Annaly Capital Management, Inc. Stock

Thank you for standing by, and welcome to the Annaly Capital Management Third Quarter 2026 Earnings Conference Call. [Operator Instructions]

I'd now like to turn the call over to Sean Kensil, Director of Investor Relations. You may begin.

Good morning, and welcome to the Third Quarter 2026 Earnings Call for Annaly Capital Management. Please note that this call is being recorded. As a reminder, materials for today's call are available on our website at www.annaly.com.

Today's call may include forward-looking statements, which are subject to certain risks and uncertainties that could cause actual results to differ materially and refer to certain non-GAAP measures. Please see the notices in our earnings release for important information regarding forward-looking statements and non-GAAP measures.

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

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

Thank you, Sean. Good morning, everyone, and thanks for joining our Q3 earnings call. I'll begin with an overview of the macro environment and our performance during the quarter and discuss each of our 3 investment businesses, finishing with our outlook. Serena will then provide a more detailed review of our financials, after which we'll open the call up to Q&A.

Now starting with the macro landscape. The U.S. economy remains resilient, supported by heavy AI investment and healthy consumption. The labor market is stable, while inflation remains above the Fed's target, driven in part by higher energy prices. The bond market faced a challenging third quarter, with the 10-year treasury yield rising 82 basis points to multi-decade highs. The sell-off accelerated following the Fed's first rate hike since 2023, and markets are now pricing nearly 3 additional 25 basis point hikes through the end of next year. Higher rates also reflected concerns around government debt, heavy corporate issuance and a repricing of the Fed's neutral rate.

Mortgage rates have accordingly reached 7.5%. The level during this cycle seen only briefly in the fall of 2023, and thus housing activity is likely to stay subdued as affordability challenges persist and the existing borrower lock-in effect continues to constrain turnover. Weaker demand could soften home prices, though supply and demand remain broadly balanced, notwithstanding regional disparities, and underlying borrower credit remains fundamentally sound.

As upward pressure on rates intensified during the month of September, rate volatility rose significantly, with implied volatility measures reaching their highest levels since the administration's initial tariff announcement 1.5 years ago. And this drove mortgage spreads wider and led to meaningful underperformance in Agency MBS. Against this backdrop, our portfolio delivered a negative 7.6% economic return for the quarter. Earnings remain durable, however, with EAD of $0.80 per share, again, exceeding our dividend, while economic leverage ended Q3 up modestly at 5.9 turns.

In capital markets, we announced the redemption of our $443 million Series I floating rate preferred stock during the third quarter, and the redemption helps us maintain a very conservative capital structure. And we view balance sheet leverage as more attractive, particularly as repo financing remains readily available in terms of residential credit and MSR warehouse lines continue to improve. Relatedly, we issued $757 million in common equity in the quarter through our ATM program, with proceeds used both to fund the preferred redemption as well as to invest across our portfolios.

Now turning to our investment strategies and beginning with Agency. The sharp selloff in rates led to meaningful extension across the MBS universe, particularly in the more negatively [ convexed ] portions of the market. This created duration mismatches and contributed to selling pressure from some more highly levered investors late in the quarter, which exacerbated the volatility-driven MBS spread widening. While we are certainly not immune to mortgage underperformance, we were positioned for rate and spread volatility with conservative duration exposure and historically low leverage heading into the quarter.

Our Agency portfolio decreased modestly to $92 billion in market value, representing 55% of the firm's capital that we added approximately $2 billion notional in MBS in the quarter. Activity focused on deploying a portion of our common equity raised in a higher coupon specified pools, primarily [ 5.5s and 6s ]. This past quarter also demonstrated the value of our allocation of high-quality specified pools. On average, our pools for more than 3.5 years season and carry loan balances less than half those of new production, providing both call and extension protection. As mortgage rates increase, paves declined on call-protected pools as expected but increased on extension protected pools. And given the distribution and quality of our collateral, the average pay up on our portfolio increased modestly over the quarter.

