Yahoo Finance

Serena Wolfe

Thank you, David. Today I will provide brief financial highlights for the quarter ended March 31, 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.
Earnings available for distribution per share for the quarter was consistent with the prior quarter at $0.72 per share.
Earnings were primarily driven by lower average repo rates of 4.56% compared to 4.93% in the prior quarter, along with higher coupon income on higher average investment balances.
These increases were partially offset by lower swap income due to the unwinding of the swaps, which were replaced with future positions that do not have an interest component in EAD.
Considering continued strong earnings, driven largely by reduced repo funding costs and higher average investment yields, we increased our dividend from $0.65 to $0.70 per share for the first quarter.
Given our outlook for 2025, we expect to maintain this level for the remainder of the year, all else equal. As of March 31, 2025, our book value per share was $19.02 a modest decline of less than 1% quarter over quarter.
After accounting for our aforementioned dividend, we achieved an economic return of 3% for Q1. Our individual businesses all contributed positively to our economic return despite the challenging macro environment in the latter part of Q1.
For the quarter, we saw gains on agency, MBS, Residential Credit and MSR portfolios of $1.89 $0.08, and $0.05 per share, respectively. However, declines in our hedge positions modestly outpace these gains at $2.14 per share.
Over the last year, we have spent time on our earnings calls discussing the various additions and expansions of funding options available to our credit businesses.
Our financing strategy is defined by our diversified structures and given our size and scale, we have access to a wide range of funding options, including bilateral repo, our in-house broker dealer, sponsored repo, securitization, credit facilities, and warehouse financing.
We took advantage of the robust funding markets during the quarter and added term to our repo book at attractive spreads. As a result, our Q1 reported weighted average repo days extended to 50 days compared to 32 days as of the fourth quarter of 2024.
Since the end of 2022, we have added $2.1 billion of warehouse capacity, including supplements for new products and non-marked to market and committed facilities within the Residential Credit business.
This brings total capacity to $3.9 billion across 10 counterparties as of March 31, 2025, with a utilization rate of 43%. Additionally, we have added $1.6 billion in capacity over the same period within our MSR business.
This is consistent with portfolio growth, bringing the total available committed warehouse for MSR to $1.8 billion across three counterparties as of March 31, 2025, with a utilization rate of 50%.
After quarter end, we upsized an existing credit facility within the Residential Credit business, bringing our current total capacity across both businesses to $5.8 billion.
Annaly's financial strength is further evident in our unencumbered assets, which ended the first quarter at $6.3 billion including cash and unencumbered agency MBS of $4.7 billion, which is approximately 60% of the dedicated capital of our agency business.
In addition, we have approximately $1.2 billion in the fair value of MSR that has been pledged to the committed warehouse facilities, but remains undrawn and can be quickly converted to cash, subject to market advance rates.
Together, we have approximately $7.5 billion in assets available for financing, up approximately $600 million compared to the fourth quarter and representing approximately 60% of our total capital base.
Finally, touching on OpEx, our efficiency ratios increase moderately during Q1 due to the timing of certain expenses. However, we expect expenses to normalize and full year OpEx to equity ratios to align with historical levels, all things being equal. Now that concludes our prepared remarks, and we'll open the line for questions. Thank you, operator.

Question and Answer Session

Operator

(Operator Instructions) Bose George, KBW.

Bose George

Everyone, good morning. Can I get an update on your book value quarter to date?

David Finkelstein

Sure, Bose. Good morning. As of Tuesday evening, our book value inclusive of the dividends, so, economic return was off roughly 3.5%. And, to give you context of how, it has evolved coming out of the Easter holiday weekend, the economic return was roughly off 4.5%.

Bose George

Okay, great. Thank you. And then just can you talk about your outlook for spreads and how does the, what's happening in the swap market, play into that? Does it have more to do with swaps normalizing, and also just any thoughts on what regulators might end up doing with the bank SLR and what that could mean for the market.

