Annaly (NLY) Q1 2026 Earnings Call Transcript

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DATE

Wednesday, April 22, 2026 at 9:00 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — David Finkelstein
• Chief Financial Officer — Serena Wolfe
• Chief Investment Officer – Residential Credit — Michael Fania

TAKEAWAYS

• Economic return -- 1.5% for the fiscal first quarter ended March 31, 2026, supported by Annaly Capital Management's diversified housing finance platform.
• Book value per share -- Decreased by 1.9% to $19.82 from the previous quarter.
• Earnings available for distribution (EAD) per share -- Rose to $0.76, exceeding the declared $0.70 quarterly dividend.
• Leverage -- Maintained at 5.7x, indicating conservative risk-taking in the capital structure.
• Common equity raised -- $510 million through the at-the-market program, primarily deployed into Residential Credit and MSR strategies.
• Capital allocation -- Shifted from 38% to 44% in aggregate to Residential Credit and MSR by quarter end.
• Agency portfolio -- Ended the quarter at $92 billion in market value, representing 56% of total capital, with strategic rotation from 6s to 4.5 TBAs.
• Residential Credit portfolio -- Closed at $10.3 billion in market value, accounting for 23% of total capital; $6.7 billion of whole loans acquired, with lock volume up 16% quarter over quarter and 41% year over year.
• Residential Credit securitization -- OBX platform settled eight deals totaling $4.7 billion, generating $570 million of proprietary assets; $79 billion fiscal first quarter gross industry issuance reflects a 63% year-over-year increase.
• MSR portfolio -- Ended at $4.2 billion in market value, with allocation rising to 21% of capital; $24 billion in principal commitments made this quarter across bulk and flow channels.
• Liquidity -- $7.4 billion in unencumbered assets at quarter end, including $5 billion in cash and unencumbered Agency MBS; approximately $9 billion of total assets available for financing.
• Efficiency ratio -- Fell two basis points to 1.29%, cited as among the lowest in the mortgage REIT sector.
• Quarter-to-date economic return -- As of the Friday before this call, economic return was up 4%, including accrued dividend, per Finkelstein.
• Non-agency allocation target -- Long-term mix objective reaffirmed at 50% Agency, 30% Residential Credit, 20% MSR.
• Non-agency subsector ROEs -- Recent portfolio additions produced levered returns: third-party securities at 12%-13%, OBX mid-teens, whole loans 11%-12% pre-securitization, and 15% post-securitization.
• Serious delinquencies -- Residential Credit portfolio reported D90+ delinquencies at 140 basis points, stable year to date.
• MSR prepay speeds -- 4.2 CPR for the quarter, with the portfolio's weighted average note rate at 3.3%, the lowest among the top 20 agency MSR holders.

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RISKS

• Book value per share declined by 1.9% to $19.82, primarily due to Agency underperformance and hedging costs tied to significant rate volatility.
• Management noted persistent affordability pressures for U.S. consumers from higher energy and food costs, which may challenge economic performance through the rest of the year.
• Finkelstein said, "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," signaling uncertainty in rate outlook.

SUMMARY

Annaly Capital Management (NYSE:NLY) shifted capital allocation toward Residential Credit and MSR, reducing Agency allocation amid evolving market technicals and volatile rates. Management raised $510 million in new equity specifically for higher-returning credit and servicing assets, with Residential Credit lock volume up 16% quarter over quarter and MSR commitments totaling $24 billion in principal. EAD per share increased and outpaced the quarterly dividend, while efficiency gains continued, enhancing operating leverage in a competitive environment.

• Management confirmed that, quarter to date, economic return had improved 4%, inclusive of the accrued dividend.
• Executives emphasized flexibility and patience in deploying capital toward long-term strategic targets of 50% Agency, 30% Residential Credit, and 20% MSR, allowing Annaly Capital Management to adjust quickly to shifting market opportunities.
• Residential Credit securitization volume set a new record, with eight OBX deals closed and continued growth in proprietary asset generation on Annaly Capital Management's balance sheet and through joint ventures.
• Bank capital regulation changes were discussed as potentially reducing future Agency MBS issuance, with management expecting banks to hold more residential loans and remain active on the MSR side regardless of the current 250% risk weight.
• The company indicated its MSR portfolio was characterized by very low note rates and high credit quality, supporting muted prepayment rates and strong recurring cash flows.

INDUSTRY GLOSSARY

• MSR (Mortgage Servicing Rights): The contractual right to service a mortgage, receive a fee for collecting payments, and manage accounts for the underlying loans.
• OBX platform: Annaly Capital Management's proprietary securitization vehicle for residential mortgage credit, facilitating issuance and structuring of non-agency RMBS.
• TBA (To Be Announced): A forward contract for the purchase or sale of Agency mortgage-backed securities at a future date, where the specific securities are not designated until settlement.
• CRE CLO: Commercial real estate collateralized loan obligation, a structured finance product backed by diversified pools of commercial mortgages.
• CPR (Conditional Prepayment Rate): The estimated annualized rate at which borrowers are expected to prepay their loans within a pool of mortgages.
• LLPA (Loan-Level Price Adjustment): Fees charged by GSEs on conventional loans based on risk factors such as credit score and loan-to-value ratio.
• D90+: Loans classified as seriously delinquent, with payments overdue by 90 days or more.
• GSE (Government-Sponsored Enterprise): Entities like Fannie Mae and Freddie Mac that support the secondary mortgage market via purchases and securitizations of mortgages.
• RPL/NPL: RPL stands for re-performing loan; NPL stands for non-performing loan. Both refer to pools of mortgages classified by payment performance status.

Full Conference Call Transcript

David Finkelstein: 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.

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

Crispin Love: 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?

David Finkelstein: 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.

Michael Fania: 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.

Crispin Love: 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?

David Finkelstein: 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.

Operator: Next question comes from Bose George with KBW.

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

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

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

David Finkelstein: Inclusive, inclusive of the dividend accrued.

Bose George: 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?

David Finkelstein: 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.

Operator: The next question comes from Marissa Lobo with UBS.

Ameeta Lobo Nelson: 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?

David Finkelstein: Sure. Mike, do you want to take it?

Michael Fania: 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.

Ameeta Lobo Nelson: 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?

Michael Fania: 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.

Operator: The next question comes from Rick Shane with JPMorgan.

Richard Shane: 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?

David Finkelstein: 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.

Richard Shane: 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.

Operator: The next question comes from Harsh Hemnani with Green Street.

Harsh Hemnani: 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?

Michael Fania: 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.

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

Unknown Analyst: 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?

David Finkelstein: 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..

Operator: The next question comes from Jason Weaver with Jones Trading.

Jason Weaver: 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?

David Finkelstein: 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.

Jason Weaver: 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?

David Finkelstein: You said Onslow Bay specifically?

Jason Weaver: Correct.

Michael Fania: 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.

Jason Weaver: Congrats on the quarter.

Operator: Next question comes from Trevor Cranston with Citizens JMP.

Trevor Cranston: 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?

David Finkelstein: 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.

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

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

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

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