Annaly Capital Management, Inc. Aktie

Good day, and welcome to the First Quarter 2026 Annaly Capital Management Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Sean Kensil, Director Investor Relations. Please go ahead.

Good morning, and welcome to the First Quarter 2026 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 and our most recent annual and quarterly SEC filings. 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 filings.

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.

During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release. Content referenced in today's call can be found in our first quarter 2026 Investor Presentation and First Quarter 2026 financial supplement, both found under the Presentations section of our website.

Please also note this event is being recorded.

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 Servicing Rights.

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

Thank you, Sean. Good morning, everyone, and thank you for joining us on our first quarter earnings call. I'll open with a brief review of the macro landscape for discussing our performance then I'll provide further detail on each of our three investment strategies and conclude with our outlook. Serena will then discuss our financials before opening up the call to Q&A.

Now starting with the macro backdrop, January and February saw a continuation of many of the trends seen in the second half of 2025 highlighted by a resilient economy as well as modest stabilization in the labor market. Consequently, fixed income markets initially experienced continued strong investor demand and generally muted volatility, ultimately, however, the war in the Middle East, ruptured the calm as it introduced an energy price shock that may challenge the performance of the U.S. economy as the rest of the year unfolds.

Although the U.S. is better insulated from higher commodity prices than most of Europe and Asia, rising oil and food prices risk further squeezing a consumer that is already facing slowing income growth and persistent affordability constraints. The bond market reacted sharply to the Middle East conflict and higher commodity prices as treasury yields sold off meaningfully in March. Short-term rates led to sell-off as investors priced higher near-term inflation, while long-term yields rose on increased term premium.

Expectations for monetary policy shifted significantly with markets pricing limited probability of any rate cuts this year compared to roughly 2.5 cuts priced in at the end of February. For the time being, it appears that officials will be best served by waiting to evaluate incoming data for clear signs that inflation pressures are receding, where the labor market is more markedly weakening before further lowering rates.

This past quarter also saw the release of the Federal Reserve's reproposed bank capital requirements, which were generally in line with market expectations. The newly proposed capital standards are more market friendly than both the original 2023 Basel Endgame proposal and current standards, providing the potential for deployment of excess capital from banks into fixed income and housing finance. The reproposal also specifically targets the mortgage market as residential mortgage loan RWAs are estimated to decline by 30%. This could accelerate Prime Bank loan growth and lower Agency MBS securitization rates of positive technical for prime loans and Agency MBS.

Also the elimination of a provision that deducted mortgage servicing rights above a specific threshold from regulatory capital, may at the margin lead to slightly higher demand to hold MSRs on the part of banks.

Now with respect to our portfolio performance in the first quarter, we delivered an economic return of 1.5%, reflecting the strength of our diversified housing finance platform across a volatile market backdrop. Leverage remained conservative at 5.7 turns, and we generated $0.76 of earnings available for distribution per share. Capital markets remained supportive in the first quarter, and we were able to raise approximately $510 million of common equity through our ATM in Q1.

The majority of capital raise was deployed in our residential credit and MSR strategies given the tightening experienced in the Agency in January and as such, our aggregate capital allocation to resi and MSR increased from 38% to 44% at the end of the quarter.

Now turning to our investment strategies and beginning with Agency. Spreads tightened sharply in early January, following the GSE purchase announcement before ultimately drifting wider, initially simply on tight valuations and later on increased rate volatility following the outbreak of the Iran war. Now despite the wide intra-quarter range, MBS widened only modestly quarter-over-quarter with lower coupons outperforming.

For Agency strategies, the story for the first quarter was about our ability to allocate capital dynamically as relative value shifts. Following the January tightening, we redeployed capital away from Agency and into our credit businesses, which exhibited a more attractive return profile. However, the ultimate retracement of MBS spreads back to more reasonable levels later in the quarter left the center in Q2 with a more balanced view of the relative value landscape across our three businesses.

The further support for Agency currently is the strong technical backdrop the sector is exhibiting as aside from GSE purchase mandate, weekly flows into fixed income funds are strong and CMO issuance continues to absorb over 30% of gross supply as banks have ramped up buying CMO floaters. Moreover, recent changes to bank capital rules encourage banks to retain more loans, which could lower securitization rates and decrease organic growth in Agency MBS.

In our Agency portfolio, specifically, we ended the quarter at $92 billion in market value, a marginal decrease from year-end with Agency representing 56% of the firm's capital. We opportunistically repositioned the portfolio during the late quarter sell-off in rates, rotating down in coupon from 6s into 4.5 TBAs. And notably, 4.5s provide more durable cash flows and improve the portfolio convexity should rates retest recent lows.

Also to note, we added modestly to our Agency CMBS portfolio in the quarter. We maintained conservative interest rate exposure throughout Q1 with continued focus on protecting book value and managing risk through disciplined measured hedging.

Tightened rate macro volatility led to more active tactical hedge adjustments in the quarter as markets moved quickly in response to geopolitical developments. Despite this activity, the net impact by quarter end was modest with overall hedge levels changing only slightly.

We remain comfortable maintaining exposure in swap spreads given the increased clarity around bank capital regulation and the growing presence of mortgage investors who actively hedge using swaps. That said, treasuries have proven to be a more effective hedge in sharp volatility episodes, such as March, which is why they continue to be an important part of our overall hedge composition.

Now moving to Residential Credit. Our portfolio ended the first quarter at $10.3 billion in market value, increasing to 23% of the firm's capital, driven largely by continued growth in our whole loan correspondent channel. Residential Credit spreads tightened at the outset of the year as the strong movement in the Agency basis drove a rally across securitized products. However, similar to Agency, credit spreads gave back their tightening in late February and March with AAA non-QM spreads ending the quarter 10 to 15 basis points wider.

We acquired $6.7 billion in whole loans on the quarter, approximately 80% sourced via our correspondent channel. Our lock volume was very strong at $7.4 billion, a 16% increase quarter-over-quarter and 41% increase year-over-year. Securitization markets remained healthy with Q1 Residential Credit gross issuance of $79 billion, a 63% increase year-over-year.

Our OBX platform settled 8 securitizations for $4.7 billion on the quarter generating $570 million of high-quality proprietary assets for Annaly's balance sheet and our joint venture. And subsequent to quarter end, we priced an additional 4 securitizations and now brought 12 transactions to market totaling $6.6 billion year-to-date.

Onslow Bay remains the largest non-bank securitizer of Residential Credit and is well positioned to continue to benefit from the growth of the private label market. And we maintained our tight credit standards as our quarter end locked pipeline is represented by a 764 weighted average FICO, a 67% combined LTV with less than 2% of the portfolio greater than 80 LTV.

Now shifting to MSR, our portfolio ended the first quarter at $4.2 billion in market value, and our capital allocation MSR increased 21% of the firm's capital. During the quarter, we committed to purchase $24 billion in principal balance or roughly $388 million in market value of MSR with a weighted average note rate of 3.4%. And these purchases came across 4 bulk packages as well as our flow channels.

We were the second largest buyer of conventional MSR in the first quarter, as measured by transfers, and we are now ranked as the fifth largest nonbank conventional servicer. Bulk supply in the first quarter, roughly $80 billion UPB was above Q1 '25, and we expect supply levels to remain ample throughout the balance of the year. And we continue to scale our flow MSR capabilities in order to acquire current coupon MSR when attractive and our active flow partners more than tripled quarter-over-quarter as we purchased $1.9 billion UPB via flow, though still a small share of our overall purchases.

Underlying fundamentals within our MSR portfolio remained strong, with prepay speeds muted at 4.2 CPR in Q1, while our credit profile continues to be high quality with serious delinquencies just under 50 basis points. The portfolio's weighted average note rate of 3.3% continues to provide significant prepayment protection and is the lowest note rate among the top 20 largest agency MSR holders.

Our MSR valuation multiple increased modestly to a 5.94 multiple primarily driven by the increase in interest rates.

And lastly, to touch on our outlook, we believe each of our investment strategies is well positioned to deliver attractive risk-adjusted returns through the remainder of the year, supported by a constructive market and housing finance backdrop. Again, Agency spreads are at a more reasonable level today than earlier in the year, offering perspective new money returns in the mid-teens and as I noted earlier, market technicals are the most favorable they've been since the end of QE. We believe that our portfolio composition continues to be a meaningful differentiator for Annaly, minimizing prepayment risk, while also generating strong carry.

Our Residential Credit business continues to see very strong growth, all while maintaining a diligent focus on asset selection and credit quality. While the non-QM and broader Residential Credit market is attracting new forms of institutional capital, our early investment in infrastructure and technology, the expansion of our correspondent partners and the depth of our OBX platform creates competitive advantages that are not easily replicated, and we intend to continue growing our allocated capital Residential Credit.

Our MSR portfolio is distinguished from other scaled portfolios in the industry by our significantly out of the money note rate and the high credit quality of our underlying borrowers. This has allowed us to consistently outperform our model projections, providing ample and predictable cash flows. We expect to further add MSR this year with increasing usage of our flow acquisition channels and benefiting from our long-standing synergistic relationships with large originators and servicers.

Now overall, Annaly's scaled, diversified housing model has demonstrated our ability to perform across different market environments. And over the last 3 years, Annaly has delivered a double-digit annualized economic return with a lower levered and more efficient platform than peers. The ability to dynamically allocate capital toward the most attractive relative value opportunities is critical in times such as this past quarter, and as we entered the second quarter with a reduced overweight in agency, we see a more balanced opportunity set with each strategy, providing compelling new money returns.

And now with that, I'll hand the call over to Serena.

Thank you, David. Today, I will briefly review the financial highlights for the quarter ended March 31, 2026.

As in prior quarters, our earnings release discloses GAAP and non-GAAP earnings metrics, and my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA.

This quarter, our portfolio delivered sound performance even as market volatility and geopolitical challenges increased. Our diversified housing finance platform proved resilient, and our proactive hedging strategy protected us against interest rate volatility throughout the quarter.

With that context in mind, as of March 31, 2026, our book value per share decreased by 1.9% from the prior quarter to $19.82. After accounting for our $0.70 dividend, we achieved an economic return of 1.5% in Q1. Earnings available for distribution per share increased by $0.02 to $0.76 per share and exceeded our quarterly dividend. We achieved this level of EAD primarily through a 30 basis point improvement in our average repo rate to 3.9% and higher TBA dollar roll income driven by increased specialness.

Partly offsetting these benefits were lower levels of swap income due to lower average receive rate on declining SOFR. Net interest margin benefited from the reduction in cost of funds, improving 2 basis points to 1.71% while our net interest spread remains strong, declining modestly to 1.42%.

The Residential Credit securitization business achieved another record quarter, issuing $4.7 billion across 8 securitizations, surpassing $50 billion in total issuance since inception. Our economic leverage ratio remained disciplined at 5.7x and our Q1 reported earning repo rate was 3.87%, down 15 basis points. The weighted average repo days to mature at the end of the quarter at 36%, up 1 day.

Total warehouse capacity across our Residential Credit and the MSR businesses was $7.6 billion, including $2.8 billion of committed capacity. We have ample available capacity in both businesses with utilization rate at 65% for Residential Credit and 50% for MSR.

We ended the first quarter with $7.4 billion in unencumbered assets. This includes $5 billion in cash and unencumbered Agency MBS. We also have roughly $1.6 billion of fair value of MSR pledged to committed warehouse facilities. This amount remains undrawn and can be quickly converted to cash, subject to market advance rates. In total, we have about $9 billion of total assets available for financing, down $300 million from the prior quarter. This represents about 55% of our total capital base and provide significant liquidity and flexibility.

Finally, on our OpEx. Our efficiency ratio fell 2 basis points to 1.29% this quarter, continuing our trend of being 1 of the lowest in the mortgage REIT sector despite operating 3 fully scaled businesses on the balance sheet.

That concludes our remarks. We will now take questions. Thank you, operator.

[Operator Instructions] The first question comes from Crispin Love with Piper Sandler.

Dave, you mentioned the bank capital rules. Do you think these changes will drive significant changes in bank balance sheets with banks holding more mortgages, mortgages have definitely been moving towards nonbanks for an extended period of time. I think the bank crisis in 2023, you only increased that just given the asset liability mismatches. So I'm curious if you think that these changes could be meaningful could change just on the margin and what that could mean for the broader mortgage industry?