David Finkelstein

Sure. Let's first talk about, swap spreads, because obviously a lot of factors have driven mortgage widening and swap spread tightening is one of them, but also volatility. As it relates to swaps. It's important to back up and talk about how the swaps market has evolved over really the past decade. Beginning with post Dodd Frank, swaps ultimately were all cleared, and as a consequence, margined and mark to market on a daily basis.
So effectively they, that eliminated credit risk. Another evolution obviously is the transition from LIBOR. To sour so overnight treasury is the benchmark, which also reduces any risk associated with, with that Instrument as Hedge and the last point to note is they're synthetic and so there's no balance sheet risk associated with swaps. So effectively, what's occurred over the last decade.
That swaps have become the risk-free curve, yield curve in the US and as a consequence, your best carry. As a hedge is going to be that risk-free curve. So, it's a very attractive hedge, from a carry standpoint. However, it doesn't have the highest correlation to mortgages.
Treasuries actually do exhibit greater correlation. That's largely because of balance sheet, risks. Now, the way we look at it is we're looking to balance carry and correlation and strike the best risk adjusted return as a hedge and we think we've done that effectively. Now, what's occurred, over the very recent past is as, we got to April 2, and beyond a lot of volatility ensued.
And as a consequence, that flight to quality was more reflected in swap spread tightening as opposed to a treasury rally, albeit Treasury have now since rallied back. And that, and that's what's driven the underperformance of agency relative to swaps. So our view is that as we do get to hopefully a better outcome on these trade negotiations, you will see volatility decline, and you'll see swaps normalized and widened.
That's our view, but it's going to be predicated on, greater confidence on the outlook as it relates to trade. And also, market volatility subsiding. Now, your point about the regulatory environment, obviously coming into the year, there was a lot of anticipation about rate reform and, that did lead to swap spreads widening largely because of the anticipation that it would free up balance sheet on the part of banks and particularly, broker dealers and banks so that they could intermediate.
Balance sheet intensive products with greater capabilities and that did get put on the sidelines a little bit given the other priorities of the administration. But our anticipation is that we will have a broad regulatory reform coming down the pike.
I, think the Treasury Secretary said you can anticipate the third and fourth quarter to see the benefits of that. When he was interviewed early this week, the Fed obviously has a new, regulatory chair coming in waiting confirmation in Bowman. Treasury is well focused on it, as are the other parts of the administration, FDIC OCC, and we do expect that to be a focus. So SLR is obviously on the table and then.
Likely a full reproposal of Basil Endgame, and other accommodations to make balance sheet, more friendly in the intermediation of, the treasury market and other, sectors in markets, to be more fluid. So, we're hopeful and we'll wait to see, and we do think it'll be a tailwind to spread, swap spread widening in the coming quarters. Does that help?

Bose George

Yes, that's great. Thanks for all the color.

David Finkelstein

Sure.

Operator

Douglas Harter, UBS.

Douglas Harter

Thanks. David, you mentioned that you came into the year with your lowest economic, leverage, just thinking now that spreads have widened and how you're thinking about leverage, today, whether this is an opportunity to increase it or, with volatility likely or potentially to remain high, you would kind of keep it as is.

David Finkelstein

Sure, Douglas. You bring up the two opposing forces in terms of how, we look at leverage. Number one is that spreads are wider, which would suggest you would take more risk and, add more leverage. But on the other side of the equation, a lot of that is driven by higher.
Volatility and as a consequence, it makes taking leverage up riskier. So, when we look at how we're positioned currently, we're trying to balance those two competing forces and positioning wise. Leverage has picked up modestly this quarter, but we're still inside of six turns.
And until we see leverage come or sorry, volatility come down or at least we can forecast it, we're probably going to keep things close to home. We're optimistic that, things will continue to subside in terms of market conditions, liquidity and volatility.
But there's still a lot of uncertainty and so our inclination is to keep things close to home. We'll let leverage drift a little bit and we're not going to, we're.
Not going to be overly defensive when we don't think we need to be, but we're going to keep it conservative for here, Douglas.

