make those decisions, very deliberately and we did have confidence that it was certainly earnable. And that's been the case we've out earned the dividend and we expect to certainly cover and potentially out earn the dividend for the remainder of the Year, all else equal. Um, as it relates to economic return. Um, you know, the way we look at it is, is the portfolio should generate, uh, an economic return, you know, approximating or or an upwards of the dividend there are hedging costs, which could could erode that, uh, uh, economic return somewhat. But nevertheless, the goal is to get to as close to the dividend, uh, as his achievable managing for hedging costs and other other costs. And we feel pretty good about where our economic return is uh uh, year to date certainly. And as I mentioned, uh, we have had positive economic return for the past 7 quarters. And uh, we think the we think the environment is certainly conducive.

Speaker Change: Uh to achieving close to that dividend yield given. Volatility has come down and asset spreads are relatively cheap.

Speaker Change: Okay, great. Thanks.

Speaker Change: Thank you, both.

Doug Harter: The next question from Doug Harter, UBS, please go ahead. Thanks, and good morning.

Speaker Change: The next question from Doug, Harter UBS, please go ahead.

David Finkelstein: David, hoping you could just talk through, you know, kind of how you thought about managing the portfolio through the second quarter, you know, your comfort in letting, you know, kind of leverage rise during kind of the extreme bouts of volatility versus, you know, kind of feeling compelled to kind of risk manage the portfolio and just help us with that thought process. Sure. Good question, Doug. So look, we came into the end of the quarter with a very good liquidity position consistent with where we're at this quarter. So we were comfortable in light of the volatility and Liberation Day was announced well in advance.

Uh, thanks and good morning. Uh, David hoping you could just talk through, you know, kind of how you thought about um managing the portfolio through the second quarter, you know, your comfort and letting you know kind of Leverage rise during kind of the extreme bouts of volatility versus you know, kind of uh feeling compelled to to kind of risk manage the the portfolio and just, you know, help us with that thought process.

David Finkelstein: And so we wanted to be prepared for it. Our leverage was low and we had ample capacity. So as April did get underway, our biggest focus was managing rate exposure. Given our low leverage, we could allow leverage to drift higher, which we certainly did. But rate exposure was something we were more focused on. And I think when it comes to the rates market in the current environment, navigating uncertainty is now the base case. And we need to be prepared for a range of outcomes. And so we're keeping our rate risk very close to home, as I mentioned in my prepared remarks.

Sure, good question, Doug. So look, we came into the port into the quarter with the with a very good liquidity position, consistent with where we're at this quarter. So we were comfortable uh in light of the volatility and and Liberation day was announced well in advance, and so we wanted to be prepared for it. Our leverage was was low, uh, and and we had ample, um, capacity. So, um, as, as April did get underway, our biggest Focus was managing rate exposure, given our low leverage. We could allow, uh, leverage to drift higher, which we certainly did. But rate exposure was something we were, we were more focused on and I think when it comes to the race Market, uh, in the current environment,

You know, navigating uncertainty is now the base case and uh, we need to be prepared for a range of outcomes.

David Finkelstein: And we let duration drift, but we're very disciplined when it comes to bans. And now we feel we're in a much better place, certainly, than we were in April and throughout the second quarter. We have a little bit more clarity on where tariffs are heading. The tax bill's complete. We came into this quarter with virtually no duration. We drifted a little bit insofar as rates have gone up, which is fine. But we feel good about the rates view. But that's the key focus in terms of managing that type of volatility, given the fact that we have flexibility in light of relatively low leverage.

Doug Harter: Does that help? Very helpful.

Speaker Change: Managing that type of volatility given the fact that we have flexibility in light of relatively low Leverage.

Speaker Change: Is that?

Doug Harter: And then I guess in that context, if you're, yes, how do you think about You know, balancing, you know, kind of continuing to invest into a market you see as attractive, whether that's through increasing leverage or continuing to access, you know, fresh capital, you know, kind of how are you weighing those, those decisions as, you know, as kind of there's slightly more certainty than there was, you know, say three months . Yeah, so look, as it related to the second quarter and raising capital, we were very deliberate with how we invested it. You know, our view when it comes to raising capital, as we've said before, it's got to be accretive to book value and accretive to earnings.

Speaker Change: Very helpful. And then, I guess in that context, if you're, I guess, how how do you think about

Speaker Change: You know, balancing, you know, kind of continuing to invest into a market, you see as attractive, whether that's through increasing leverage or continuing to assess, you know, fresh Capital, you know, kind of how are you weighing those, those decisions as you know, as kind of there's slightly more certainty than there was, you know, say, 3 months ago.

Doug Harter: And as we raise capital, we deploy it accordingly. You know, we look at new capital the same as we look at existing capital and we study our leverage position on a daily basis. And if we feel like we're under levered, we'll put money to work. And to your point about in an environment that it was as uncertain as it was early in the second quarter, it can be difficult at times to deploy capital. But at the end of the day, we had confidence that capital raise would be would be accretive. And so we're comfortable putting it to work now related to increasing leverage versus versus raising capital.