Sure, Cris. And look, we'll have to see. I think when you look at the estimates in terms of balance sheet capacity for mortgages as a consequence of the rule and it gets a little over $600 billion in balance sheet capacity. And in terms of how we see it evolving, the tiering of LTVs, obviously, is quite favorable, and we think it will reduce agency issuance as banks will retain more loans. We don't know at this point the extent of it. But generally, it's good for the technicals associated with mortgages.

And as far as origination, and I'm going to hand it over to Mike momentarily. But as far as the origination market, we don't see banks getting back into origination. That has largely moved outside of the banking system into nonbanks. And the nonbanks have made considerable investments and it will be hard to ultimately compete with them. Banks obviously still engage in origination, but that's typically on behalf of their customers as opposed to a real profit center. And Mike, feel free to add.

Yes. I would just add, Crispin, that in terms of what banks have been focused on, they have been focused on catering to their retail customer. They are not focused on pursuing origination through the correspondent channel. You could see that through Wells Fargo, but there's been a number of other companies that have deemphasized correspondent lending, as a way to acquire the customer. And we do not think that these rules will change that.

A lot of it is what David is saying is that the secular trend of nonbanks, that's going to stay in place. They've invested in terms of technology resources, but also the profitability of the mortgage origination market as well is currently challenging. If you look at 2025, the net profit margin for independent mortgage bankers was 21 basis points. So that is historically a low number. So it's not really a conducive environment for banks to come back into the mortgage origination market with a large presence.

Okay. That makes a ton of sense. And then just a second question for me on capital allocation across the businesses. You did lean into Resi Credit and MSRs. Can you just remind us what your long-term goals are for allocation? I believe it was 50% Agency, 30% Resi Credit, 20% MSRs. First, does that still stand? Is that a place that you'd like to get to and just be able to dial up or dial down specific areas?

Yes, that is correct, and you did identify those metrics accurately. And it is a long-term objective of ours. But as I've always said, we've always said we're very patient about getting there. And this past quarter is an example of our ability to pivot. In January, Agency MBS were very difficult to buy given the valuations and the ability of the other businesses to pick up the slack and add assets, I think, is a testament to the flexibility of the model, but long term, 50%, 30%, 20% is still the target.

Next question comes from Bose George with KBW.

Actually, can we get an update on your book value quarter-to-date?

Sure, Bose. As of Friday, we were up 4% in economic terms.

And that's 4% net of the accrued dividend?

Inclusive, inclusive of the dividend accrued.

Okay. Okay. Great. And then on the -- going back to the Basel III question. I mean the MSR risk weighting has remained at 250%. Do you expect that to go down after the comment period? And if so, think that gets the banks a little more active on the MSR side?

Well, the banks are already active on the MSR side. So we see them as we're bidding for MSR. And look, it's under common, the 250% risk weight, I would expect that the banks are going to be very active at lobbying around that 250% risk weight. And whether they'll be successful or not, we don't know, but they'll certainly be proactive about commenting on it.

The next question comes from Marissa Lobo with UBS.

On the increased capital allocation to non-agencies in Q1, the presentation states returns of about 12% to 15%. Can you expand on how that looks among the various non-agency subsectors you're active in?

Sure. Mike, do you want to take it?

Sure, Marissa. So the net increase in the portfolio was $2.3 billion. I would say it's broken down within 3 components. One is third-party securities. So the portfolio was $2.1 billion at the end of the quarter. That was up $435 million. So within third-party securities, we bought $395 million of CRE CLOs. These are AAA assets, points of enhancement or like a 2-year spread duration, they're uncapped floaters, 7 turns of leverage, that gets you kind of to 12%. We also bought BB non-QM bonds. So these are the [indiscernible] ones. We bought those in the kind of the range of 3.35 to 3.40 over. I would say that those are in kind of the 12% to 13% levered ROEs.

And then we also bought $55 million of NPL, RPL A2s. So these are unrated securities. We're buying the subordinate bond 15 to 20 points of enhancement and they're in the kind of like the 3.50. So there's kind of the 12% to 13% as well. So the lower end of that 12% to 15%, that is the identification of these third-party securities.

The other 2 components of the portfolio is OBX. That was $3.5 billion. That is where you're getting those mid-teens returns. Whole loans were up $1.65 billion on the quarter. I will say when they're sitting on warehouse lines, you're earning kind of in that 11% to 12% range. but that when they're ultimately manufactured into OBX securities, you're earning that 15% on 1 turn of leverage. So that is kind of the breakdown over the quarter.

I appreciate that detailed answer, Mike. And referencing recent reports from the rating agencies on non-QM delinquencies, particularly newer vintage collateral. And with the rising pressure you referenced on the consumer from inflation? And how is that impacting investor appetite down in credit. Has it impacted your credit enhancement and pricing in your deals in any meaningful way?

Yes. So I would say that what we are experiencing and what we are seeing is that the 2024 and the 2025 vintages up the seasoning curve of the credit card are showing lower delinquencies than what was experienced in 2023. And in 2025 is outperforming 2024. When you look at our portfolio, our serious delinquencies are D90 plus. It's 140 basis points. That has been pretty much in the range over the last year, call it, in the 130 to 145 basis points. So our performance has been very, very consistent.

In terms of the deals themselves, what we're seeing broadly is when non-QM gets up the seasoning ramp, 2023 vintage, if you include other third-party non-QM shelves, you're maybe in that kind of 5% to 6% range as a percentage of current. What you are not seeing, however, is realized losses. Realized losses, cumulative losses within non-QM are still a handful of basis points across various vintages. So I would say we have not really had seen any impact from the investor side.

I think we're very comfortable with the structures of the deals, the credit enhancement, the performance and ultimately, the fact that these borrowers have equity and they're not realizing losses on those delinquencies and then in terms of the rating agencies, I would say that they have been constructive. They initially were we thought very conservative evaluating these transactions. And CEs, I would say, have actually probably have declined a little bit given the actual performance that we've seen over the last number of years.

The next question comes from Rick Shane with JPMorgan.

Look, you guys were aggressive in the first quarter, raising capital through the ATM. Stock continues to trade at a premium to book. I am curious in this environment with spreads tightening again how aggressive you might be at these levels and also given deployment into what I would describe as less liquid, more bespoke instruments, whether it's MSR or CRT, is the strategy to raise capital and then deploy it into the core agency book? And then as you see opportunities rotated into the other asset classes, how should we think about deployment and your ability, I guess, how aggressive you will be in raising capital and how you will mitigate the drag as you redeploy capital?

Sure. Good question, Rick. So just to be clear, in the first quarter, the capital raise was specifically related to Resi Credit and MSR in real time. So in January, Agency obviously got quite tight, as I mentioned. However, we were seeing a lot of supply coming in both MSR and the loan pipeline was picking up. So we felt it was highly productive to raise capital, and we did so.

We added nearly $400 million in market value in MSR and obviously, couple of billion in Resi Credit. And so that was the purpose. We weren't just raising capital, putting it in Agency and then redeploying it. It was specifically earmarked.

On a go-forward basis, Agency looks better than it did obviously, in January after the GSE announcement. And when we look at that sector, the technicals are as supportive as they've been, as I mentioned in the prepared remarks, since QE. And so while spreads are not as cheap as they were in 2025, it's a very investable sector because we feel like it's safer given the breadth of demand across virtually all market participants.

So we wouldn't hesitate to methodically raise capital and invest in Agency. But we don't feel like our footprint is going to be that heavy. We don't need to be that aggressive. It's got to work for us. And obviously, it was accretive last quarter and it still looks to be that way, but we're going to be delicate and we want to be very thoughtful about how we allocate it. And again, Q1 was not about just storing it in Agency and then redeploying it. We have done that from time to time.

As I've mentioned, when Agency was cheaper but really, it's a very thoughtful process. We weren't in the market that frequently. In March, when the volatility certainly weren't actively in the market. It had to be right. The stock had to be liquid and with a strong bid associated with it and we didn't have a heavy footprint at all, and we'll maintain that approach.

I'm a little -- our team is a little short handed at the moment, and I'm bouncing around between calls. So the clarification on how opportunistic that issuance in Q1 was really helpful.

The next question comes from Harsh Hemnani with Green Street.

So there were a few securitizations this quarter that included Agency eligible loans. Could you maybe talk a little bit about the dynamic that's incentivizing originators to sell their loans to -- in the non-agency channel over the agencies? And then how you expect that to trend over the coming quarters?

Sure. Thanks, Harsh. This is Mike. So I would say that the Agency eligible investor loans and Agency-eligible second homes has been a continuing sector within the Residential Credit market over the last number of years when the FHFA and the GSEs made changes to their LLPAs. At the higher LTV levels, it is very onerous to deliver those products to the GSEs. So dependent upon where market execution is, a lot of these underlying originators would rather retain those loans, put them on gestation facilities for a period of time and deliver to nonagency aggregators like ourselves relative to delivering to correspondents or the cash window.

So there's enough pay up for them to hold that loan, perform due diligence, pay incremental warehouse costs relative to just delivering it to another correspondent or cash window within a handful of days. So that's something that has existed within this market for a number of years, given those LLPAs. A new development, what the market is seeing is that Agency owner-occupied collateral, which does not have the so-called onerous LLPAs. You have seen more and more originators securitize that.

So at this point, I think that there's been 3 originators that have come to the market. I think they all have differing objectives in terms of coming to the market. One of them, which is fairly large, I think that they've been very clear that the actual execution of owner-occupied in the PLS market versus the Agency market is breakeven, but they're utilizing it to create credit investments. We did a deal this quarter with the company. It was a partnership transaction. We didn't actually take principal risk, but we are charging for the use of our shelf. We take down [indiscernible] bonds. I think their incentive was they wanted additional capital markets distributions away from the GSE.

So we've seen a handful of originators go down the route of owner occupied. At this point, though, we don't think that it's actually that profitable relative to the agency execution. It's more just broadening these originators capital markets distribution, so to speak.

The next question comes from Merrill Ross with Compass Point Research and Trading.

You mentioned that there were slight changes in your hedging portfolio despite the shift in your equity allocation. And I'm wondering if the lower periodic income reduces your appetite for hedging with swaps over treasury futures and just how you expect to roll forward your hedge is in the second quarter?

Sure, Merrill. So I'll just take a big picture approach to your question and talk about swap versus treasuries. Now we've had a couple of changes to the market in the past number of months beginning last fall and the first one being that the Fed ended QT and started reserve management purchases. And that to us, signaled that the Fed is going to stand behind balance sheet in the market. And the difference between swaps and treasuries in terms of the risk is treasuries have balance sheet risk, swaps don't.

And so when you add potential for balance sheet on the part of the Fed, it makes swaps a safer hedge. And in addition to that, the second item is we got clarity on bank capital rules, which should free up a little bit of balance sheet. So from that standpoint, our disposition towards hedging with swaps is a little bit more optimistic.

Now having said that, the correlation between mortgages and swaps is not as good as the correlation between mortgages and treasuries or hasn't historically been as good. It's a tighter fit to hedge with treasury. So it makes sense to maintain treasuries as a hedge even though the carry isn't as good.

However, if you look at some of the evolution over the very recent past, REITs growing and they're hedging the GSEs hedged with swaps, a lot of bank purchases of CMO floaters, which are SOFR based. And so the market is evolving more towards benchmarking mortgages to swaps and as a consequence, you should get better correlations on a go-forward basis.

So between both of those developments, I think we're a little bit more comfortable hedging with swaps, and you might see a slight increase in our usage of swaps. However, when you get shock environments like we saw in March and the selloff, treasuries tend to underperform swaps and they end up being a better hedge. So you want to have some element of your hedge portfolio in treasuries to kind of cushion those eventualities. But generally, we're pretty comfortable with around 2/3 hedge ratio between swaps and treasuries. You could see it go up because of the better or the increasingly better fit between mortgages and swaps..

The next question comes from Jason Weaver with Jones Trading.