Douglas Harter

It's just a question on that, right? If you wait until you see, volatility kind of decline, don't you risk, kind of that is the spread movement tighter since, that is the bulk of widespread there's so higher volatility, just kind of how you. Offense and defense.

David Finkelstein

Sure. Well, first of all, I'd say if you look at our spread shocks, for a 25 basis points, tightening and spreads, the portfolio makes nearly 10%. And right now, spread durations are a little bit longer, so that's a little bit over 10%. It's more than sufficient opportunity to generate return under that eventuality.
And yeah, it is a difficult puzzle to assess, given the fact that you'll miss some of that spread tightening. If you think about it, you, these two com competing forces, you want to move quickly, but if you think about the alternative, if all of a sudden we do have a reinvigoration of the extreme volatility that materialized.
Between April 2 and April 9, that's going to be quite painful, and that's what we're, tasked with being respo. Responsible about so the return will be, will be certainly rewarding if spreads do tighten, but we want to make sure that the portfolio doesn't get unwieldy in terms of managing leverage and duration in the absence of that and a retracement of some of the calmness that's ensued in the past week or thereabouts.

Douglas Harter

Great. I appreciate those answers, David.
Thank you.

David Finkelstein

Thank you, Douglas.

Operator

Richard Shane, JPMorgan.

Richard Shane

Hey guys, thanks for taking my questions this morning. Look, obviously large portfolio dealing with incredible uncertainty and a high degree of volatility. It does, and you're also in an environment where I think you're investing in at least nine different coupons.
It looks like during the quarter you shifted incrementally towards a little bit more of the discount bonds. Is that sort of strategically where we think you should be going or not where we think you should, but where we should expect that you are trending over the next two or three quarters?

V.S. Srinivasan

Hi, Shane, this is Srini. Thanks for the question. Overall, we feel like, at this moment, particularly in the first quarter, roles were starting to look pretty attractive in the intermediate coupons and the intermediate coupons have underperformed in the sell-off which we saw in the fourth quarter, and they were on a relative coupon basis, pretty attractive.
Over the last month or so, we still find the intermediate coupons quite attractive.
We do have a general bias towards rates going lower rather than higher, which again suggests we should be in intermediate coupons, but pay apps have come up a lot since the end of the fourth quarter, so pay apps are looking much more attractive now. So, we do like. Specified pools up in coupons. So when the opportunity presents itself, we will add some specified pools up in coupon, but our TBA positions will remain in intermediate coupons.

David Finkelstein

And Rick, I'll just add, to srini's point, we did add a lot of 4s and 4.5s, and those are around the $93 to $95 dollar price bonds. And if we do get a rally, those assets will trade.
Long for, for Quite some time, so we'll really benefit from that. And then conversely, in higher coupons, if you think back to the fall when the 10-year rallied to, $3.65 or thereabouts, speeds really accelerated on those premium coupons and, we're certainly sensitive to the refinanceability of, costs beer and higher coupons as well. So, you think that's the right sweet spot.

Richard Shane

Got it. And do you think that, we've been in an environment, all mortgage borrowers are rate bulls, all mortgage originators are rate bulls, and we've been in an environment for the last 18 months or 24 months where people have been financing homes with the expectation that they'll be able to refinance them very quickly.
In addition, the technology for refinance and the industry structure is evolving. Do you think that on a like for like basis, we will see speeds substantially higher than we would have expected historically based upon modest moves up in the stack, based on more modest rate moves.

V.S. Srinivasan

The short answer would be yes. We got a glimpse of this, in the fall of last year, as David mentioned, when rates rallied and mortgage rates got below 6%, cheapest to deliver sixes, which were roughly 75 basis points of incentive, refinanced at a speed 1 month speed of 38 CPR, and 6.5s with 125 basis points of incentive paid at almost 50 to CPR.
These are faster speeds than what we saw experienced in 2019, but not as fast as what we saw in 2021. And the reason is that in 2021 we were at historic low-end rates, so there was a lot of media effect. But the combination of higher loan size and the shift in origination from bank originators to non-bank originators has definitely made the cheapest to deliver a universe much more negatively convex today than it was pre-COVID.