David Finkelstein: It was more advantageous for us. We felt to raise capital and put that money to work as opposed to increasing leverage given the uncertainty. And now we're in a place where all has come down. We could raise leverage, but we don't need to. If you look at the returns we're generating, the yield we're generating, which spreads where they're at, you can earn quite a handsome return with relatively low leverage. And it gives us a lot of flexibility to manage other parts of the portfolio and it gets smoother returns. The point I wanted to stress about consistently positive returns is that we have run at meaningfully lower leverage over the past couple of years than we had in the past.

Speaker Change: Yeah, so look, is, is it related to the second quarter and raising Capital we were, we were very deliberate with how we invested it. You know, our view, when it comes to raising Capital, as we've said before, it's got to be accretive to to book value, and and, and creative to earnings. And as we raise Capital, we deploy it. Uh, accordingly. Um, you know, we look at new capital, the same as we look at existing capital and we we we study our our leverage position on a daily basis. And if we feel like we're underlever, you know, we'll put money to work and and to your point about in an environment that it was as uncertain as it was early in the second quarter. Um, it can be difficult at times to deploy Capital, but um, at the end of the day, we had confidence that Capital raise would be would be accretive uh and so we're comfortable putting it to work. Now related to increasing leverage versus versus raising capital.

David Finkelstein: And it's worked out quite well. There's always an episode of volatility here and there, but we're able to sit on our hands with low leverage and not be forced sellers in a lot of circumstances. And that's led to smoother returns because we haven't been in positions to sell cheap assets. And as we've raised capital, we've been able to deploy it profitably. So we feel really good with the leverage where it's at.

Speaker Change: It was more advantageous for us. We felt to raise capital and put that money to work as opposed to to increasing leverage given the uncertainty and and now we're in a place where all has come down. We could raise leverage but we don't need to. If you look at the returns were generating and the yield were generating, which spreads where they're at, you can earn quite a handsome return, uh, with relatively low leverage. And it gives us a lot of flexibility to to manage other parts of the portfolio. Uh, and it gives smoother Returns the point. You know, I want to distress about about consistently positive returns is that is that we have run at meaningfully lower leverage, uh, over the past. You know, couple of years than than we had in the past and it's worked out quite well, there's always an episode of volatility here and there, uh, but we're able to sit on our hands with low leverage and not be for sellers uh, in a lot of circumstances and that's led to smoother returns because we haven't been in positions to

Doug Harter: And we haven't raised capital thus far this quarter, but if the opportunity materializes, we may do so. Great. Appreciate the answers, David.

Speaker Change: Sell cheap assets and, and uh, as we raise Capital, we've been able to deploy it, uh, profitably. So, so we feel really good with the leverage where it's at. And, you know, we haven't raised Capital thus far this quarter, but if the opportunity materializes, um, we may do so

Rick Shane: Thank you, Doug. The next question from Rick Shane, JP Morgan. Please go ahead. Thanks for taking my questions this morning. Look, one of the things you mentioned, or actually two of the things you mentioned, an expectation that rates will be headed lower later in the year, and commentary about negative HPA. As we think about the credit portfolio, can you help us start to think about some of the dynamics there? How are you insulated on the credit side? What are the puts and takes potentially of higher speeds on a portfolio that has different discount characteristics than the historic agency portfolio?

David binkle: Great, appreciate the answers, David.

Doug Harter: Thank you, Doug.

Doug Harter: the next question from,

Doug Harter: Thanks for taking my questions this morning. Um,

David Finkelstein: This is going to be sort of the first cycle with a credit portfolio of this size, and I think it's helpful for investors to sort of understand the dynamics, sort of the pros and cons as we enter a new part of the housing cycle.

Michael Fania: Yeah, so I'll start and then and then Mike can take it from there. I'll just say, Doug, you know, Mike has been very forward thinking about about making sure that the quality credit portfolio was as high as it could be. We were very early in tightening credit standards in 2022. You know, as I talked about, we tightened them more recently. And I think when you look at the the underlying credit, it's it's as high quality as it gets in that sector. Our mark to market LTV on the portfolio, I think is around 62%. We look at, you know, stress scenarios with HPA shocks.

Doug Harter: Look, you, you 1 of the things you mentioned or actually, 2 of the things, you mentioned an expectation that rates will be headed lower later in the year, um, and commentary about uh, negative HPA. Um, is we think about the credit portfolio? Um, can you help us start to think about some of the Dynamics there? Um, how how are you insulated on the credit side? What are the puts and takes potentially of uh higher speeds on a portfolio. That has different discount characteristics than uh the historic uh agency portfolio. Uh this this is going to be sort of the first cycle with a credit portfolio of the size and I think it's helpful for investors to sort of understand the Dynamics uh, that you the better, the sort of the pros and cons is, is we enter a new part of the housing cycle?