I was hoping to perhaps that maybe you could disaggregate the 190 basis points book value decline by what was driven by HD spread widening versus marks on the Resi Credit and MSR book and if that's materially reversed in April?

Yes. So I'd say resi performed the best, followed by MSR and Agency obviously lagged. So Agency spreads as well as costs associated with dynamically hedging. We had a 50 basis point variation in 10-year swaps, and that can tend to cost a little bit. And so some of the book value deterioration was as a consequence of just managing the portfolio and hedging. But generally, Agency lagged the other 2 on a little bit of spread widening, maybe had a very slightly negative return and resi did the best, call it, low to mid-single digits and MSR low single digits in terms of economic return.

Got it. That's helpful. And then given the geopolitical volatility that's been going on since March, has that shifted your outlook for the runway for the Onslow Bay business? Or have you changed your retention target with that strategy?

You said Onslow Bay specifically?

Correct.

Jason, this is Mike. I would say if anything, Q1 has actually given us more comfort in terms of ramping up -- residential whole loans ramping up the correspondent business. Similar to what we experienced during Liberation Day and the subsequent fall out there, there's been significant resiliency within the non-agency market. When we look at Q1, David mentioned in his script, over 60% growth year-over-year in Q1. And that is despite spreads at the top part of the capital stack experiencing a 50 basis point -- 50 basis point range.

So the market was fully functioning. We obviously priced 8 deals, settled 8 deals, $4.7 billion. We priced 12 deals to date. And right as we sit here today, the cost of funds on a AAA security is probably in the 1.20 range all-in SOFR cost or SOFT plus 1.50 and you're in the low 5% cost of funds. So the market has shown increasing growth, sponsorship and liquidity and I would say we're comforted by despite this volatility, the market continued to operate at a high level.

Congrats on the quarter.

Next question comes from Trevor Cranston with Citizens JMP.

With mortgage rates increasing a decent amount over the last several weeks, can you give us an update on your thinking as to the probability of further efforts from the government to potentially lower mortgage rates and what form do you think that could potentially come in?

Sure. So look, the affordability issues kind of moved a little bit to the sidelines in light of the conflict in Iran, and just to summarize what's been done thus far. Obviously, the GSE announcement was meaningful for the mortgage basis. But there's been a couple of executive orders, which have been primarily focused on regulation, both building as well as mortgage lending. And those are just around the edges. The ROAD Act is stuck in the house and that has, again, some positive impact for affordability as pilot programs, convert vacant buildings into attainable housing, spur construction through regulatory relief as well.

Grants for manufactured housing, et cetera. And also the other efforts within the government to just generally make housing more affordable. But these are not having an impact insofar as at the end of the day, mortgage rates are higher, folks are locked in and home prices are high. And ultimately, we need lower rates to be able to help that. We'll see what else the government can do.

But one thing I can tell you that might be a little novel idea, if you want to get mortgage rates lower, is to take a bipartisan approach and focus on reducing spending and raising revenues and get overall level of interest rates down, if you can deal with deficits. And until you really deal with the bigger structural problems in the economy, it's going to be hard to get mortgage rates lower. So -- that's the short of it.

This concludes our question-and-answer session. I would like to turn the conference back over to David Finkelstein for any closing remarks.

Thank you, operator, and thanks, everybody, for joining today, and we'll talk to you next quarter.

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

Good morning, and welcome to the fourth quarter 2025 earnings call for Annaly Capital Management. [Operator Instructions]

Please note today's event is being recorded. I would now like to turn the conference over to Sean Kensil, Director of Investor Relations. Please go ahead.

Good morning, and welcome to the fourth 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 filings. 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 filings. .

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. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release. Content referenced in today's call can be found in our fourth quarter 2025 Investor Presentation and Fourth Quarter 2025 financial supplement, both found under the Presentations section of our website.

Please also note this event is being recorded. 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 Servicing Rights. 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 fourth quarter earnings call. Today, I'll open with a brief overview of the macro and market environment. and then touch on our performance for the quarter and the year, following which I'll provide an update on each of our 3 investment strategies and conclude with our outlook for 2026. Serena will then discuss our financials before opening up the call to Q&A.

Now starting with the macro landscape. The fourth quarter supported the prevailing narrative of a solid U.S. economy. Although official data flow was disrupted by the government shutdown, reports received thus far suggest that the expansion continues at an net above trend pace. The labor market remains soft, however, hiring slowed further in Q4, but limited layoffs and a reduction in labor force growth have muted the rise in the unemployment rate. Fixed income markets exhibited another strong quarter, in turn, helping 2025 register the highest total return in the U.S. aggregate bond index since 2020. The market benefited from continued strong inflows into bond funds and the ongoing decrease in both implied and realized rate volatility to the lowest levels since 2021.

This decline in volatility was supported by a more predictable outlook for monetary policy and following 75 basis points of aggregate rate cuts in 2025, markets currently priced nearly 2 additional cuts later this year. The pace and realization of those projected cuts will be dependent on developments in the labor market, stability and inflation, and the composition of the FLMC going forward. The yield curve further steepened during the quarter as short-term yields fell, while long-term yields rose modestly. Swap spreads continue to widen partially driven by a shift on the part of the Fed from quantitative tightening to balance sheet expansion through reserve management purchases and bills, which served to increase the stability in short-term funding markets.

And amid this constructive environment, our portfolio generated an economic return of 8.6% for the fourth quarter, with all 3 businesses contributing solid returns. For the full year 2025, we've delivered an economic return of just over 20% and a total shareholder return of 40%, underscoring the strength and resilience of our diversified housing finance strategies. And notably, we've been able to produce these results with a conservative leverage profile and our economic leverage decreased modestly to 5.6 turns in the quarter. Our earnings available for distribution rose marginally to $0.74 again out earning our dividend. And also to note, we remained active in capital markets, raising $560 million of common equity through our ATM in Q4 bringing total equity raised in 2025 to $2.9 billion, inclusive of our Series J preferred stock issuance this past summer.

With the capital raised, we were able to accretively grow our portfolio by 30% on the year with each of our 3 strategies demonstrating double-digit growth. Now turning to our investment businesses and beginning with agency. Our portfolio ended 2025 at $93 billion in market value, an increase of nearly $6 billion in the quarter and $22 billion over the course of the year with agency ending the year representing 62% of the firm's capital. In addition to MBS benefiting fundamentally from lower volatility in a steeper yield curve, sector has exhibited a highly supportive supply and demand picture as well. In particular, strong and consistent bond fund inflows, REIT equity raises, in GSE portfolio growth of $50 billion through year-end against the backdrop of net MBS supply surprising to the downside, helped fuel spread contraction in the second half of 2025.

With respect to our portfolio activity, our purchase is centered on adding 5% coupons evenly split between pools and TBAs. Given the range-bound rate environment and steeper curve, we were comfortable taking on current coupon exposure to drive higher returns in light of the anticipated reduced hedging costs. And we also grew our Agency CMBS portfolio by roughly $1 billion given the sector's relative attractiveness compared to lower coupon MBS. With mortgage rates approaching 6% and recent prepay activity highlighting a more reactive borrower, higher coupons lagged on the coupon stack. However, we have deliberately constructed our specified pool portfolio with enough call protection to withstand a lower rate environment. For example, our 6% and 6.5% coupon pools have prepaid 40% slower than that a generic cheapest to deliver collateral, and we anticipate our holdings in these coupons should provide durable carry for years to come.

Now our hedge position remained broadly stable this quarter, consistent with our strategy of maintaining a conservative rate posture with volatility at some of the lowest levels we've experienced over the past 5 years, our duration management focused predominantly on hedging new asset purchases using a combination of both treasury futures and swaps. Now shifting to residential credit. Our portfolio ended the fourth quarter at $8 billion in market value, up $1.1 billion quarter-over-quarter, representing approximately 19% of the firm's capital. Non-Agency residential credit was relatively range-bound throughout the quarter with AAA non-QM spreads, ending the year marginally tighter at 125 to the curve.

Q4 represented another record quarter for our Onslow Bay franchise as we achieved all-time highs across lock volume, fundings and securitization issuance. During the quarter, our correspondent channel locked and funded $6.4 billion and $5 billion, respectively. We settled an additional $800 million of whole loans via bulk acquisitions and we closed 8 securitizations totaling $4.6 billion. And this securitization activity resulted in the creation of $570 million of proprietary OBX assets on the quarter with mid-teens expected ROEs.

And throughout the entire year, we locked over $23 billion of loans to the correspondent and funded $16.5 billion exclusively through that channel, representing an increase of 30% and 40% year-over-year, respectively. During 2025, we closed 29 securitizations for an aggregate $15.2 billion, generating approximately $1.9 billion of high-quality retained assets for Annaly in our joint venture while remaining firmly entrenched as the largest nonbank issuer in the residential credit sector. And even with the continued growth in the Onslow Bay channel and securitization program, we remain disciplined on credit with our current locked pipeline representing a 762 weighted average FICO and a 68 original LTV with limited layer risk. Now the first few weeks of 2026 have been marked by credit spread tightening as both the corporate credit and structured finance asset classes have strengthened given the movement in the Agency MBS market.

Now this is a supportive backdrop for our business as declining cost of funds and stability in capital markets should keep our volumes elevated. Given our market leadership, Annaly remains well positioned to continue to benefit from the growth and liquidity of not only the non-QM market, but also the broader non-agency market, which is expected to experience the highest growth securitization issuance since 2007 this year. Now turning to MSR. Our portfolio ended the fourth quarter at $3.8 billion in market value including unsettled commitments, representing a nearly $280 million increase quarter-over-quarter and a 15% increase year-over-year, and MSR ended the year representing 19% of the firm's capital. And during the quarter, we committed to purchase $22 billion in principal balance or roughly $330 million in market value of MSR with a weighted average note rate of 3.46%.

Now these purchases were across 5 bulk packages in our flow channels, of which $150 million of market value is expected to settle in Q1. And notably, we are the second largest buyer of conventional MSR in 2025, onboarding $59 billion in UPB throughout the year, and we ranked as the sixth largest nonbank agency servicer. Bulk supply was ample this past year, and we expect this pace of activity to continue in 2026 due to increasing origination volumes, coupled with compressed gain on sale margins necessitating MSR sales as demonstrated throughout 2025.

Now regarding our flow business, we're focused on expanding our footprint and are now active across all GSE platforms, providing access to current coupon MSR, which we plan to purchase opportunistically. Our MSR valuation multiple increased marginally on the quarter driven by a steeper yield curve, modest spread tightening and lower volatility. Fundamental performance within the MSR portfolio continues to be strong and cash flows remain durable. The portfolio paid 4.6 CPR in Q4, unchanged quarter-over-quarter while serious delinquencies remain muted at 55 basis points. And with a weighted average note rate of 3.28% our portfolio is still 250 basis points out of the money. As we continue to enhance our subservicing and recapture relationships, we look forward to growing our MSR portfolio in the coming year taking advantage of the role we've created as a preferred partner to the originator and servicer community.

Now to conclude with our outlook, as we look further into 2026, each of our investment strategies is well positioned to continue delivering strong results for our shareholders. The agency spread tightening following the GSE's recent MBS purchase announcement has been pronounced, but it is important to note that not only are technicals in the market vastly better than at any time since the Fed was actively buying MBS. Also MBS hedging costs should be meaningfully lower given the decline in volatility supporting low to mid-teen prospective returns. And we anticipate the non-Agency market to continue to grow as a share of total origination and Onslow Bay is uniquely positioned to maintain its healthy pace of loan acquisitions and securitization issuance.

The non-QM market, in particular, has matured into a more liquid institutional asset class and our early positioning gives us significant competitive advantages in loan selection and execution. And our best-in-class MSR portfolio remains distinguished with an average note rate that is significantly out of the money and an exceptional credit profile which provides our portfolio with a stable cash flow vehicle, supporting our overall yield and returns. Most importantly, we believe our diversified housing model will continue to perform for our shareholders in the year ahead. In an environment where spreads across various asset classes have tightened unevenly the optionality to invest in the most accretive assets is an important lever to drive returns that monoline peer strategies are not afforded.