Richard Shane

Got it. It's interesting to hear the phrase media effect which we have not heard for a while in this space, but it's a good point as well. It's not a factor I was considering. Thank you, guys, very much.

David Finkelstein

Thank you.

Operator

Eric Hagan, BTIG.

Eric Hagen

Hey, thanks. Good morning, guys. I think you talked about housing prices and some moderation there in certain areas. I mean, do you see weaker housing prices becoming systemic under any scenarios, or do you think it's really more likely to be isolated? And if it does stay relatively isolated, do you think that could have any impact in any way on agency MBS spreads or conditions in the securitization market?

Michael Fania

Sure, Eric, this is Mike. I'll take the first part of the question regarding housing. I think when talking about housing, I think the first thing that you need to do is take a step back and assess, what that market has done. So, housing prices are up 47% since the year end of 2019.
They've outperformed significantly, they've outperformed analysts' expectations, and even over the last 2.5 years with the mortgage rate at six. 3/4, home price appreciation has still been very strong. What you are now seeing is inventory has increased, inventory is up 18% year over year, but inventory is up close to 50% from February of 2022.
So longer term, inventory is still 25% below where we were pre-COVID, but shorter term. It has increased, and what you're seeing is this spring selling season is weaker than the past seasons. Existing home sales, it's the lowest existing home sales that we've seen since March of 2009.
You're hearing it on the builder calls that they, it's more than just incentives now they actually need to decrease pricing. And I think a lot of that is just, you're seeing a little bit of pullback from outsized HPA where you're seeing it, it's more regional in nature.
You're seeing a lot in the South, a lot in the southeast. Florida is pretty weak, but Florida was also up 60% since 2019. But a lot of it is just you're seeing it from short-term increases in inventory. So, Texas, Florida, Georgia, you're seeing it in the Carolina, a little bit in Colorado and Arizona. On the other side of that, the Northeast is very strong. In New York, New Jersey up 6%, 7%. You're seeing the Midwest is also strong as well. So, I think shorter term, you may see some pullback here. HPA may be flattish and maybe, negative, throughout the year.
But I think, as David mentioned in the script, there's still a lot of longer term, reasons as to why we're constructive on housing. Delinquencies are still relatively low; mortgage credit availability is still tight. You're seeing in terms of longer-term inventory, we think it's short, $3 million to $4 million units. And then when you think about borrower equity, housing market is $55 trillion and there's only $13 trillion of first lien debt.
So I think longer term, we feel, we feel constructive, but over the near term, just given the outsized HPA, you are going to see some pullback. In terms of what that means for the securitization market, we have seen, Delinquencies increase, we'll relate that to the non-QM market.
But I think in actual losses, it, it's been nominal, and it's because of the equity that you see within these securitizations and within the PLS market, those borrowers have anywhere from 25 points to 30 points of equity. So, I think that housing would really need to depreciate and decelerate, for the PLS market to be impacted.

David Finkelstein

And Eric, your second part of the question, was that related to if there's a widening in in Recredit spreads? Will agency, follow sympathy or is it Is that it?

Eric Hagen

Yeah, essentially, yeah, exactly.

David Finkelstein

Yeah, so, obviously. There are two different markets and typically two different buckets across buyers of mortgage-backed securities. But yeah, certainly to the extent, Recredit does cheapen and it's not really deemed a credit event and, it'll be more competitive with agency, but, generally, we think there's appetite certainly for the residential credit sector and agency buyers, will, look at agency based on OAS volatility, and all the metrics that you assess agency NBS relative to.