Yeah. So I'll start and then and then Mike can take it from there. I'll just say Doug you know, Mike has been very forward thinking about about um making sure that the quality of the credit portfolio was as high as it could be. We were very early in tightening credit standards in 2022. You know? It's I talked about we've tightened a more recently and I think when you look at the the underlying credit, um, it's it's

Michael Fania: And if you look at our portfolio, we experienced, say, a 20% decline in home prices, roughly 4% of that portfolio would be underwater, which is which is a very high quality credit portfolio in our view.

Michael Fania: And I think Mike's done a nice job and feel free to take it from here and talk about how you manage it. Yeah, thanks. I think that I would just add that in terms of the proactive changes that we've made since 2022, they are they are very significant. And I would say that we are an outlier in the market in terms of making those changes. So if you go back to the middle of 2022, the weighted average FICO in our lock pipeline was 735. About 20% of our originations were greater than 80 LTV, about 20% were less than 700 FICO.

Taken from here.

Michael Fania: So if you fast forward to our lock pipeline right now, it's a 764 weighted average FICO, only about 1% of loans are greater than 80 LTV. And I'll say only about four to 5% are less than 700 FICO. So it has not impacted our volume in a meaningful way. But we've been, you know, we've been very proactive in, you know, seeing the housing market decelerate, and trying to be, you know, on our on our front foot, so to speak. And Dave did mention that the quality of the portfolio, you know, it's a $30 billion plus gap, you know, whole loan portfolio, it's a 759 original FICO, it's a 62 mark to market LTV, there's 300k of borrower equity in those in those underlying properties.

Mike FIA: Talk about how you manage it. Yeah, thanks. I I think that I would just add that in terms of the proactive changes that we've made since 20122. They are they are very significant and I would say that we are an outlier in the market in terms of making those changes. So if you go back to the middle of of 2022, the weighted average FICO in our lock pipeline, was 735 about 20% of our originations, were greater than ADL TV, about 20% or less than 700 FICO. So if you fast forward to our lock pipeline right now, it's a 764. Weighted average FICO only about 1% of loans are greater than 80 LTV. And I'll say, only about 4 to 5% or less than 700 FICO. So, um, it is not impacted our, our volume in a, in a meaningful way. Um, but we've been, you know, we we've been very proactive in in, you know, seeing the housing market decelerate, um, and trying to be, you know, on our on our front foot so to speak and Dave did mention that the quality of the portfolio, you know, it's it's a 30 billion dollar plus Gap

Michael Fania: And the D60 plus as of the end of the recent quarter was under 2% was 185 basis points. And that's actually down, you know, called seven, eight basis points quarter over quarter. In terms of the second part of your question in terms of speeds, so the portfolio is a 655 gross WAC, that's the gap consolidated portfolio, the one month CPR is 13. But I think when you look at the part of the portfolio that right now, non QM rates will say are seven and a half percent. If you look at our non QM portfolio rates that are eight and a half to 9%.

Mike FIA: You know, whole loan portfolio. It's a 759 original FICO. It's a 62 Mark to Market LTV, there's 300 K of borrower equity in those, in those, underlying properties and the D60 plus as of the end of the recent quarter was under 2% was 185 basis points and that's actually down, you know, call it 78. Basis points quarter over quarter in terms of the second part of of your question in terms of speeds. So the portfolio is a 655 gross whack, that's the Gap Consolidated portfolio.

Michael Fania: So you're saying, you know, 100 to 150 basis points in the money, you know, they're only paying 25 to 35 CPR. So yes, curves within this market are flatter than the agency market, they're certainly much flatter than the jumbo market, you do have forms of prepayment protection, like penalties. So I think that, you know, we are well insulated, if there is a significant rally, given, you know, the current gross WAC of the portfolio, and the prepayment protection that that we have. Got it. Okay, that's, that's helpful. And look, I'm, this is all triggering thinking about this on a deeper basis.

The 1 month, CPR is is 13. But I think when you look at the, the the part of the portfolio that, uh, right now, non-qm rates will say, are 7 and a half percent. If you look at our non-qm, portfolio rates that are 8 and a half to 9%. So you're saying, you know, 100 to 150 basis points in the money. Um, you know, they're only paying 25 to 35 CP. So, the s-curves within this Market are flatter than the agency market. There's certainly much flatter than the jumbo Market. You do have, uh, forms of prepayment protection like penalties. Um, so I think that, you know, we are well insulated, if there is a significant rally given, you know, the current gross whack of the portfolio and the prepayment protection that that we have.

Rick Shane: I don't see anywhere in the disclosures, but I may just be missing something.

David Finkelstein: Is there a breakout by vintage so we can think about the expo, the cohort exposure and HPA, underlying HPA by year? Yeah, Rick, that's not something that we have disclosed. But that's something that we can follow up with you offline in a discussion about, you know, potentially disclosing that in the future.