And accordingly, while Agency will certainly continue to remain the anchor of our portfolio, our non-agency strategies will likely see additional capital allocation all else equal. We do, however, have the earnings power and the liquidity to be both patient and opportunistic and the scale to maintain our market leadership across housing finance and our diversification enables us to be resilient across different rate cycles and market environments. And now with that, I'll hand 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 December 31, 2025, as well as select -- measures. Consistent with prior quarters, while our earnings release discloses GAAP and non-GAAP earnings metrics, my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA. Starting with book value. As of December 31, 2025, our book value per share increased 5% from 1925 in the prior quarter to 2021. After accounting for our $0.70 dividend, we achieved an economic return of 8.6% in Q4. This brings our full year 2025 economic return to 20.2%. .

Strong investment gains drove this quarter's performance. We benefited from spread tightening driven by lower volatility as favorable technical factors. Gains on our interest rate swaps also supported results as swap spreads widened. Earnings available for distribution per share increased by $0.01 to $0.74. And again, as David mentioned earlier, exceeded our dividend for the quarter. This increase in EAD was driven by a 30 basis point improvement in our average repo rate to 4.2% and higher average investment balances resulting from growth in our agency and residential loan portfolios. For the full year, average yields rose 26 basis points year-over-year from 5.13% in 2024 to 5.39% in 2025.

However, these benefits were partially offset by lower levels of swap income due to lower average receive rates. Net interest spread and net interest margin, both excluding PAA, remained strong and comparable to prior quarters at 1.49% and 1.69%, respectively. For the full year 2025, net interest spread and net interest margin, both excluding PAA, reached 1.4% and 1.7%, an improvement of 18 basis points and 13 basis points, respectively further demonstrating the returns from our disciplined investing and funding teams. Turning to financing. We added $6.7 billion of repo principal at attractive spreads while deploying the proceeds from accretive ATM issuances during the quarter. This led to a Q4 reported a repo rate of 4.02%, down 34 basis points.

Additionally, our weighted average repo days ended the quarter at 35 days, 14 days lower than the prior quarter. Our economic leverage ratio remained historically low at 5.6x, down 1 bp from the third quarter's end. Meanwhile, total warehouse capacity across our residential credit and MSR businesses reached $6.9 billion, with $2.7 billion of that committed. We continue to maintain ample capacity in both businesses with utilization rates at 47% for residential credit and 50% for MSR. As for liquidity, we ended the fourth quarter with $7.8 billion in unencumbered assets, including $6.1 billion in cash and unencumbered agency MBS. We also have about $1.5 billion in fair value of MSR pleased committed warehouse facilities but still undrawn, which can be quickly converted to cash, subject to market advance rates.

As a result, our total assets available for financing are approximately $9.4 billion, up $500 million from the third quarter. This represents about 58% of our total capital base and provides significant liquidity and flexibility. Finally, regarding OpEx, our efficiency ratios again improved significantly during the quarter, down 10 basis points to 1.31% and brought the full year ratio to 1.42%, illustrating the efficiencies of our size and scale. Now that concludes our prepared remarks, and we'll now open the line for questions. Thank you, operator.

[Operator Instructions] And today's first question comes from Alison Stefano with KBW.

This is Bose with KBW. The first question, could you give us an update on mark-to-market book values?

Sure, Bose. So as of Tuesday, our book was up 4%, inclusive of the dividend accrual so 3% netting that out after yesterday, maybe a fraction of 1% higher than that.

Okay. Great. And then can you just talk about the portfolio returns or the blended ROEs on the portfolio given the spread tightening since quarter end? And then can you just translate that into a comfort level with your dividend in 2026.

Sure. So overall, we could still achieve an upwards of mid-teens returns. When we look at the Agency market, obviously, we've gotten a considerable amount of tightening. But versus swaps, you still get there. And we're confident in the durability of the swaps market as a hedge given the fact that the Fed's obviously, as I mentioned in my prepared remarks, much more considerate of balance sheet availability. And we haven't really tightened that much or rather -- sorry, widen that much since that announcement. So we feel like the swaps market is a perfectly good place to hedge and you can get that return. .

In the resi market, the whole loan channel to securitization is still giving us those returns. MSR is a little bit lighter. But when you consider the hedging benefits and diversification benefits will take that. And then when you look at our overall balance sheet, where we own assets is very supportive of the dividend yield. So we feel good about it. We outearned in Q4. We expect outearned certainly in Q1, and we feel like the dividend is safe here.

And our next question comes from Jason Stewart of Compass Point.

Obviously, on the MSR portfolio, the current portfolio is pretty well insulated from modestly lower interest rates. But could you expand on your comment about being opportunistic for coupon MSR and how you're expecting that market to trade as prepays increase?

Sure. I'll hand it off to Ken for that.

Yes. I mean we've now set up the infrastructure to be fully active in that space. And the primary way we've done that is through the Fannie and Freddie MSR exchange platforms. And we're now active with close to 100 counterparties today, and we provide pricing every day. What's really interesting about new production pricing is it really doesn't move that much with interest rates because it's always set at the current mortgage rate. So really, what it is, is about the value chain after you buy it. I think -- and given the improved ability to do recapture for the industry, that's been much more insulated than it's been in past regimes. So we're there, and we don't see it as valuable to us at this time based on where we can buy the lower note rate stuff. So to the extent relative value changes and that becomes more attractive, you will see us more active in that area.

Yes. And I'll just add, Jason, to the extent we're a financial participant, the low note rate MSR has worked well and let the operating platforms, the originators focus on production coupon and their management of the borrower, but we do expect origination obviously, to pick up a lot this year with a 6% mortgage rate. And so as a consequence, you'll see a lot of production coupon hitting the market. And we've gotten comfortable, very comfortable with our recapture partners at our servicers to where we can manage that quite well. So we'll see how the market develops, but we'd like to get more into the production MSR space.

Okay. That's helpful. And just 1 more point on that. How much would you need to see valuations change for the hit return hurdles in terms of current coupon production.

Yes. Well, what's going on is when -- I mean originators sell MSR. They want to sell the MSR that's least valuable to them. And that is the lower note rate MSR because there's a lower chance that customer is going to become active. So in today's world, when they originate and Dave alluded to this in the prepared comments, when they originate a loan, the profitability on that origination does not allow MSR retention to retain all the MSR. In fact, they have to sell a majority of the MSR to be liquidity neutral.

So what we're seeing is originators prefer to sell the lower noted MSR so that's more valuable to us because that's what they're selling. We expect that flow to dry up and then the relative value shifts to the current coupon. But also, as Dave alluded to, we're well set up based on the network of people to buy from and then a network of people to both subservice and perform recapture for us.

And our next question today comes from Eric Hagen at BTIG.

Lots of speculation out there right now for things the administration can do to lower mortgage rates further, including a potential cut to guarantee fees. I mean can you weigh in on this? And how you think a big GC cut could impact the prepayment environment?

Sure. So obviously, a GP cut is something that's been talked about. Our view -- and we've been communicated about this 2 policymakers is that a GC cut on purchased loans is perfectly appropriate. We're concerned that if you do broad GC cut and impact existing loans, you're going to damage the MBS market and widen spreads. And I think that there's been an awareness of that. And furthermore, if you can find it to purchase loans, you don't negatively impact the ROEs of the GSEs, and that's certainly a consideration. So perhaps they do something give it a year holiday on purchased loans, we think that would make sense to help first-time homeowners and new buyers get into the housing market.

Okay. That's great. You mentioned the cost of hedging should be lower as a result of the GSEs being back in the market, spread volatility being lower. I mean what metric would you use to maybe like compare the cost of hedging over time? And how would you maybe compare the attractiveness of raising capital when spreads are widened kind of more attractive versus an environment of tighter spreads and lower spread volatility?

Yes. So the first question in terms of measuring spread volatility, like here is our view as it relates to the GSEs and they're involved. We don't have a lot of clarity. We know there's a $200 billion mandate, but we don't know what role the GSEs are going to play. I think it would be highly productive if they evolved into a spread stabilizing force for the MBS market, and that was somewhat of the role they played pre-financial crisis. And it gave investors confidence that mortgage spreads would remain relatively stable. And as a consequence, it incentivizes participation in the market. And then overall, given higher participation, you got a tighter spread as a consequence of others doing the work for the GSEs because you knew that they would be there when they got too wide and provide support for the market.

And they also we're economically focused and sold when mortgages were tight. That would be a good outcome. They clearly don't have the capacity that they did pre-financial crisis. but they got a lot of dry powder. So we'd like to see that evolution, but we'll have to wait to see. In terms of measuring spreads, in volatility, spread vol has been very stable for the last 6 months, and it's been quite comforting. We haven't had to spend a lot of money at all hedging and see that in our economic return. So we feel quite good about that. And then Srini, you want to dive -- your second question again -- second part of your question again, Eric?

Sure. Yes, we're just looking at how you might compare the attractiveness of raising capital in the different spread environments.

So look, I'll jump in there, and then Srini can add. When spreads were extraordinarily wide. It was obviously a catalyst to raise capital because there was a tremendous amount of upside. Compare that to today, where spreads are meaningfully tighter, obviously, from a relative value standpoint, it doesn't look as attractive. But when you consider the fact that the stability of spreads is higher. It gives you some confidence. But candidly, if I had to choose between 1 environment or over the other, I'd rather have wider spreads, with a little bit more uncertainty in terms of raising capital. So from that standpoint, I would expect that the pace of capital raising may not be as high as in that environment.

But nonetheless, the amount of support for the agency market, given the fact that you have very strong technicals from obviously the GSEs, but also money managers, REIT squeezing capital, et cetera. That's quite comforting. And to the earlier part of the question about volatility, where the cycle lows, and that's supported by what we're seeing day-to-day in markets. Another point to note is that the Fed is shoring up balance sheet, as I talked about in my prepared remarks and in Bose's question, the fact that the Fed went from Q2 to adding reserves in the system is a very good sign for balance sheet intensive products, whether it's treasuries or agency MBS, the ability to finance is key. And I think it's been a little bit underappreciated. So the agency market is a safe place right now. It's just that spreads are obviously at the tight end of the range. They're close to QE type levels. The safety of those returns is there, but the abundance of yield is not quite there.

And going forward, there could be pockets of opportunity if we get more clarity on what policy changes come about, the post the GSE announcement to purchase MBS, higher coupons really have not tightened that much because that has increased policy uncertainty. So as we get some clarity there, there could be pockets of opportunity. .

And our next question today comes from Doug Harter at UBS. .

David, you were just talking about the lower risk environment that we're in today. I guess as you look out, like how do you handicap the risks that, that could change what might be the factors that could cause kind of an end to this low-risk environment with more volatility.

From a macro standpoint, then I'll drill down a little bit on the mortgage market. But the 2 biggest risks that we see are the global fiscal picture and the amount of debt out there, including that in the United States and a little bit of complacency around it, and you could end up with the vol environment because of the amount of debt in the world. And I think it's probably under-recognized this to that. And another macro risk is just the euphoria in asset markets and asset pricing. It's been a pretty remarkable run across markets, and there's real signs out there that people should be -- investors should be a little bit concerned. Just look at the price of gold as a safety store of value. It's doubled since the beginning of last year and up 27%, 28% this year. So I think there's some nervousness out there, and it's a little bit hard to invest and we could get a correction broadly in assets.

Now as it relates to the agency market, specifically in our markets, valuation as well is a risk. We are at the very tight end of the range on Agency MBS. It's justified given the facts I mentioned earlier, but nonetheless, they're relatively tight. Another risk as Eric discussed is housing policy uncertainty and what role the GSEs will play and what the administration will do to potentially increase affordability and how that could impact the convexity profile of the agency market. So those are 2 things we're watching quite closely in terms of risks in the agency market specifically.

And our next question today comes from Rick Shane at JPMorgan.

Look, you guys are seeing attractive opportunities buying MSRs, low coupon MSRs. I assume you're basically seeing that as an attractive IO given discounts in MBS for lower coupons, does it make sense? Is it attractive to be buying lower coupon MBS at this point as well. I'm just curious, particularly as sort of on the margin, you're starting to get more questions about prepayment.

Yes, you're just saying as a hedge to our MSR and the runoff.

Exactly. Give yourself an opportunity to pick up some discount accretion if speeds pick up and also potentially is an attractive yield.