Michael Fania

Yeah, and Eric, I would just add in terms of, if you want to think about the resiliency of the PLS market and what we have recently seen, we were out with our non-QM 6 transaction. We went out with that market, we're out in the market on April 1 we ended up pricing that on April 7.
So during that time period, you saw the S&P 500 was down, around 10%, and we were still able to price a transaction in the middle of liberation Day, with equity markets effectively catering. And doing it at a level that we still thought was relatively accretive to our cost of funds, to warehouse.
We had over 20 investors in that transaction. So, I think the PLS market is different than where it was called fortified. Years ago, if you asked us, would you be able to print a transaction in that type of volatility, three four five years ago, I think the answer would have been no, but I think the growth of the market and, the resiliency and the number of sponsors, in terms of your investors, I think has certainly increased.

Eric Hagen

Really helpful color from you guys as always. One more if I may, just because, there's so much going on right now. I mean lots of speculation around the GSCs getting released from conservatorship. We're not looking, we're not overlooking any of the complexities with respect to a release, but if it eventually results in the GSC's having a smaller or more nimble footprint in the mortgage market, I mean, first, what do you think that could mean for the level and the volatility of MBS spreads and what are the opportunities more broadly in the market that you think could be most attractive against that backdrop?

David Finkelstein

Well certainly it's a topic of a lot of Attention right now and as we see it, conservatorship shouldn't last forever. But what we've heard from policymakers is that to the extent the GSEs are privatized, it needs to be done thoughtfully and carefully. And I think that the FHFA director is aligned with the Treasury secretary. And I think Pulte said just the other day that first and.
For Most the objective is to make sure that anything that's done doesn't affect the mortgage market in a negative way.
So we've been encouraged with what we've heard thus far and given the other priorities on the administration's plate from trade to taxes to immigration, it's further out the horizon that we think it'll come to the forefront. Now, as it relates to the GSE's footprint under scenario where they're no longer in conservatorship, yes, they could have a smaller.
Footprint which is generally good for both our agency business and our residential credit business. I think we talked about on our last call that we'd be, we would be more competitive, from a reire standpoint, with a lot of the products that the GSCs do currently, guarantee.
I think, we noted that 20% of the, of the existing. Wheelhouse to the GSEs is what's considered non-core second homes, investor properties, and other types of loans, and we would welcome the opportunity to compete, to acquire and securitize those products. And then a smaller footprint and agency only helps the supply and demand dynamics, of the agency market. So, generally we feel pretty good about that.

Eric Hagen

Thank you guys. I appreciate you.

David Finkelstein

Thank you, Eric.

Operator

Jason Weaver, Jones Trading.

Jason Weaver

Hey, good morning, guys. Thanks to my question. You mentioned the allocation shift towards agency with the distribution of more already credit in the quarter, but can you talk about today where you see relative attractiveness in capital deployment?

David Finkelstein

Sure. Agency as spreads have cheapened, some of that's driven by ball, but generally, OASs are wider and that, that's where the marginal dollar is going given the returns in the agency market. We'll still continue to focus on.
OBX loan acquisition to securitization, because that's a very good return for us and , we expect to grow. OBX.
Platform. However, it could come at the cost of our third-party portfolio, much like you saw in the first quarter where we grew OBX, but we reduced third party securities primarily CRT as well as MPLRPL, and we'll see how spreads evolved to determine that, but generally.
Agencies where the marginal dollar is going as it relates to MSR, we have grown the portfolio nicely. We didn't grow. It much in the first quarter. The MSR portfolio for us is just kind of quietly lied in the laid in the grass.
And generated really strong returns because of the low note rate, low delinquency. Attributes of that portfolio and it's just been very stable for us, and we'd like opportunities to continue to buy MSR but those do tend to be episodic. We expect there to be a reasonable amount of supply.
Coming and growth will be dependent on pricing for the most part. But generally, right now, Marginal dollars are going to be allocated to agency, but we'll make sure we keep, an overall level of diversification in the portfolio that has benefited, the shareholder for, the past couple of years. It's worked out quite well and we'll be focused on it.

Jason Weaver

That's helpful. Thank you. And as a follow up, I wonder if you could talk about, the home equity securitization transaction, what you learned from that, and, where you see investor demand evolving there.