Speaker Change: Got it. Okay, that's that's helpful. And and look, I'm this is all triggering thinking about this on a deeper basis. Um, I I don't see anywhere in the disclosures, but I may just be missing something, is there? Um, a Breakout by vintage? So, we can think about the exposure, the cohort, exposure, and HPA, um, underlying HPA, uh, by year.

Rick Shane: Terrific. Hey, appreciate the answers and thank you for the time this morning. Thank you, Ray.

Speaker Change: yeah, that's not something that we we have disclosed but that's something that we can follow up with you offline um in a discussion about you know, potentially disclosing that in the future

Speaker Change: Terrific. Hey, appreciate the answers and uh, thank you for the time this morning.

Rick: Thank you, Rick.

Jason Stewart: The next question from Jason Stewart, Jenny Montgomery Scott, please go ahead. Hey, good morning. Thanks. And congrats on seven consecutive quarters of positive economic returns. It's quite an achievement there.

David Finkelstein: So, you know, I wanted to continue on Rick's question on the private credit markets. You know, what's your expectation at this point for GSE reform and you know, how does that impact opportunities and developments in terms of products and where you can grow that business? Sure. And we've talked a lot about this in the past, Jason. Our expectation is now that the tax bill is done, and we're working our way through tariff negotiations, we do expect it to be on the front burner over the near term. The GSEs do still need to raise capital, and there's a lot of work to do before privatization can occur.

Doug Harter: Hi, good morning, thanks and uh, congrats on 7 consecutive quarters of positive economic returns. It's quite an achievement there. So um, you know, I wanted to continue on Rick's question on the, the private um the credit markets. You know, what's your expectation at this point for, for GSC reform. And um, you know, how does that impact opportunities and developments in terms of products and where you can and grow that business?

Michael Fania: But as we've said in the past, a lot of the loans that the GSEs originate are what are considered non-core, I think roughly 20% or thereabouts. And ultimately, we'll be able to compete for that origination, is our view. So we're optimistic, both in terms of lower supply in the agency sector, which can help the technicals, and also the ability to broaden the approach on the resi side. Does that help? Yeah, I guess I'm hearing no change to your view there, which is fine. Sorry, Jason, one thing I could add to, you know, for David, in terms of the correspondent channel, about, I'll say, you know, call it 10 to 11% of the actual correspondent lock volume is agency collateral.

Doug Harter: Sure. And we've talked a lot about this in the past. Jason, our expectation is now that the tax bill is done and and we're working our way through through through tariffs. Negotiations we do expect it to to to be on the front burner, over the near term, the gsc's do still need to raise capital and there's a lot of work to do before privatization can occur. Um, but as we've said in the past, a lot of, uh, a lot of the, the loans that the gsc's originated or what are considered non-core? I think you have, you have to say, 20% are there about some? Ultimately uh we'll be able to compete for for that origination as our view. So um, we're optimistic both in terms of lower Supply and the agency sector which can help the technicals and also the ability to to broaden the uh the approach on the resi side. Does that help?

Doug Harter: Yeah, I guess, I guess I'm hearing no, no change to your to your view there, which is fine. Um, just 1 thing that

Michael Fania: So that is agency investor, agency second homes, you are not seeing us come to the market to do standalone deals. However, that collateral is oftentimes included in our non-QM transactions. So we are capitalizing on some of the, you know, the pricing that the GSEs have and some of the, you know, efficiencies within the PLS market relative to GSE execution. So we are doing that right now. Okay, okay, that's helpful. Thanks.

Doug Harter: Relative to GSE execution. So we are doing that right now.

Michael Fania: And then on the MSR portfolio, you know, I mean, I understand that the 324 gross WACC is so far the money that, you know, any sort of, it would take such a meaningful movement rate to have a prepayment effect there. But how do you think about external factors impacting the multiple, you know, whether it's M&A activity in the space, lower rates impacting, you know, transaction multiples elsewhere. How do you think about that in terms of valuation on the MSR portfolio? One of the driving factors of MSR valuations as of late has been the cost of servicing has come down because of technological enhancements, which are only, I would say right now, escalating and accelerating and consolidation in the servicing sector will only fuel that, you know, there's about four to five players that that are investing combined hundreds of millions of dollars in technology and what you're going to see in terms of the pace of advancements in service .

Speaker Change: Okay, okay, that's helpful. Thanks. Um, and then on the MSR portfolio, you know, I mean, I understand that the 324, um, gross whack is is so far out of the money that it, you know, any sort of it would take such a meaningful movement rates to, to have a prepayment effect there. Um, but how do you think about external factors? Um, impacting the multiple, you know, whether it's, uh, m&a activity, in the space lower rates in impacting, you know, transaction multiples elsewhere. How do you think about that in terms of valuation on the MSR portfolio?

Michael Fania: Unknown Speaker, The Edge, The Edge is a very large company, and it's been very meaningful over the next few years in terms of lowering the cost. And that all passes through to us because it leads to cheaper subservice. So we're happy with what we've seen. We think there's going to be a lot of differentiation in servicing. And we're partnered with the ones who are making these investments. And, you know, they provide great service. And what we provide them is we help them with their scale, obviously. But also we're a capital and liquidity provider when there's when there's a need to, to move MSR off balance sheet.