Now early in the fourth quarter, we monetized some of this outperformance, rotating over $2 billion in primarily seasoned pools in the higher coupon TBAs, which stand to benefit more from a decline in volatility, something we have begun to see since the end of the third quarter. On the liability side, as rates moved higher, we responded by adding to our hedge position, primarily in treasury futures, to keep our overall interest rate exposure contained. And we entered the fourth quarter with slightly more rate exposure, however, as current higher yields offer attractive value. And we're also comfortable carrying somewhat more duration as the rise in rates materially reduced negative [ convexity ] in both our portfolio and the broader MBS universe. And as a result, asset durations should be less sensitive to further rate moves in the current environment, reducing the need for hedge rebalancing.

Moving to residential credit. Our portfolio ended the third quarter roughly flat quarter-over-quarter at $10.4 billion in market value, representing 23% of the firm's capital. Residential spreads traded in a tight range for the majority of Q3, with AAA non-QM spreads ending the quarter approximately 10 basis points wider, largely in sympathy with other securitized products. Our Onslow Bay correspondent channel delivered another strong quarter, with $7 billion of lock volume and $5.8 billion of fundings, our highest quarterly funding volume since the channel's inception more than 5 years ago. And importantly, growth has not come at the expense of credit discipline, with our current lock pipeline carrying an average FICO of 766 and an average LTV of 67%.

Now with respect to securitization, we settled $7.4 billion of transactions in Q3, while pricing an additional $2.2 billion in October. Annaly remains the market's largest expanded credit sponsor, and we have now [ prized ] more than $21 billion securitizations in 2026 across 37 deals. And while the new issue market has experienced marginal widening post quarter end, we're encouraged by the resiliency of the private label market, and expect 2026 to be a post-GFC record in transaction volume.

Now to discuss MSR, our portfolio increased to $4.3 billion market value, with our allocation of the sector representing 22% of the firm's capital. We took a measured approach to purchases during the quarter, settling one bulk package for roughly $140 million in market value, while our flow channel experienced just over $50 million in volume and new quarterly highs as we continue to gain market share in the co-issue sector. Both supply in the market increased quarter-over-quarter, and we expect it to stay robust throughout the balance of the year given current mortgage industry dynamics, as we've spoken about extensively over the past year. And this environment should provide ample opportunity to responsibly grow our portfolio. Year-to-date, we remain the largest purchaser of bulk MSR, reflecting the value we bring to the origination community as a strategic partner with a deep permitting capital base.

MSR valuations modestly increased, with our multiple ending the quarter at 6.15x, largely driven by higher interest rates and wider current coupon MBS spreads. Our prepayment speeds remained very low this past quarter, decreasing to 4.8 CPR, reflecting our portfolio's low average note rate, seasonal factors and higher mortgage rates. Credit performance remains strong, with serious delinquencies below 60 basis points and along with healthy income from our escrow deposits, these factors support a predictable cash flow profile that continues to be a complement to our other investment strategies and an important contributor to our EAD.

Now turning to our outlook. We're mindful of uncertainty in the market. We entered the fourth quarter prudently positioned with substantial liquidity, and we remain focused on preserving capital while dynamically allocating across our 3 businesses as opportunities emerge. Within Agency, we continue to manage [ call and ] extension risk proactively as the rate outlook evolves, while current spread levels offer compelling new money returns in the mid- to high teens. And while elevated volatility persists, the outlook for Agency MBS is constructive as spreads retraced the widest level since before the GSEs began more actively increasing their portfolios in mid-2025. At the same time, the technical picture remains favorable, with record bond fund inflows and continued support from the GSEs, overseas investors and banks, while supply is limited given seasonal and high primary mortgage rates.

In residential credit, our scaled Onslow Bay correspondent platform gives us direct access to high-quality whole loans, greater control over asset selection and supports one of the leading securitization programs across asset-backed finance. As the largest issuer of expanded credit MBS, we're uniquely positioned to participate in the continued growth in the non-Agency market, with non-QM issuance up nearly 60% year-to-date. And the investments we have made across our platform over the past several years have supported expansion, operating efficiency and disciplined credit execution.