Yes. And look, the first point I'd note is that the valuation on low coupon MBS is quite tight. So there's better ways, I think, to manage that type of risk, whether it be through duration or other factors. There's a little bit of policy risk in low note rate MSR, but we feel it's very safe. And I think when it comes to housing policy changes, you could see legislation that reduces capital gains tax, so you could get some turnover in low coupon MSR but those are at the margin. Otherwise, I think the borrower in a 3-odd percent note rate loan really ascribes the value to that loan, and there's some real reluctance to give it up. So we do feel like it's a sectorable asset -- and we do hedge some of that uncertainty through duration but to couple it with low coupon MBS, and we do have some, and that is obviously a consideration, Rick, but the valuations just don't warrant it.

Got it. And is there enough liquidity in the lower coupons that if you felt like there -- the bid-ask was attractive that you could deploy capital there? Or is it -- and that's a nuance just as equity guys, I don't think -- at least I fully appreciate.

Yes. Yes. And there is liquidity in low coupons. It's not as good as production and slightly higher. But if you wanted to compile a bigger position in local bonds, it wouldn't be hard. I mentioned we added dust to the portfolio, Agency CMBS. In our view, relative to lower coupon MBS that was meaningfully cheaper. And so to get a good convexity profile and longer duration assets that was sufficient for us last quarter.

Got it. Okay. That makes sense because that's got a super low prepayment characteristics because those are...

Exactly.

And our next question today comes from Harsh Hemnani with Green Street.

Thank you. So I think on the prepared remarks, you characterized the current environment as spreads have tightened across oil housing finance assets, but unevenly. And it seems like credit is starting to look a little bit more attractive on a relative value basis and we saw that section of the portfolio grow a little faster than the debt of the business this quarter. I guess, as you look out over the next year or so, your long-term target for the equity allocation is like 60% Agency MBS and 20% across the other 2 each. Can you help us put some bands around that? How much could we see credit exposure or MSR even increase from your over that 20% number?

Sure. And I did allude to this, Harsh, so thank you for the question. So in 2025, we grew the agency portfolio of 30% each resi and MSR by 15% through the capital raises that we undertook. And that was the right weighting to go with, given how well Agency has done. So we're perfectly happy with it. But now we're at a little bit of a different balance when it comes to valuations, and we do from a capital allocation perspective, favor resi credit, even though it has tightened and MSR for that matter. And we like those percentages if we did add capital to switch. We'd like to grow resi MSR 30% and an Agency, less than that. So the objective today from a capital allocation standpoint is to increase MSR and resi.

It's episodic in terms of the opportunities, notwithstanding the consistency of the pipeline for or whole loan correspondent channel, but we would like to grow those businesses. And we've said in the past that the longer term weighting we would like to achieve this 50% agency, not below that and 30% resi, 20% MSR. We don't have to get there right away, but that is an objective. We have to be very considerate with respect to the credit environment. But nonetheless, when you look at the health of the loans we're acquiring, and our portfolio, we're very comfortable with the credit we're doing. And so we're hopeful we can grow it. And I don't expect us to get to those objectives over the near term in terms of down to 50% agency, but we'd like to at the margin increase MSR resi here.

And our next question comes from Trevor Cranston of Citizens JMP.

You talked some about the impact of the GSE portfolio buying on the market. I was curious if you could share your views on the likelihood or feasibility of the portfolio caps potentially being increased at some point as they get closer to current cap side? And then also, I was just curious if you guys have seen or if you expect to see any impact from their portfolio buying on the swap or funding markets?

Yes. So as it relates to the caps, it's hard to say. Obviously, everybody probably saw that post from the FHFA Director last Friday, I believe it was talking about they don't intend to increase the caps, but we just don't know. But when you look today, they came into the year with, I think it's $178 billion in capacity between the 2 of them. So we're a long ways away from hitting those caps, and we'll see how it evolves. But we don't have a good answer as to whether or not those caps will actually be increased. Obviously, they can do it in conjunction with treasury and it doesn't require Congress. So we'll have to wait and see how the year evolves on that front. And sorry, the second part of your question, Trevor. Hedging, yes.

Whether you're seeing any impact from the GSE buying on swap markets.

Not as much. you could argue that swap spreads should be wider given the adjustments the Fed has made with respect to their asset purchases, and we didn't get, as I mentioned earlier, a meaningful amount of widening based on the greater availability of balance sheet. And it could indicate some involvement from the GSEs. We don't have information on that. I do know from our experience pre-financial crisis, and I was on the sell side interacting quite extensively with the GSEs. If past is prologue in terms of how they behave, they would hedge those purchases and use swaps because that will enhance the yield relative to shorting treasuries for example, and they can get a decent ROE out of it.

So we would expect that to be the case whether they're actively engaged in the swaps market today. I don't have a good answer for their involvement. And as it relates to funding markets, the GSEs are active participants in the funding markets with their liquidity and their capital during parts of the month and their absence might be a factor. However, what I would say is that they're buying MBS, which is a balance sheet-intensive product, and is funded in many circumstances. So they're taking assets out of the market that might otherwise be funded. And so even though they're not providing as much liquidity in the repo market that should offset -- the asset purchases should offset the lack of funding. And really what matters, I think, in terms of funding markets is reserves in the system. And that's the key factor we look at, and they're now back to slightly over $1 trillion -- $3 trillion, and we feel like funding markets are still going to be fine without their participation. And Srini, you got another point.

The 1 thing I would add is just the size of the GSE book. I mean if they import the entire $200 billion, it's about $100 million DBO1 so if you assume they have done 5% or 10%, you're talking about 5 million, 10 million DBO1, it's just not large enough for you to see any impact on swaps that's right on it. It will take time. .

And that concludes our question-and-answer session. I'd like to turn the conference back over to David Finkelstein for any closing remarks.

Thank you, Rocco, and thank you, everybody, for joining us today. Have a good rest of the winter, and we'll talk to you real soon. .

Thank you, sir. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Good morning, and welcome to the Q3 2025 Annaly Capital Management Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Sean Kensil, Director of Investor Relations. Please go ahead.

Good morning, and welcome to the Third 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 filings. 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 filings. 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. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release. Content referenced in today's call can be found in our third quarter 2025 investor presentation and third quarter 2025 financial supplement, both found under the Presentations section of our website. Please also note, this event is being recorded. 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 and rights. 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 third quarter earnings call. 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. Now starting with the macro landscape. The U.S. economy remained resilient in the third quarter, with GDP likely to be on pace with that Q2. Growth was supported by healthier consumer spending as well as AI-driven business investment despite lingering uncertainty around tariffs and the immigration.

Inflation remained elevated near 3% during the quarter, though the anticipated uptick in goods inflation resulting from higher tariffs has been more muted than expected thus far. Labor market conditions did weaken with hiring slowing to a mere 30,000 jobs per month over the past 3 months, while sentiment around future hiring deteriorated. Although the unemployment rate has moved only slightly higher, the Fed's 25 basis point cut in September and forward guidance was supported by an outlook that suggests growing downside risks to its employment mandate. Yields fell modestly during the quarter, and the curve steepened given the market's expectation for modestly lower policy rates going forward. The treasury market also benefited from a shift in issuance towards the front end of the yield curve and strong tariff revenue, the combination of which helped ease concerns about long-term debt issuance.

This led quarter-over-quarter and a 6 to 9 basis point widening in swap spreads relative to their forward implied levels, which benefited our returns. The precipitous decline in interest rate volatility during the quarter also provided meaningful support to our portfolio by lowering convexity costs and fueling much of the agency spread tightening that occurred. We generated an economic return of 8.1% for the third quarter and 11.5% year-to-date, notably recording a positive economic return for 8 consecutive quarters, exhibiting the benefits of Annaly's diversified housing finance strategy.

our portfolio's earnings power remains strong with EAD of $0.73 per share, out-earning our dividend each quarter since we increased it at the outset of the year. Also to note, we raised $1.1 billion of accretive equity in Q3, including $800 million through our ATM program. We also reopened the mortgage REIT preferred market with Annaly's first preferred issuance since 2019 and the first residential REIT issuance in multiple years. Now turning to our investment strategies and beginning with agency. Our portfolio ended the quarter at just over $87 billion in market value, up 10% quarter-over-quarter, as the majority of the capital raise was deployed in Agency MBS considerate of attractive relative returns.

Total growth of our agency portfolio was $7.8 billion in market value with about 15% of that increase coming from Agency CMBS and a similar share coming from market value appreciation. While the primary driver of agency performance was lower interest rate volatility, also noteworthy that the supply and demand dynamics in the Agency MBS market continue to improve. Specifically, fixed income fund inflows were more than 50% higher than the average over the past few quarters and an additional indication of favorable technicals is that CMO demand has been heavy with production running at over $30 billion per month, which has helped distribute MBS supply to a wider audience of investors.

Overall agency spreads tightened by 8 to 12 basis points to treasury in the quarter with intermediate and lower coupons outperforming higher coupons. Early in the quarter, we added agency in line with our capital raise across coupons. And ultimately, as higher coupons began to look more attractive given cheapening into lower mortgage rates. We shifted purchases to specified pools in 5.5s and 6s. Our holdings and higher coupons have been methodically constructed over the past few years to mitigate prepayment risk, which gives us flexibility to add in areas that provide the best expected return. And on the hedging side, we had less need to intervene this past quarter, as realized volatility was somewhat muted but we did maintain our disciplined approach to rate risk management, as we added hedges alongside new asset purchases with a bias towards swaps in the front end of the yield curve.

And as we mentioned previously -- value and the superior carry of swap hedges has informed our overweight and swaps, which added meaningfully to our economic return this past quarter. Shifting to residential credit, our portfolio increased to $6.9 billion in economic market value, representing $2.5 billion of the firm's capital. Investment-grade residential credit assets tightened during the quarter with new origination, non-QM AAA spreads ending Q3, 15 basis points tighter, providing a supportive backdrop for securitization issuance. Non-Agency gross securitizations have totaled $160 billion year-to-date, which is already the second largest annual gross issuance since 2008, and will end up being second only to the 2021 vintage.

Our Onslow Bay platform was 8 transactions for $3.9 billion in the quarter, generating $473 million of high-yielding OBX retained securities for handling in our joint venture. Year-to-date, we've now priced 24 transactions, representing $12.4 billion of UPB, solidifying Annaly is not only the largest nonbank issuer in the residential credit market but a top 10 issuer worldwide of asset-backed and mortgage-backed securities. We also redeemed OBX 2022 and QMA during the quarter, exercising the transaction's 3-year call feature and we expect there to be significant embedded value in our late '22 and '23 vintage NQM issues, given current mortgage rates and securitization economics.

With respect to our correspondent channel, we achieved record-setting quarterly volumes across both locks and fundings while remaining disciplined in our approach to credit. The channel locked $6.2 billion in whole loans and funded $4 billion in the third quarter with our quarter-end lock pipeline representing a 765 weighted average FICO, 68 LTV and over 96% first lien. Now with respect to the underlying housing market, as we foreshadowed on previous calls, the market is now experiencing relatively flat year-over-year HPA nationally, as consistently elevated mortgage rates weigh on affordability.

There is a potential for further depreciation in the winter seasonals as available for sale inventory has increased, although we do expect cumulative depreciation to be modest given the longer-term positive fundamentals in the housing market. Nonetheless, in light of softer housing, we'll remain focused on maintaining a high credit quality portfolio with a continued emphasis on manufacturing our own proprietary assets through our market-leading correspondent channel. And approximately 75% of our residential credit exposure is now comprised of OBX securities and residential whole loans, providing full control over both the acquisition and management of the assets.

When moving to MSR. Our portfolio increased by $215 million in market value to $3.5 billion, comprising $2.9 billion of the firm's capital. We purchased $17 billion in UPB across 3 bulk packages in our flow network during the quarter as well as committing to purchase an additional package for $9 billion in UPB subsequent to quarter end. Our MSR valuation multiple decreased very modestly quarter-over-quarter, driven largely by lower mortgage rates. Our portfolio remains well insulated as the aggregate borrower is approximately 300 basis points out of the money and the portfolio continues to exhibit highly stable cash flows as it paid sub 5 CPR over the past 3 months.