Speaker Change: Look, 1 of the driving factors of MSR valuations. As of late has been, the cost of servicing has has come down because of technological enhancements which are only um, I would say right now escalating and uh, accelerating and consolidation. In the servicing, sector will only fuel that, you know, there's about 4 to 5 players that that um are investing combined hundreds of millions of dollars in technology and what you're going to see uh, in terms of the pace of advancements in servicing is is going to be very meaningful, a little bit of the next few years in terms of lowering the cost. Uh, and that all, uh, passes through to us because it leads to cheaper sub-servicing expenses. So, um, we're happy with what we've seen. We think there's going to be a lot of differentiation in servicing. And, uh, we're partnered with the ones who are making these Investments and and um, you know, they

Michael Fania: So we like where we sit, we like the evolution of the sector, we think it's only going to become more efficient, and it flows through into the valuations. And when you look at our multiple, we're relatively conservatively priced, we feel, and the performance of our MSR has been has been very good, well exceeded our expectations. Yeah, I mean, another exogenous factor that's really helped us, Dave mentioned in the prepared remarks, it's just the growth in the in the float accounts, the TNI accounts up 6% year over year, that's not the first year it's been up that much.

Speaker Change: Provide a great service and what we provide them is, we help them with their scale, obviously. Um, but also we're a capital and liquidity provider when there's when there's a need to uh, to move MSR off, balance sheet. So, um, we like where we sit, we like the evolution of of the sector. We think it's only going to become more efficient and it flows through into the valuations. And when you look at our, our multiple, we're relatively conservatively uh priced. We feel uh and the performance of our MSR has been uh has been very good. Well exceeded our expectations. Yeah I mean another exogenous Factor that's really helped us Dave mentioned in the prepared remarks.

Michael Fania: And it's certainly below what the industry and we've modeled. Another exogenous factor is servicers have never been able to keep customers for so long. So developing that customer relationship and cross sell opportunities and other revenue streams. off the MSR, you know, derived from the MSR asset. Those initiatives are, you know, in the infancy, but sure have a lot of promise given all the technology.

Speaker Change: It's just the growth in the in the float accounts. The the, the the TNI accounts up 6% year-over-year, that's not the first year. It's been up that much. And it's certainly below what the industry and, and we we've modeled um, another exogenous factor is Services Services have never been able to keep customers for so long. So developing that customer relationship and cross sell opportunities and other revenue streams.

Off the end of the song, You Know, derive from the MSR asset. I mean, those those initiatives are are, you know, in the emphasis. But sure, I have a lot of Promise, given all the technology Investments.

Jason Stewart: Great, thank you. Thanks, Jason.

Speaker Change: Great. Thank you.

Eric Hagen: The next question from Eric Hagen, BTIG, please go ahead. Thanks. Good morning, guys. I have one on the MSR as well. As these low coupon MSRs continue to season and pay down slowly, I mean, how should shareholders think about the value in pairing that opportunity with these higher coupons, right? Even versus a couple years ago when the complexion of the mortgage market was a little different, the level of prepayment risk looked a little different, volatility. How should we think about like the pairing of that opportunity now?

Jason: Thanks Jason.

The next question from Eric Haugen btig. Please go ahead.

Speaker Change: Yes, good morning guys. Um, I have 1 on the MSR as well.

Speaker Change: Uh as these low coupon msrs, continue to season and pay down slowly. I mean, how should shareholders think about the value and pairing that opportunity with these higher coupons, right? Like even versus a couple years ago when the complexion of the mortgage Market was a little different. The level of prepayment risk left. A little difference volatility.

Speaker Change: And how should we think about like the the pairing of that opportunity now?

Michael Fania: Yeah, I mean, we built out the capability to really participate actively in any coupon. And the way we've done that, again, is Dave alluded to building out these partnerships. with the largest, the best and most technology enabled of servicers and we capture our partner. And, and, you know, given the portfolio of partners we have. and our website at headstories.com. are prepared. On the loan coupon side, I mean, there is still a lot out there that does change hands. Because there's still there is a need for much of the mortgage industry to recycle out of the lower yielding loan rate MSR and kind of reallocate that capital to originating new loans, which will be the higher coupon MSR.

Speaker Change: Yeah. I mean we built out the the capability to really participate actively in in in any coupon.

Speaker Change: Um and and the way we've done that is again, it's Dave, Dave, alluded to is, is building out these Partnerships.

