Annaly (NLY) Q4 2025 Earnings Call Transcript

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DATE

Thursday, January 29, 2026 at 9 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — David Finkelstein
• Chief Financial Officer — Serena Wolfe
• Head of Mortgage Servicing Rights — Ken Adler
• Chief Investment Officer — V.S. Srinivasan

TAKEAWAYS

• Economic Return -- 8.6% for the quarter and 20.2% for the year, driven by investment gains, spread tightening, and lower volatility.
• Total Shareholder Return -- 40% in 2025, highlighting performance across diversified housing finance strategies.
• Book Value per Share -- Increased 5% sequentially to $20.21, up from $19.25 in the prior quarter.
• Earnings Available for Distribution (EAD) per Share -- Rose by $0.01 to $0.74, driven by a 30 basis point improvement in average repo rate and higher investment balances.
• Dividend -- $0.70 for the quarter; EAD exceeded the dividend, with management stating the dividend is "safe."
• Leverage -- Economic leverage decreased modestly to 5.6x, described as historically low.
• Portfolio Growth -- Total portfolio grew 30% in 2025, supported by $2.9 billion in equity raised and double-digit growth across agency, residential credit, and MSR segments.
• Agency Portfolio -- Ended at $93 billion in market value, up $6 billion sequentially and $22 billion year over year, now comprising 62% of capital.
• Residential Credit Portfolio -- Ended at $8 billion in market value, up $1.1 billion sequentially and representing 19% of capital allocation.
• Onslow Bay Activity -- Q4 record lock volume ($6.4 billion), fundings ($5 billion), and 8 securitizations totaling $4.6 billion, generating $570 million in proprietary assets with mid-teens expected ROEs.
• MSR Portfolio -- Ended at $3.8 billion, rising $280 million sequentially and 15% year over year, now 19% of capital allocation.
• Liquidity -- $7.8 billion in unencumbered assets, with $6.1 billion in cash and agency MBS and $9.4 billion total assets available for financing, representing 58% of total capital base.
• Net Interest Spread (Excluding PAA) -- 1.49% for the quarter; full year increased by 18 basis points to 1.4%.
• Net Interest Margin (Excluding PAA) -- 1.69% for the quarter; full year improved 13 basis points to 1.7%.
• Efficiency Ratio -- Decreased 10 basis points to 1.31% for the quarter, with a full year ratio of 1.42%.
• Agency CMBS -- $1 billion growth in Q4 driven by sector’s relative attractiveness.
• MSR Bulk Purchases -- Committed to $22 billion in UPB ($330 million market value), with $150 million expected to settle in Q1.
• MSR Prepayment Rate (CPR) -- 4.6% for the quarter, unchanged sequentially; serious delinquencies remained low at 55 basis points.
• Average Yield -- Rose 26 basis points year over year to 5.39% from 5.13%.
• Warehouse Capacity -- $6.9 billion total, with $2.7 billion committed; utilization rates at 47% for residential credit and 50% for MSR.
• ATM Capital Raised -- $560 million in Q4, $2.9 billion for the year, including Series J preferred stock issuance.
• Onslow Bay Loan Quality -- Locked pipeline has a 762 weighted average FICO and 68 original LTV, noted as having limited layer risk.
• Market Outlook -- Management noted "agency will certainly continue to remain the anchor," but capital allocation is likely to shift incrementally toward non-agency credit and MSR segments.

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RISKS

• Finkelstein said, "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."
• Management identified "valuation as well is a risk. We are at the very tight end of the range on Agency MBS."
• Policy uncertainty was flagged: "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."

SUMMARY

Management described an environment of falling volatility, significant book value gains, and a capital base rebalanced more toward non-agency and MSR segments for potential future growth. New loan production, record Onslow Bay securitizations, and expanding MSR operations positioned the company for continued sector leadership. Executives emphasized adaptive capital deployment, “ample capacity” in warehouse lines, and ongoing discipline in credit underwriting. The call featured detailed discussion on hedging strategies and the implications of GSE activity for Agency MBS spreads and funding markets. Recent spread tightening may moderate future capital raising pace, but management indicated confidence in maintaining and exceeding dividend requirements.

• Mark-to-market book value as of the call date was reported as up 4%, or 3% net of dividend accrual, relative to year-end.
• “we could still achieve an upwards of mid-teens returns.” was cited regarding overall portfolio ROE prospects in a tightening spread environment.
• The company has now established active access to all GSE MSR platforms and works with nearly 100 counterparties for daily pricing and flow business expansion.
• “originators prefer to sell the lower note rate MSR so that's more valuable to us because that's what they're selling,” clarifying observed MSR market behavior.
• Executives provided that swap and repo funding conditions have stabilized, with lower average receive rates slightly offsetting yield gains elsewhere.
• The annual gain in total shareholder return outpaced the increase in economic return, highlighting the impact of capital markets activity in 2025.
• On capital allocation, management affirmed a long-term target of 50% Agency, 30% residential credit, and 20% MSR for the equity book.