The fundamentals associated with conventional MSR remained positive as evidenced by our portfolio of serious delinquencies being unchanged at 50 basis points. The competition for deposits remaining strong, resulting in better-than-expected float income and subservicing costs decreasing given increased technology investments across our servicing partners. Also to note, we announced a new partnership with PennyMac Financial Services subsequent to quarter end, adding another industry-leading mortgage originator and servicer to our existing set of best-in-class subservicing and recapture partners.

As part of this new relationship, we purchased $12 billion of low note rate MSR whereby PennyMac will handle all subservicing and recapture responsibilities for the portfolio sold. Now shifting to our outlook. Our investment strategies are well positioned for the balance of the year given declining macro volatility, additional Fed cuts expected and healthy fixed income demand. While agency spreads are tighter, the sector remains compelling as spread compression has been achieved through lower volatility and a steeper yield curve, thus improving the fundamentals of the asset class. Furthermore, a more accommodated monetary policy should continue to support a strong technical backdrop for Agency MBS, not to mention the likelihood of regulatory reform and the potential for greater bank demand for the sector into 2026.

Our residential credit business should further benefit from the growing private label market with our Onslow Bay correspondent channel and OBX securitization platform being clear market leaders. And our MSR portfolio stands out as the lowest note rate portfolio out of the top 20 largest conventional portfolios in the market, providing highly predictable, durable cash flows with limited negative convexity. Lower note rate MSR remains our preferred positioning, as investors are compensated more for selling convexity and Agency MBS. We also expect MSR supply to remain healthy as we maintain ample excess capacity to opportunistically grow our portfolio.

Now this diversified housing finance model has delivered proven results, having generated a 13% annualized economic return over the past 3 years since scaling each business. And while we maintain our positive outlook, we carefully built our portfolio to guard against uncertainty, and we remain flexible in the current investing climate with historically low leverage and significant liquidity.

And 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 September 30, 2025. Consistent with prior quarters, while our earnings release discloses GAAP and non-GAAP earnings metrics, my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA. As of September 30, 2025, our book value per share increased 4.3% from 18.5% in the prior quarter to 1925. After coming for our dividend of $0.70, we achieved an economic return of 8.1% in Q3. This brings our year-to-date economic return to 11.5%.

We generated positive economic returns for the quarter across all of our businesses. Our performance was driven by strong results in our Agency business, which benefited from spread tightening leading to gains across the investment portfolio. These gains were partially offset by losses on our hedge positions in light of marginally lower interest rates in the quarter. Earnings available for distribution per share for the quarter were consistent with Q2 at $0.73 per share and again exceeded our dividend for the quarter. We maintained our AAG levels by generating average yield of 5.46% compared to 5.1% in the prior quarter, and our average repo rate improved by 3 basis points to 4.5%.

Our credit business contributed to increased yields this quarter, driven by record securitization and loan purchases with average yields rising to 6.29%. Net interest spread ex-PAA, increased again this quarter to 1.5% and net interest margin ex-PAA is comparable with the price 1.7%. Turning to our financing. In conjunction with deploying the proceeds from our capital raise during the quarter, we added approximately $8.6 billion of repo principal at attractive spreads. As a result, our Q3 reported weighted average repo days maintained a healthy position of 49 days, comparable to the prior quarter and a modest economic leverage ratio of 5.7x on to lower than at the end of the second quarter.

As of September 30, 2025, our total facility capacity for the -- with a utilization rate of 40%. Our MSR total available committed warehouse capacity is $2.1 billion across 4 companies at September 30, 2025 with a utilization rate of 50%. We continue to explore additional funding relationships as we invest in our growth businesses and add new facilities in anticipation of future business growth. Annaly financial strength is further demonstrated by our $7.4 billion in unencumbered assets at the end of the quarter. This includes cash nonencumbered agency MBS of $5.9 billion. In addition, we have roughly $1.5 billion of fair value of MSR pleased to committed warehouse facilities that can be quickly converted to cash subject to market advance rates.

Combined, we have a probably $8.8 billion in assets available for financing, which is up $1.4 billion compared to the second quarter, in line with our asset growth and represents 59% of our total capital base. Finally, touching on OpEx, our efficiency ratios improved significantly during Q3, decreasing by 10 basis points to 1.41% for the quarter and now standing at 1.46% for the year-to-date period. Using period end equity as of September 30, our OpEx to equity ratio was 1.34% for the quarter, highlighting the efficiency and scale of our diversified model. This ratio is one of the lowest in the mortgage REIT sector, despite having 3 complementary businesses on the balance sheet. Now that concludes our prepared remarks, and we will now open the line for questions. Thank you, operator.

[Operator Instructions] The first question comes from the line of Bose George with KBW.

First, just in terms of returns, the agency returns took down a couple of points just with tighter spreads. Can you talk about how that compares now with -- like in terms of your preferred area for investment, is it more parity now with agencies and some of the other areas?

Sure. From a capital allocation perspective, as we came into the third quarter, we obviously felt like agency warranted an overweight, and that certainly came to fruition. As spreads have come in, agency still looks very attractive, particularly because, as I mentioned in the prepared remarks, both fundamentally and technically, this sector has healed quite well from 2022 and 2023. Fundamentally, we have lower volatility. Fed cuts are going to continue, and we have slope to occur. And also equally as important from a technical perspective, the demand base has broadened quite a bit. Money managers are adding.

Obviously, a lot of money is coming into fixed income, as we talked about, REITs are adding. And we haven't had banks in overseas as strong of a participation. But as the Fed does continue to cut and potentially bank deregulation occurs, we do expect more demand to come from that sector. So we feel good about the market. Spreads are tighter still overweight agency, even more overweight, which benefited us. We'd like to get our resi and MSR weightings back up to a combined 40%. We're patient to do so. And we feel good about how the portfolio is positioned. But nonetheless, we would like to increase those 2 sectors from a near-term capital allocation perspective.

Okay. Great. And then actually, just following up on that. The MSR, you guys noted the bulk supply is up, I think, 50%. Where is that coming from? How is the pricing looking? And could we see the MSR increase as a result of that?

Yes. Thanks, Bose. This is Ken. Yes, the bulk supply has been coming from large participants. Several of them have not previously been sellers. So that is encouraging for future bulk supply. Pricing has been relatively stable throughout the year. So we're pretty much encouraged by that like the return profile. And we opportunistically added on the quarter, as you can see and subsequent to quarter end, Bose.

The next question comes from the line of Doug Harter with UBS.

As you look at the agency returns, can you help break down kind of how you see like OAS returns versus how much of it is coming from the swap spread and how that makes you think about the risk of the position?

Sure. I mean, the spread to swaps versus treasuries is running about 35 to 40 basis points. So if you fully 100% has to small spread about 25 basis points wider than what they would be as to treasuries. And let's stay 5.5, we see to our hedge ratio, we're using about 35% swaps and -- 55% swaps and 35% pressures to our mix of hedges, we see a blended yield of about 160 basis points, which is just shy of a 17% ROE.

Now finally, a fair amount of option costs. I would put the option cost somewhere in the 60 to 65 basis point rate. But depending on what kind of specified pool you buy and what -- how much you allow your duration to drip, you can substantially decrease the hedging costs. What has really helped over the last quarters, how low realized swaps has been -- realized what has been running below implied -- and that has really helped with hedging costs. And we think we are in an environment where what will remain subperiod at least relative to what we saw in 2023 or 2024. Does that help?

That's very helpful. And then if you could just provide an update on how book value is faring quarter-to-date?

Doug, as of last night, book pre-dividend accrual was up in upwards of 1%. And if you add the dividend accrual, 1.5% to 2% economic return.

The next question comes from the line of Harsh Hemnani with Green Street.

So this quarter, it seems like you rotated up in coupon continued that rotation, but focused primarily on specified pools. Could you sort of talk to the puts and takes of how you're thinking about given the rate backdrop we're in right now, being those higher coupon specified pools versus perhaps rotating into lower coupon to get some of that prepayment protection in that way?

So we are constantly looking at what is the better way to get better in production, either move down at coupon or kind of bispecified pools. What happened in the last quarter is as rates rallied to the lowest level in over a year, prepared expectations on generic higher coupon of rent-up materially. And this caused the duration to shrink and negatively impacted their carry profile. So not surprisingly, there was a big shipment demand to lower the intermediate coupons.

And by our metrics, it looked like lower intermediate coupons are rich relative to where higher coupons were traded. So this gave us -- so when you look at specified pools, the pay up to -- quite strong, but that the TBA has underformed materially and so that made a specified pool taper. The big advantage of such that these are options that we own for a very long time. It's not like these options expire in 6 months or 9 months. Once you buy a loan -- it doesn't matter how long it takes for rates to rally. Eventually when they do, you still have the option in place. So the length of the option is what makes specific so much more attractive than going down in coupon or buying general collateral and trying...

Got it. That's helpful. And then maybe 1 on the MSRs. So it seems like the purchase this quarter was fairly low co point perhaps in a your existing portfolio. But given the increase in supply we've seen perhaps over the last quarter, how is breaking down between the lower coupon MSRs that close the production coupons.

Yes. Thank you very much for the question. And just a follow-up to what Srini said, we have the opportunity to look at OAS valuations in both MBS and MSRs. So when we price convexity in opportunities, we're taking convexity on the MSR side by purchasing the lower note rates. And when we do the valuations, we see more opportunity there and to participate in the higher note rates in the form of Agency MBS. So that's a big part of our strategy.

And as a follow-up to the other point about the increase in bulk supply. What's going on as rates have come down, mortgage origination is at a much higher level. And as mentioned previously, the industry just can't afford to retain all the MSR that's created in a high-volume environment.

And Harsh, just to jump in here, Ken brings up a very important point in terms of -- we'd rather take negative Convex risk in MBS in pass-throughs in the TBA market than in the MSR market because it's cheaper there. Now your question to both Srini and Ken, from a big picture perspective in terms of how we manage Convexity and bolt. We have a fair amount of options and we look at everything on a portfolio basis. So first of all, diversification outside of Agency MBS in the form of resi credit and MSR is the biggest most powerful way to reduce our negative to bat.

In fact, in the resi market, every time we do a securitization, we're buying an option, essentially with the call option in the burn down rate type scenario. So we're buying both from that standpoint. And again, we pick up a better convexity profile by buying low note rate MSR, which has very little negative convexity exposure to it. And then within the agency market, obviously, Srini talked about pools and how for years we've built what we think is a very durable portfolio from a convexity profile, but also Agency CMBS, which we added over $1 billion this past quarter, which has virtually no negative convexity.

So the point being is that there's a lot of options for us to mitigate our convexity risk. And I think we look at everything on a portfolio basis and come up with the most efficient way to do it.

The next question comes from the line of Jason Weaver with Jones Trading.

With your outlook you put out, with mortgage spreads now back at the tight, would you expect for the pace of lock volume and securitization issuance sort of towards and into year-end remains elevated despite the usual seasonal pressure?

Jason, this is Mike. Thanks for the question. In terms of where we're at in mortgage spreads, we've actually been tighter in the beginning of the year, AAA spreads were 115 to 120 over the curve. Right now, I think that just given the supply that we've seen over the last 2 to 3 weeks and to your point, broader supply within the market, we're probably closer to that 135 area for generic issuance. What I will say, though, is that non-QM continues to make progress in terms of market penetration. There's market share that's being created.

If you look at Optimal Blue, in the month of July, they said 8% of all outstanding lots were non-QM and SCR, which is the highest percentage that we've ever seen. If you went back 2 to 3 years, I think that number is probably closer to 2% to 3%. So I think in terms of mortgage spreads, the fact that they've been in a range -- mortgage spreads, AAA spreads, they've been in the kind of the 130 to 145 range. So there slightly wider than the beginning of the year, but the fact that they've been stable has allowed us to be very active. It's allowed the market to continue to grow.