Speaker Change: With the largest, the best. And, and, and most, uh, technology enabled, uh, services. And we we capture, uh, partners,

Speaker Change: um, and and, you know, given the portfolio Partners, we have

Speaker Change: And given, we already have the exposure to all the coupons. Well, not not a lot in the higher. Coupons, we have enough to be statistically significant. We're really able to see how they're performing and what's really going on. And, and, and we do isolate the head strategies between the different note rates. So, um, we'll, we'll we're ready. We're there we're showing bids on all coupons and

Speaker Change: And and and and you know, are prepared on the low coupon side. I mean, there is still a lot out there that does change hands because there's still there is a need for for much of the mortgage industry to recycle out of the lower, yielding low note, write MSR and and kind of reallocate that that Capital to originating new loans. Um,

Michael Fania: So we're still facilitating that trade, as well as well as building out the infrastructure.

Which will be the higher proof on it. So,

Speaker Change: So we're still facilitating that trade.

Speaker Change: As well as building out the infrastructure.

Michael Fania: Okay, that's helpful color. I mean, how much hedging or like dollar duration is covered by the MSR position at this point? If you didn't have the MSR, how much bigger would your hedge portfolio, swap portfolio. be? In other words, like, how much is the return of the total portfolio being supported by this pairing of MSR and agency MBA? Maybe I would call in less than 2% of the overall hedge portfolio. There's very little structural leverage in the MSR position. So we don't get a meaningful duration change. But it's just a very powerful carry generator with a little bit of negative duration here.

Speaker Change: Hedge portfolios swap portfolio.

Speaker Change: Be in other words like how much is the the the return of the total portfolio being supported by this pairing of MSR and agency MBS?

Maybe I would call in less than 2% of the overall hedge portfolio. There's very little structural leverage in the MSR position, so we don't get, uh, meaningful duration change. But it's just a very powerful care generator with a little bit of negative duration there.

Eric Hagen: Right. Right on. All right. Thank you, guys. Thank you, Eric.

Speaker Change: Right. Right on. All right. Thank you, guys.

Speaker Change: Thank you, Eric.

Crispin Love: The next question from Crispin Love, Piper Sandler, please go ahead. Thank you. Good morning, everyone.

David Finkelstein: Can you dig into the demand picture for agency MBS in the current environment? Where's the bulk of demand coming from? You seem pretty positive on the space. Just curious on your expectations and demand. Have you seen more involvement from banks? Is it too early there? Just curious on the picture overall, and then just how that could impact your spread expectations.

Speaker Change: Thank you. Uh, good morning everyone. Um, can you dig into the demand picture for agency MBS in the current environment? Where is the bulk of demand coming from you? Seem pretty positive on the space, just curious on your expectations and demand. Have you seen more involvement from Banks? Is it too early there? Um, just curious on the the picture overall and then just how that could impact your spread expectations,

David Finkelstein: Sure. On fundamentals, on demand, fixed income funds saw about $50 billion in redemptions in April. But since then, they've seen about $50 billion per month in inflows. So demand from fixed income funds has been pretty strong. CMO issuance continues to be very strong. We're seeing about $25 to $30 billion in CMO issuance. So that's taking away about 30% of the gross supply to the market. What they've not seen is... demand from banks and overseas accounts. And even without that demand, I think fundamentals are quite supportive for agency MBS. Implied volatility is currently at three-year lows.

Sure. Um,

Speaker Change: On fundamentals on demand fixing and funds. Saw about 50 billion in redemptions in April, but since then, they've seen about 50 billion per month in uh uh in inflows. So demand from fixed income funds, has been pretty strong. Strong CMO issuance continues to be very strong. We're seeing about 25 to 30 billion in share moisture. And so that's taking away about 30% of the

Speaker Change: Uh, of the growth supply to the market.

Speaker Change: Uh, what we've not seen is uh, uh,

Speaker Change: Demand from Banks and overseas.

Speaker Change: and uh, even

David Finkelstein: Asset carry is attractive for unhedged accounts. So we do think MBS spreads can tighten three to five basis points to treasuries, even without additional demand from banks and foreign accounts.

David Finkelstein: But the real bull case for MBS is that a combination of regulatory reform and further easing in monetary policy will materially increase demand from banks and Asian accounts. And we think the odds of that happening in the second half of the year are quite. Yeah, Crispin, if you think about the bank model, you know, they've benefited quite a bit from from high short rates and the generation of NIM, specifically as a consequence of that, as the Fed does, does reduce rates that need for NIM to replace that NIM will materialize and we do expect it to come into agency MBS.

Speaker Change: Demand, I think, uh, fundamentals are quite supportive for agency MBS. Uh, implied volatility is currently at 3 year lows. Uh, asset carry is attractive for unhedged accounts. Uh, so we, we do things, MBS spreads can tighten 3, to 5 basis points to treasuries, even without additional demands from, uh, Banks and foreign accounts. But the real bull case for MBs, is that a combination of regulatory reform. And further easing in monetary policy, will materially increase demand from Banks and Asian accounts. And we think the odds of that happening in the second half of the year are quite good.

Speaker Change: Yes, Christian. If you think about, um, the bank model, you know, they've benefited quite a bit from from high short rates and in the generation of nim, uh, specifically as a consequence of that as the FED does, does reduce rates that need for Nim to replace that Nim uh will materialize. And we do expect it to come into agency MBS.