INDUSTRY GLOSSARY

• ATM (At-the-Market) Issuance: Issuing new equity shares incrementally into the open market at prevailing prices, typically via a broker.
• MSR (Mortgage Servicing Rights): The contractual right to service a pool of mortgage loans for a fee, including billing, collections, and customer service.
• CPR (Constant Prepayment Rate): An annualized measure of the percentage of a loan pool's principal expected to be paid off prematurely during a given period.
• OBX (Onslow Bay): Annaly Capital's proprietary platform for non-Agency residential loan origination, acquisition, and securitization.
• Net Interest Spread (Excluding PAA): The difference between the yield on interest-earning assets and the cost of funding, calculated before amortization adjustments (PAA).
• Net Interest Margin (Excluding PAA): Net interest income as a percentage of average interest-earning assets, excluding PAA effects.
• GSE (Government-Sponsored Enterprises): Refers to Fannie Mae and Freddie Mac, which play a central role in the US mortgage market.
• PAA (Premium Amortization Adjustment): An accounting adjustment related to the amortization of purchase premiums on MBS securities.
• TBA (To Be Announced): A forward contract for the purchase or sale of agency mortgage-backed securities, with details specified on settlement date.
• DUS (Delegated Underwriting and Servicing): A Fannie Mae program under which approved lenders underwrite and service multifamily loans on behalf of Fannie Mae.
• DV01: Dollar Value of a 1-Basis-Point Move; measures price sensitivity to a 1 basis point move in yield.
• Non-QM: Non-qualified mortgage; home loans not meeting the standard underwriting requirements established by the Consumer Financial Protection Bureau.
• Repo (Repurchase Agreement): Short-term funding arrangement where securities are sold and later repurchased at a specified price.

Full Conference Call Transcript

David Finkelstein: 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 above-trend pace.

The labor market remains soft, however, as 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 FOMC 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 5.6x on the quarter. Our earnings available for distribution rose marginally to $0.74 again outearning 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, and 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. And 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.

Serena Wolfe: 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 full year 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 $19.25 in the prior quarter to $20.21. 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 ending 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 tick 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 pledged 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: [Operator Instructions] And today's first question comes from Alyssa DeStefano with KBW.

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

David Finkelstein: 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.

Bose George: 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.

David Finkelstein: 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.

Operator: And our next question today comes from Jason Stewart at Compass Point.

Jason Stewart: 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?

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

Ken Adler: 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 change 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.

David Finkelstein: 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 MSR 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.

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

Ken Adler: Yes. Well, what's going on is when originators sell MSRs, 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 note rate 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 network of people to buy from and then a network of people to both subservice and perform recapture for us.

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

Eric Hagen: 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 G-fee cut could impact the prepayment environment?

David Finkelstein: Sure. So obviously, a G-fee cut is something that's been talked about. Our view -- and we've been communicated about this to policymakers is that a G-fee cut on purchased loans is perfectly appropriate. We're concerned that if you do broad G-fee 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 like 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.

Eric Hagen: 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?

David Finkelstein: Yes. So the first question in terms of measuring spread volatility, like here is our view as it relates to the GSEs and their involvement. 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 incentivize 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 were 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 you see that in our economic return. So we feel quite good about that. And then Srini, you want to dive into your second question again -- second part of your question again, Eric?

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

David Finkelstein: 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, REITs raising 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 QT 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.

V.S. Srinivasan: And going forward, there could be pockets of opportunity if we get more clarity on what policy changes come about, 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.

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

Douglas Harter: 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.

David Finkelstein: Sure. 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 the risk of 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.

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

Richard Shane: 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.

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

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

David Finkelstein: 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 safe durable 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.

Richard Shane: 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.

David Finkelstein: 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 DUS 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.

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

David Finkelstein: Exactly. Locked out.

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

Harsh Hemnani: Thank you. So I think on the prepared remarks, you characterized the current environment as spreads have tightened across all 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 rest of the businesses 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?

David Finkelstein: 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 and MSR 30% and 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 our 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 is 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 and resi here.

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

Trevor Cranston: 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 size? 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?

David Finkelstein: 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.

Trevor Cranston: Yes. Whether you're seeing any impact from the GSE buying on swap markets.

David Finkelstein: 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 -- or $3 trillion, and we feel like funding markets are still going to be fine without their participation. And Srini, you got another point.

V.S. Srinivasan: The 1 thing I would add is just the size of the GSE book. I mean if they bought the entire $200 billion, it's about $100 million DV01 so if you assume they have done 5% or 10%, you're talking about $5 million, $10 million DV01, it's just not large enough for you to see any impact on swaps spreads right away. It will take time.

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

David Finkelstein: 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.

Operator: 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.

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