And I think that when you look at the last half of the year -- at this point, we've done $60 billion of non-QM issuance. Last year in 2024, the entire year, was $47 billion, $48 billion. I think we'll end up, call it, $65 billion to $70 billion. And from our perspective, we actually had our most active month in September. We did $2.3 billion of locks within non-QM and DSCR. We did over $6 billion in the quarter. So I think that securitization may be a little bit slower than what we just did within Q2 and Q3. A lot of that is what you're mentioning. It's seasonal. It's the holidays, but I think that just the market penetration of non-QM continues to grow, and we do think it could be close to 10% of the market. So over long periods of time, we think it will continue to increase.

Got it. That's helpful. And then maybe more for on the agency side. There's some talk to Governor Logan is proposing shifting of the Fed's primary policy tool to target tri-party repo away from Fed funds. Any sense on the likelihood there and if or how that might ultimately influence MBS repos?

Well, it's present Logan, not Governor Logan. But to answer the question, so in a speech, she did discuss that tri-party GC was a better indicator in terms of short-term rates relative to Fed funds. And the fact of the matter is the Fed has to evolve as the market evolves. And the Feds market is just not as good of a barometer of financing rates as repo is, and that's simply a reflection of that. I wouldn't read anything more into it than the Fed thinking about rates that are most impactful to markets and making sure that they have all the best information to evaluate financing markets and conduct policy. That's simply how I would read it.

The next question comes from the line of Eric Hagen with BTIG.

This is kind of a big picture question. There's a point at which mortgage REITs, including Annaly applied more duration to their portfolio. And then the taper tantrum in 2013, disrupted some of that since then, the mortgage rates have basically hedged out all the duration in their portfolio including yourselves. I mean, do you envision ever getting back to a point where a duration gap is part of the conversation again? Like how do you weigh the act of like raising leverage versus letting the duration drift out a little bit more in order to create alpha?

Sure. So obviously, we have 3 risks -- primary risks that we take, spread basis risk in agency credit risk and duration risk and we evaluate those risks based on the most attractive and place our bets where we think it has the highest risk risk-adjusted return. Now as far as a duration gap, it's absolutely the case. We've been running at close to a 0 duration gap for the recent past. And I think it's justified by virtue of the amount of uncertainty currently in the rates market.

Look, I can give you arguments for lower rates, and I can give you arguments for higher rates. In terms of the catalyst for lower rates, obviously, the Fed is cutting rates, and we'll likely continue to do so. The deficit prognosis is better, so less long-term issuance than we might have just thought QT is coming to an end. There's very strong demand for fixed income in the market, and that could accelerate with lower cash yields, deregulation for banks to add demand for fixed income and the labor market is weakening, certainly. And all of these would suggest lower rates. However, on the other side of the equation, no rates do look full currently, 5-year real rates right around 120, 10 years around 170, nominal rates, inflation breakevens. They look a little snug in the low to mid-2s.

And globally, rates in the U.S. are a little bit low relative to the rest of the G7 and inside of 90 basis points on that average. So the market doesn't look cheap. And inflation hasn't gone away. We'll get some more down this week, fortunately. The Fed will cut next week. But beyond that, it is uncertain. You had 8 committee members -- actually 9, I believe -- 9 committee members that said 1 or 2 cuts to come this year, and there's some hawks on that committee. So the market's been priced pretty aggressively in terms of cuts. We're through neutral by the end of next year in the eyes of the market, and the Fed's 50 basis points above that.

So to us, we get the fundamentals and what's going on that could lead to lower rates, but there's also the potential for higher rates. And the way we want to play it is something could break either way and the best approach for us right now is to not take a lot of risk in the rates market. And fortunately, volatility has been low. We've been able to manage our duration with minimal cost to the portfolio. And until we get a better sense of where things are going from we remain that way. Now relative to the longer-term business model REITs taking duration risk and levered maturity transformation. There is, at times, carry and taken rate risk. When the yield curve is quite steep, you're paying check and carry -- near-term carry for taking rate risk. 52 basis points on 10s, it's positive, but it's not all that attractive. And so at some point, I'm sure we'll take a longer duration approach. But right now, we feel being very close to home is where we want to be.

Yes. Got you. That's really helpful. I mean there's lots of speculation right now around the GSEs being buyers of Agency MBS again, certainly in a more meaningful way. I mean how much of that potential catalyst do you think is priced in to spreads right now? And more generally, I mean, do you think their presence in the market would have an impact on the MSR market or valuations in any sort of way?

Well, a couple of points to note. There has been a lot of talk about the GSEs having entered into the market, but that's been very limited, and I wouldn't read too much into it. Market does have some expectations that they could be more active buyers as we're talking about this privatization potential and the fact that they do have capacity and the portfolios are relatively low. So there is a little bit priced into the market. But the demand for MBS has been broad and it's been strong. REITs have obviously been buyers of MBS. And again, the money flowing into fixed income funds and 1/3 of that money on average goes to mortgages.

That's been the real driver. And speculation around the GSEs is not something that we want to bank on, but it could materialize. And does it warrant consideration from a policy perspective, it certainly could. Back pre-financial crisis, the GSEs were very powerful stabilizers of spreads and that lowered spread volatility. And as a consequence of that, you ended up at a lower baseline spread. So from a policy perspective, if the government does have this desire to get spreads tighter, giving the GSE some capacity in acting somewhat as guardrails so long as it's very well regulated and they don't get out over their skis or anything like that, it could have some benefit, but it's very difficult to navigate that path and it could be a slippery slope. So it has to be looked at very carefully. But nonetheless, as stabilized as they could be beneficial.

The next question comes from the line of Rick Shane with JPMorgan.

And there have been a lot of thoughtful questions and answers on this. So just 1 quick one. When we look at the NII adjusted for PAA. It's been really stable over the last 4 quarters. You guys have done a good job managing asset yields and funding costs. I'm curious at this point, how confident you are that it will remain stable over the next couple of quarters? And how do you sort of manage that given the uncertainty?

So the question you're asking, I'll start from a big picture standpoint, and then Serena can get into the accounting. But look, at the end of the day, the portfolio has been very stable from the standpoint of low leverage, and we haven't had a lot of volatility associated with the hedged returns from an EAD perspective. It's been $0.72, $0.73. And that's how we feel about this quarter, we expect to earn EAD consistent with where we were this past quarter. Another point to note that I think helps the stability is the swap portfolio. So in terms of runoff, we have about $1.5 billion running off in the first quarter next year, then we don't have any runoff until Q4 of 2026.

So the slot portfolio should stay relatively stable. And the agency portfolio, the average price of the portfolio is very close to par. And so the runoff doesn't have too much -- add too much volatility to the overall accounting aspect of it. So we'll see. We can't forecast too far out. But this quarter, we feel good about outearning the dividend and overall, the portfolio is in a stable place. Anything to add, Serena?

No, I think they have covered it. Look, obviously, we have been doing really well and increasing yields as we are deploying additional capital and that is showing up in the NII. We offer an accounting projective. Obviously, we lock in those yields. And so we should expect to continue to benefit from those. And obviously, as David mentioned, we do expect future set cuts, so we will benefit on the cost of fund side of things. So I think that all things equal and another crystal ball, we should continue to see some good levels of NII going forward.

Got it. Yes. The point about increasing yields, but not increasing premiums really the big takeaway for me on that comment.

You bet. Thanks Rick.

The next question comes from the line of Kenneth Lee with RBC Capital Markets.

And this is just a follow-up from a previous one. Fair to say that the risk appetite has been tempered down a bit. Just looking at the spread and rate sensitivity, they both declined a bit quarter-over-quarter. So I just wanted to check to see if that's reflective of Annaly taking a little bit less risk there.

Yes, it's a good question, Ken. So on the rate side, there's a little bit more negative convexity with -- in the portfolio with current coupon spreads, I think, 28 basis points lower. And so that does lead to what looks like a more deleterious outlook on both sides of the equation and the duration is hovering close to flat. And to the earlier question, we're not going to take a lot of rate risk right here. In terms of spread exposure, also that decline in mortgage rate does reduce the spread duration of the portfolio, and so that's kind of occurred organically, and we were a little bit lighter coming into the quarter on MBS.

We do have a little bit of dry powder. I'd say our risk posture is not overly conservative, but we -- to the extent we see an opportunity we could add to the agency portfolio or an MSR resi package over the near term locally. So our risk is not more negative at all by any stretch. We do just have a little bit more dry powder.

Great. And just 1 follow-up. I think you touched upon this, EAD looking around consistent to the third quarter's levels. Any updated thoughts around dividend coverage, especially just given the current macro rate outlook?

Sure. So again, this quarter, we have line of sight into and we'll see what happens into 2026, but we feel very good about the dividend. It's at a healthy level. It's little over 13% yield, close to 15% yield on book. And it feels perfectly ample, and we feel like good place. And we also feel like when we look at the forwards and also the Fed doesn't cut as much as the market, we still feel like the dividend is safe. our hedge ratio is 92%. So there's a lot of protection around the income stream, and we're perfectly comfortable with where things are at, and we'll see what happens into 2026.

The next question comes from the line of Trevor Cranston with Citizens JMP.

Question on the non-agency portfolio and I guess, particularly the OBX securitizations. Can you comment on kind of what you guys are seeing there in terms of refi responsiveness as mortgage rates come down recently? And more generally, if you could also just comment on kind of what the return sensitivity is on the subordinate positions if we do and do see faster prepay speeds within that portfolio?

Sure. Thanks, Trevor. This is Mike. In terms of prepaid protection and what we have been seeing within the OBX portfolio, 2023 vintage, the majority of those deals that are outstanding there between, call it, 8% and 8.5% gross WAC. Those deals are paying in the low 30 CPR, which I will say is a decent amount slower than we would have anticipated, non-QM rates as we sit here today for the type of credit that we're underwriting, call it, 6%, 7%, 8% so 100 to 150 basis points in the money, and it's only paying modestly above where we would put at the money loans and where the market convention is, which is 25 CBR.

So I think we've been pleasantly surprised the convexity profile of the underlying. Part of that is driven by prepayment penalties that we see within our investor loans. Investor loans are about 50% of the loans that we buy, and about 3/4 of investor loans have prepayment penalties. So the S curves associated with those assets are significantly flatter than what you would see within the agency conforming market. It's also significantly flatter than what you would see within the jumbo market as well. So I think the portfolio and the broader market has been in pretty good shape in terms of prepaid fees.

Regarding the level of variability within our returns, as you see within the presentation, we've kind of been in this 13% to 15% ROE range. That is referencing OBX retained securities. That's forecasting what I'll say, a base speed of, call it, 20 to 25 CPR for at-the-money loans. So I will say that the actual return profile has been higher within our open transactions because speeds have been slower than anticipated. But yes, there is a lot of embedded IO that we are taking once we securitize these assets, given that we are retaining the excess. But I will say at this point, it's actually been a large positive as we've outearned our forecasted assumptions.

This concludes our question-and-answer session. I would like to turn the conference back over to David Finkelstein for any closing remarks. Thank you.

Thank you guys, and thank you, everybody, for joining us today. Enjoy the fall, and we'll talk to you real soon.

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

Good day, and welcome to the Q2 2025 Annaly Capital Management Earnings Conference Call. [Operator Instructions] [Operator Instructions]Please note, this event is being recorded.

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

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 filings. .

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 filings. 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.

During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release. 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 Presentations section of our website. Please also note, this event is being recorded.

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. Srinivas, 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. 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, 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. .

Now starting with the macro landscape, the U.S. economy is persevere 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%. And overall hiring has slowed compared to recent years, but the labor market is relatively balanced and layoffs have been somewhat muted.

Inflation, meanwhile, likely ran at the slowest level in the past 3 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 2 interest rate cuts projected for 2025 at the last FOMC meeting given the consensus view among policymakers, the current interest rate levels remain somewhat restrictive.

As it relates to markets, a positive reversal in sentiment as the second quarter progressed, help 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. And 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 5 to 10 basis points wider on the quarter.

Now against this backdrop, we delivered an economic return of 0.7% for the second quarter, while generating earnings available for distribution of $0.73, once again out earning our dividend.

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. 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 turns in light of the increased allocation to agency.

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.

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 at attractive 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 moves, 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. 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 tightened significantly during the quarter and forward markets are signaling further tightening in the months ahead. That changes, however, You can nimbly adjust our hedges between swaps and treasury risk but for now, maintaining a roughly 60-40 hedge allocation between swaps and treasuries is more favorable in our view.