Crispin Love: Great. Thank you. Appreciate you taking my question. Thanks, Crispin.

Speaker Change: Great. Um thank you. Appreciate you taking my questions.

Mike FIA: Thanks Christie.

Matthew Erdner: The next question from Matthew Erdner, Jones Trading, please go ahead. Sure. Thanks. Thanks, Matt.

Speaker Change: This question from Matthew.

Mike FIA: Trading. Please go ahead.

Matthew: Hey, good morning guys. Thanks for taking the question. Um, I'd like to turn back to resi credit, um, you know, in the second half, you know, what you guys have seen kind of quarter to date. I know that there's close to about a billion dollars in security out there already. Um, but do you think 3 Q is tracking to kind of be in line with 2 Q? Um, and then just what, are your margin expectations going forward as well? Um, you know, given that the FED is pricing or there's 2 rate Cuts priced in

Michael Fania: This is Mike. In terms of issuance, I'll say year-to-date gross issuance has been, you know, $92 billion. That's outperformed analysts' expectations. I think we're tracking probably to be the highest issuance year since 2021, where we were north of $200 billion. So the capital markets, you know, remain robust. They're healthy. In terms of, you know, securitization and levels, we actually have the tightest print in terms of AAAs, where we've printed post-liberation day. Our latest transaction was non-QM13. It was a $662 million transaction, $500 million of AAA bonds, and we sold the AAA at $138. All other issuers and sponsors are kind of in called the $140 to $150 range.

Michael Fania: So I think what Q2 showed us and early Q2 and the volatility that we saw in April, I think that that showed us that there's a resiliency and maturation of the non-agency market that, again, if that occurred three, four, or five years ago, we don't think that you'd see the same outcomes. So I think it's very healthy, and we continue to build up the, you know, the investor base.

Sure. Thanks. Thanks Matt. This is Mike. Um, in terms of issuance I I'll say year to date. Gross issuance has been, you know, 92 billion dollars. That's outperformed analysts expectations. I think we're tracking, uh, probably to be the highest issuance year since 2021, where we were north of of 200 billion. So the capital markets, you know, remain robust, they're they're healthy in terms of, you know, securitization and and levels. We actually have the tightest print. Um in terms of Triple A's, uh, where we've printed um, post Liberation day. Our latest transaction was non-qm 13. It was a 662 million transaction, 500 million, a Triple A bonds, and we sold the Triple A at at 1:38, uh, all other issuers. And sponsors are, are kind of in call at the 140 to, to 150 range. So I think what what Q2 showed us and and

Michael Fania: In terms of the second part of your question, in terms of margins, we've talked about this in past calls. We don't actually publish what our margins are on our correspondent channel. But what you can assume is that, you know, we're retaining, call it 11% to 12% of our transactions using maybe what, you know, a turn, turn and a half of recourse leverage. So call it 5% to 7% of capital deployment per each $100. And, you know, you're talking mid-teens returns on that capital deployed. Got it. That's very helpful.

Mike FIA: Teams Returns on that, you know, on that, on that, uh, on that Capital deployed.

Michael Fania: And then, you know, just as a follow up to that, you guys talked about the credit box there, but you're you don't expect that to have any effect on the volumes that you guys do the remainder of the year. Yeah, you know, it's hard to say. So, you know, we did 5.3 billion of locks, 3.7 billion of fundings on the quarter, which was virtually identical to Q1. It was down a little bit from from Q4. When you look at some of the origination volumes that we've seen from the banks and some of the non-banks so far, you know, origination volumes are up, call it 20%.

Got it. That's very helpful and then you know just as a follow up to that you guys talked about the credit box there but you you don't expect that to have any effect on the volumes that you guys do the remainder of the year.

Michael Fania: So it's hard for us to say that if we did not make some of these changes, you know, to our guidelines and to our pricing, that we would not have done more volume. But I do think that we feel very good with the type of volume that we're doing. So, you know, we've done seven and a half billion closed funded loans to the correspondent, you know, for the first half of the year. That's a 15 billion dollar run rate. We think the non-QM DSCR market is about 5% of total originations. So, you know, call it 2 trillion of total originations, 100 billion of non-QM DSCR.

Yeah, you know, it's it's hard to say. So, you know, we did 5.3 billion of of locks 3.7 billion of fundings on the quarter, which was virtually identical to q1. It was down a little bit from from Q4. Uh, when you look at some of the origination volumes, uh, that we've seen from the banks and and some of the non-banks so far, you know, origination volumes are up call at 20%. So it's hard for us to say that if we did not make some of these changes, you know, to our guidelines. And to our pricing that we would not have done more volume. Uh, but but I do think that we feel very good with the type of volume that we're doing. So, you know, we've done 7 and a half billion uh closed funded loans through the correspondent, you know, uh for the first half of the year, that's a 15 billion dollar run rate. We think the non-qm dscr market is about 5% of total originations. So

Michael Fania: We think we're, you know, about a 15% market share. And we think that that's a comfortable level for us at this point in time. So I think we feel good with the volumes and, you know, and the targeted credit box that we have.