Michael Fania

Sure, thanks, Jason. Yeah, so, that transaction, I think actually went very well for us. We tightened that transaction, I think close to 15 basis points to 20 basis points relative to our IPTs. We priced the AAA asset at exo for plus 160. The blended cost of funds there was about 85% advance rate, so for plus 170, when we look at that relative to our cost of funds within warehouse, it's probably a 5% better advance rate and, maybe call it 25 basis points, 30 basis points better in terms of, rate, in terms of your cost of funds. So very accretive for us there.
The type of HELOC that we're, focused on their full documentation, it's bank quality credit. So, we're not participating in some of this alternative documentation that that some of our peers and other, competitors have been, have been looking to do. I think for us it just shows that, there is liquidity out there, and I think what is unique about HELOC and, the ability to sell HELOC in the securitization market is it is a floating rate product.
So when you look at floating rate assets within the PLS market, within the residential credit PLS market, really it's only CRT, and then maybe there's a small creation of floaters off prime jumbo deals, but, there was a lot of demand from accounts that historically did not participate in or not. Two transactions with our fixed rate but did participate in the EEOC transaction because of a floating rate nature. So, I think we feel very good about the deal and about future purchases and our ability to access securitization for term funding there.

Bose George

Appreciate that, Mike. Thanks for all the color, guys.

David Finkelstein

Thank you, Jason.

Operator

Trevor Cranston, Citizens JMP.

Trevor Cranston

Hey, thanks. On the agency portfolio, can you guys talk a little bit about what you're seeing in terms of the, supply demand dynamic in the near term, and in particular, if you can maybe talk about what you're seeing from foreign investors and what the outlook is for that segment of the market. Thanks.

V.S. Srinivasan

Sure, before, this recent bout of the, there was a pretty strong demand from fixed income funds because fixed income flows were very strong.
There was very high CMO creation because demand for floaters, agency floaters was from very strong and across a wide range of accounts. And there was reasonable demand from banks. Banks added about $20 billion in the first quarter, and res also had a reasonable demand.
As far as foreign accounts, we have not, we've seen a lot of demand for foreign accounts, but they're usually from places like Canada and UK, which is mostly money manager demand. I don't distinguish them any different from fixed income flows that you see in the US. What we have not seen in any reasonable size is demand from Asian accounts.
We think that we need another 25 basis points to 50 basis points of cut in the front end, Fed cuts before we see the Asian demand emerge.
Now does all of this tariffs, trade war and tariffs change that equation? It's not clear to me at this point we have enough information to go to say one way or the other.

Trevor Cranston

Okay, got it. That's helpful. And then on the non-agency side of things. With all the rate and spread volatility we've seen in April, has that had any impact on sort of the pace of new loan acquisitions in that business and how should we think about that for the early part of the second quarter? Thanks.

Michael Fania

Yeah, thanks, Joe. Yeah, it's a really good question. I would say it has, and really what we're doing is when you experience a time like this where you're seeing volatility, you're seeing increase in spreads, what we will do is we'll build in a higher margin, a higher gross margin, relative to what we have been doing historically. So, I think in times like this, it's prudent for us.
It's one of the reasons why the ROEs, the business increased in in terms of on our investor deck. Because we need to make sure that we have enough buffer, for our ability to execute these transactions. And I think it's also a little bit in terms of building a little bit more margins just given our, a little bit cautious on the consumer as well.
So I would say, our lot volume is off, but it's not off significantly. We're still, a platform that has the ability. Where there's some inelasticity in terms of our pricing, but I would say yes, we have a little bit more of a defensive posture given securitizations present and given the volatility that we're seeing, and we do that through our margin and that's pretty reactive function.

Trevor Cranston

Okay, makes sense thank you guys.

David Finkelstein

Thank you, Trevor.

Operator

With no further questions, this will conclude our question and answer session. I would like to turn the conference back over to David Finkelstein, Chief Executive Officer for any closing remarks.

David Finkelstein

Thank you, Wyatt, and thank you, everybody for joining us today. Have a good rest of the spring. We'll talk to you soon.

Operator

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