Overall, we remain optimistic on the agency sector as fundamentals are sound, and there are several potential catalysts out the [Verizon] 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.

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 in the quarter.

Our Onslow Bank platform had its highest quarterly securitization activity to date, closing $3.6 billion across 7 transactions, and we priced an additional 2 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.

Onslow Bay's 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.

Our current lock 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 3 years, we've entered a buyer's market as sellers now materially outweigh prospective homeowners. Higher supply has led to 4 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. This 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.

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 remain 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 of the portfolio persisted this past quarter with a 3-month CPR of 4.6%. Serious delinquencies unchanged at 50 basis points. and escrow balances up 6% year-over-year, which helped to drive increased float income. 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.

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 on low-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, we're well positioned as we enter the second half of the year.

And 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 $0.70, we achieved a positive economic return of 0.7% for the second quarter. 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 3 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.

Our attention upping coupon and agency over the last several quarters is evident in our interest metrics due to our increase in yields. The resi credit business generated additional income due to the growth of accretive OBX securitizations on balance as Enzo Bay experienced another quarter of record issuance.

Net interest spread ex PAA has increased again. reaching 1.47% in the second quarter compared to 1.24% a year ago. And net interest margin ex PAA is 1.71% in Q2 compared to 1.58% in Q2 2024.

Turning to our financing strategy. Over the past several years, we have made deliberate and disciplined efforts to expand and diversify our funding sources. Today, our financing platform encompasses a diverse range of traditional and nontraditional financing arrangements which enhanced 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-mark-to-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. 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 arise.

During the quarter, we added approximately $5 billion of repo principal, including term at attractive spreads. 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.

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 4 counterparties as of June 30, 2025, with a utilization rate of 50% and Inclusive of our committed MSR 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. 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.

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

[Operator Instructions] Our first question is from Bose George, KBW.

Actually, first, can I just get an update on book value quarter-to-date?

Sure, Bose. As of last night, pre-dividend accrual book was up about 0.5%, so call it, 1.5% economic return.

Okay. Great. 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 outearned 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, the way we look at it is the portfolio should generate an economic return approximating or in upwards of the dividend. 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 7 quarters. 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.

The next question from Doug Harter, UBS.

Thanks, and good morning. David, hoping you could just talk through kind of how you thought about managing the portfolio through the second quarter. your comfort in letting kind of leverage rise during kind of the extreme bout of volatility versus 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 quarter with a very good liquidity position, consistent with where we're at this quarter. So we're comfortable in light of the volatility. And Liberation Day was announced well in advance, 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. 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 is complete. We came into this quarter with virtually no duration. We drifted a little bit and so far 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. Does that help?

Very helpful. And then, I guess, in that context of your -- I guess, how do you think about balancing kind of continuing to invest into a market you see as attractive that's through increasing leverage or continuing to access fresh capital? Kind of how are you weighing those decisions as kind of there's slightly more certainty than there was, say, 3 months ago?

Yes. So look, as it relates to the second quarter and raising capital, we were very deliberate with how we invested it. 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. And as we raise capital, we deploy it accordingly. 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 accretive and so we're comfortable putting it to work.

Now related to increasing leverage versus raising capital, 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 and 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 gives smoother returns.

The point I want 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. 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 before sellers in a lot of circumstances, and that's led to smoother returns because we hadn't been in positions to sell cheap assets.

And as we raise capital, we've been able to deploy it profitably. So we feel really good with the leverage where it's at. And we haven't raised capital thus far this quarter, but the opportunity materializes, we may do so.

The next question from Rick Shane, JPMorgan.

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

Yes. So I'll start and then Mike can take it from there. I'll just say, Doug, Mike has been very forward-thinking about but making sure that the quality of the credit portfolio was as high as it could be. We were very early in tightened credit standards in 2022. I talked about we've tightened them more recently. And I think when you look at the underlying credit 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 stress scenarios with HPA shocks and -- if you look at our portfolio, we experienced, say, a 20% decline in home prices, roughly 4% of that portfolio would be under water, which is a very high quality credit portfolio in our view. And I think Mike has done the job and feel free to take it from here and talk about how you manage it.

Yes. Thanks, Rick. I think that I would just add that in terms of the proactive changes that we've made since 2022, 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 lot 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% are less than 700 FICO. So it has not impacted our volume in a meaningful way. But we've been very proactive in seeing the housing market decelerate and trying to be on our front foot, so to speak.

And Dave did mention the quality of the portfolio it's a $30 billion plus GAAP whole loan portfolio. The 759 original FICO. It's a 62 mark-to-market LTV. There's 300,000 of borrower equity in those underlying properties. And the D60+ as of the end of the recent quarter was under 2%, it was 185 basis points, and that's actually down, call it, 7, 8 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 GAAP consolidated portfolio. The 1-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 7.5%. If you look at our non-QM portfolio rates that are 8.5% to 9%. So you're saying 100 to 150 basis points in the money, They're only paying 25 to 35 CPR. So the S 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 penalties. So I think that we are well insulated if there is a significant rally given the current gross back of the portfolio and the prepayment protection that we have.

Got it. Okay. That's helpful. And look, this is all triggering thinking about this on a deeper basis I don't see anywhere in the disclosures, but I may just be missing something. Is there a breakout by vintage, so we can think about the cohort exposure and HPA underlying HPA by year.

Yes, Rick, that's not something that we have disclosed, but that's something that we can follow up with you off-line in a discussion about potentially disclosing that in the future.

The next question from Jason Stewart, Janney Montgomery Scott.

And congrats on 7 consecutive quarters of positive economic returns, quite an achievement there. So I wanted to continue on Rick's question on the credit markets. What's your expectation at this point for GSE reform and 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. But as we've said in the past, a lot of the loans that the GSEs originate or what are considered noncore, I think roughly 20% thereabouts. And ultimately, we'll be able to compete for that origination is our news. 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?

Yes. I guess I'm hearing no change to your view there, which is fine...

Sorry, Jason, one thing I could add for David, in terms of the correspondent channel, about, I'll say, call it, 10% to 11% of the actual correspondent lock volume is agency collateral. So that is agency investor agency second homes. You are not seeing us come to the market to do stand-alone deals However, that collateral is oftentimes included in our non-QM transaction. So we are capitalizing on some of the pricing that the GSEs have and some of the efficiencies within the PLS market relative to GSE execution. So we are doing that right now.

Okay. Okay. That's helpful. And then on the MSR portfolio, I mean I understand that the in gross WACC is so far the money that any sort of -- it would take such a meaningful movement rates to have a prepayment effect there. But how do you think about external factors impacting the multiple, whether it's M&A activity in the space, lower rates impacting 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. There's about 4 to 5 players that are investing combined hundreds of millions of dollars in technology and which you're going to see in terms of the pace of advancements in servicing is going to be 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 subservicing expenses.

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 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 a need to move MSR off balance sheet.

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 we look at our multiple, we're relatively conservatively priced, we feel, and the performance of our MSR has been very good, well exceeded our expectations.

Yes. I mean another exogenous factor that's really helped as Dave mentioned in the prepared remarks, is just the growth in the float accounts, the T&I 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 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 all the so derived from the MSR asset. I mean those initiatives are in the infancy, but sure, I have a lot of promise given all the technology investments.

The next question from Eric [Audio Gap].

Coupon MSRs continue to season and pay down slowly. I mean how should shareholders think about the value impairing that opportunity with these higher coupons, right? Even versus a couple of years ago when the complexion of the mortgage market was a little different, the level of prepayment risk looked a little different volatility. I mean how should we think about like the pairing of that opportunity now?

Yes. I mean we've built out the capability to really participate actively in any coupon. And the way we've done that, and again, as Dave alluded to building out these partnerships with the largest, the best and most technology-enabled servicers and we capture partners. And given the portfolio of partners we have and given we already have exposure to all the coupons, well, 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 we do isolate the hedge strategies between the different note rates.

So we're ready, we're there. We're showing bids on all coupons and 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 much of the mortgage industry to recycle out of the lower-yielding loan low-rate MSR and kind of reallocate that capital to originating new loans which would be the hydro -- so we're still facilitating that trade as well as building out the infrastructure.

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 was your hedge portfolio swap portfolio -- in other words, like how much is 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 meaningful duration change, but it's just a very powerful care generator with a little bit of negative duration there. .

The next question from Crispin Love, Piper Sandler.

Can you dig into the demand picture for CMBS in the current environment where is the bulk of demand coming from? You seem pretty positive on the space. Just curious on your expectations in 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?

Sure. On fundamentals. On demand, fixed income funds saw about $50 billion in redemptions in April. But since then, they have 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 billion to $30 billion in CMO issuance, but that's taking away about 30% of the gross supply to the market.

What we've not seen is demand from banks and overseas accounts. And even without that demand, I think fundamentals are quite supportive for agency MBS, imply batteries currently at 3-year lows. Asset carry is attractive for unhedged accounts. So we do think MBS spreads can tighten 3 to 5 basis points to treasuries, even without additional demand from banks and foreign accounts. But the real bull case for MBS is that a combination of regulatory reform and further easing and monetary policy will materially increase demand from banks in Asian accounts, and we think the odds of that happening in the second half of the year are quite good.

Yes, Crispin, if you think about the bank model, they benefited quite a bit from high short rates and the generation of NIM, specifically as a consequence of that. As the Fed does reduce rates, that need for NIM to replace that NIM will materialize, and we do expect it to come into agency MBS. .

The next question from Matthew Erdner, JonesTrading.

I'd like to turn back to resi credit. In the second half, what you guys have seen kind of quarter-to-date. I know that there's close to about $1 billion in securitizations out there already. But do you think 3Q is tracking to kind of be in line with 2Q? And then just what are your margin expectations going forward as well given that the Fed is pricing -- are those 2 rate cuts priced in?

Sure. Thanks, Matt. This is Mike. In terms of issuance, I'll say year-to-date, gross issuance has been $92 billion that's outperformed analyst 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 remain robust. They're healthy.

In terms of 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-QM 13. It was a $662 million transaction, $500 million of AAA bonds, and we sold the AAA at $138 million all other issuers and sponsors are kind of in, call it, the $140 to $150 range. So I think what Q2 showed us in 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 3, 4, 5 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 investor base. 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 we're retaining, call it, 11% to 12% of our transactions using maybe what 1 turn, 1.5 turns of recourse leverage. So call it 5% to 7% of capital deployment per each $100. And you're talking mid-teens returns on that capital deployed.

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

Yes. It's hard to say. So 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 Q4. When you look at some of the origination volumes that we've seen from the banks and some of the nonbank so far, origination volumes are up, call it, 20%. So it's hard for us to say that if we did not make some of these changes, 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 we've done $7.5 billion closed funded loans through the correspondent for the first half of the year, that's a $15 billion run rate. We think the non-QM DSCR market is about 5% of total originations. So call it $2 trillion of total originations, $100 billion of non-QM [DSCR] we think we're 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 the targeted credit box that we have.

Next question from Trevor Cranston, Citizens JMP.

I guess a question on the macro outlook. It seems like there's a pretty strong consensus around steepening of the yield curve going forward. But as the impact of tariffs 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 if some of the pricing in the Fed cuts were to come out of the market at some point? How do you think agencies in particular, would perform in that type of scenario?

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 will 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 forecast, 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.

So we do anticipate that they'll deliver on the 2 cuts, they have an unemployment rate of around 4.5%, so 4% higher. The labor market is slowing. That will likely materialize. And as it relates to growth, 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 forecast and the dots seem to paint what we believe would be a pretty accurate picture of how plays out and we'll get those 2 cuts.

Now should that not occur, let's assume that inflation runs higher, and the Fed is not in a position to cut. You'll see a flattening of the yield curve, which were hedged for and Agency MBS so long as volatility is contained, should perform just fine. If, on the other hand, you get a bigger deterioration in the economy and the Fed is more aggressive, then that's obviously 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 upon.

This concludes our Q&A session. I would like to turn the conference back over to Mr. Finkelstein for any closing remarks. Thank you.

Thank you, Vicki. Everybody, have a good rest of the summer, and we'll talk to you soon.

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