You know, call 2 trillion of total originations 100 billion of non-qm dscr. We think we're, you know, about a 15% market share. And we think that that's a comfortable level for us at this point in time. So, um, I think we feel good with with the volumes and, you know, and the targeted credit box that that we have.

Michael Fania: Awesome. That's great. Thank you, Mike.

Awesome. That's great. Thank you. Mike.

Michael Fania: Thank you.

Trevor Cranston: Next question from Trevor Cranston, Citizens JMP, please go ahead. Hey, thanks. I guess a question on the macro outlook, you know, it seems like there's a pretty strong consensus around steepening of the yield curve going forward. But you know, as the impact of terror start to come in, I guess, how much risk do you guys see of the impact of that on inflation being kind of greater than anticipated? And, you know, if some of the pricing in a Fed cuts were to come out of the market at some point, you know, how do you think agencies in particular would perform in that type of scenario?

Thanks.

Mike FIA: Next question. From traore Cranston citizens JMP. Please?

Okay, thanks.

Mike FIA: um,

Mike FIA: Yes, a question on the uh, the macro Outlook. Um, you know, it seems like there's a pretty strong consensus around a steepening of the yield curve, going forward. Um

Mike FIA: but, you know, as as um, the impact of tariffs

Mike FIA: Start to come in. I guess how much risk do you guys see of of the impact of that on inflation being kind of greater than anticipated?

David Finkelstein: Sure. So just looking at the macro outlook as it relates to tariffs, there will be inflation that will pass through. We're just starting to see it with the last CPI print, and it'll come through the summer. And our view is overall, you are going to have a continuation of services, inflation, and shelter coming down and goods inflation will be increasing. And as the Fed forecasts, you got a 3.1% core PCE at the end of the year. And that equates to roughly 25 basis points per month core PCE. And we feel like that's a reasonable assessment with services inflation coming down and goods inflation coming up.

Mike FIA: Um, and you know, if some of the pricing in a Fed Cuts were to come out of the market at some point, um, you know, how do you think agencies in particular would would perform in that type of scenario? Thanks.

Sure. So just looking at the macro Outlook as it relates to tariffs, there will be inflation that will pass through. We're just starting to see it with the last CPI print and it'll come through the summer. And um our view is overall uh you are going to have a continuation of services inflation and and shelter coming down and goods inflation. Uh will be increasing and um as the FED um forecast you got to uh 3.1% core PC at the end of the year and that equates to roughly 25 basis points per month, core pce and we

David Finkelstein: So we do anticipate that they'll deliver on the two cuts. They have an unemployment rate of around four and a half percent. So four 10s higher, the labor market is slowing, that will likely materialize. And as it relates to growth, you know, I think they have 1.4% GDP. To achieve that we need to grow close to 2% for the second half of the year. And so overall, the forecasts and the dots seem to paint what we believe will be a pretty accurate picture of how it plays out and we'll get those two cuts. Now, should that not occur, let's assume that inflation runs higher and the Fed's not in a position to cut, you'll see a flattening of the yield curve, which we're hedged for.

David Finkelstein: And agency MBS, so long as volatility is contained, should perform just fine. If on the other hand, you know, you get a bigger deterioration in the economy and the Fed's more aggressive, then that's obviously going to be good for agency because you will get more cuts, you'll get more involvement and that would be encouraging for us. But overall, if they don't deliver on the cuts, we're reasonably well hedged for that. And that's not our base case. We actually think they'll get delivered. Got it. Okay. Very helpful. Thank you.

Mike FIA: Feel like that's a reasonable uh assessment with Services inflation coming down in Goods inflation coming up. Um so we do uh anticipate that they'll deliver on the 2.

Mike FIA: Um, if on the other hand, you know, you get a, a bigger deterioration in the economy and the FEDS more aggressive, then that's obviously going to be good for agency, uh, because you will get more Cuts, you'll get more involvement and and uh, that would be encouraging for us. But overall, if they don't deliver on the cuts, we're reasonably well hedged for that. And um, that's not our base case, we actually think they'll get delivered upon.

Trevor Cranston: Thanks, Trevor.

Mike FIA: Got it. Okay, very helpful. Thank you.

Trevor: Thanks Trevor.

David Finkelstein: This concludes our Q&A session.

David Finkelstein: I would like to turn the conference back over to Mr. Finkelstein for any closing remarks. Thank you. Thank you, Vicky. Everybody have a good rest of the summer and we'll talk to you soon.

Speaker Change: How a Q&A session I would like to turn the conference back over to Mr. Fin, for any closing remarks, thank you.

Fin: Thank you, Vicky.

We'll talk to you soon.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Goodbye.

Speaker Change: The conference has now concluded, thank you for attending today's presentation. You may now disconnect goodbye.