And lastly, in MSR, our differentiated portfolio of low note rate, high-quality assets continues to generate durable cash flows, supported by our diversified network of servicing and recapture partnerships. And as demonstrated this year, we have the flexibility and capacity to grow the portfolio accretively, further enhancing our earnings and cash flow profile.

Now collectively, our 3 complementary businesses provide multiple avenues to deploy capital efficiently without the burden of a high fixed cost origination model. We remain patient, but we have ample liquidity and balance sheet capacity to put capital to work. And we believe the combination of diversified earnings, proprietary asset creation, conservative leverage and capital allocation flexibility positions Annaly well to continue delivering attractive risk-adjusted returns.

Now with that, I'll turn the call over to Serena to discuss our financials.

Thank you, David. Today, I will briefly review the financial highlights for the quarter ended September 30, 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.

As David noted, the challenging fixed income market environment weighed on book value during the third quarter. Our diversified hub and finance platform nevertheless, continue to generate solid earnings, supported by higher coupon income, continued residential credit securitization activity and lower operating expenses.

As of September 30, 2026, our book value per share decreased 11.4% from the prior quarter to $17.86. Including our quarterly dividend of $0.75 per share, we generated an economic return of negative 7.6% for the quarter. Book value performance primarily reflected wider Agency MBS spreads and the impact of elevated rate volatility, including market-driven duration and convexity effects. Gains in our hedging instruments provided meaningful offset.

Earnings available for distribution increased by $0.01 to $0.80 per share, and again exceeded our quarterly dividend of $0.75 per share. The increase was driven primarily by higher coupon interest income on larger average investment securities and residential mortgage loan balances, along with lower operating expenses. These benefits more than offset higher interest expense from increased securitization debt and repo balances as well as modestly higher funding rates.

Net interest margin declined by 7 basis points to 1.69%, while net interest spread declined by 8 basis points to 1.42%. Average asset yields were relatively stable at 5.45%. In comparison, our average economic cost of funds increased 7 basis points to 4.03%, primarily reflecting a greater proportion of securitized debt in our funding mix and slightly higher repo rates.

We continue to actively manage the balance sheet through the market volatility. Economic leverage increased to 5.9x from 5.6x, primarily reflecting the decline in equity, while our hedge ratio increased to 100% from 97% as we maintained our defensive positioning. Our weighted average repo rate for the quarter increased 3 basis points to 3.87%, while weighted average repo days to maturity ended the quarter at 30 days, down 3 days from the prior quarter.

Despite interest rate volatility in the third quarter, the reefer funding market continues to function smoothly, ensuring reliable and efficient access to short-term financing for Agency MBS. Meanwhile, we continue to maintain ample financing availability for our credit businesses to support their growth, which David highlighted earlier. Total warehouse capacity across our residential credit and MSR businesses remained $8.3 billion, including $2.8 billion of committed capacity. We maintained significant available capacity, with utilization rates of approximately 57% for residential credit and 50% for MSR.

We ended the third quarter with $6.9 billion of unencumbered assets, including $4.2 billion in cash and unencumbered Agency MBS. In addition, we had approximately $1.6 billion of MSR collateral pledged and available to support future advances, subject to market advance rates. In total, we had approximately $8.5 billion of assets available for financing at quarter end, that approximately $1.1 billion from the prior quarter, primarily reflecting lower equity and reduced unencumbered Agency MBS. This represented approximately 54% of our total equity and continue to provide meaningful liquidity and financial flexibility.

Finally, our OpEx to equity ratio decreased 11 basis points to 1.29% for the quarter, while year-to-date ratio remained 1.34%. As anticipated, expenses moderated from the elevated second quarter level, reflecting lower compensation of the G&A expenses.

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

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

Can I start with the -- just get an update on the mark-to-market book value?

Sure, Bose. As of Friday, excluding the dividend accrual, we were up about 2%, inclusive of the dividend closer to 3% on a sideways since.

Great. And then just wanted to ask about dividend coverage, just given the expectation for current economic returns, how does that compare with the required ROE to cover the dividend?

Sure. So obviously, we outearned in Q3. We expect to outearn in Q4, and we'll see how 2027 evolves. But as it stands today, we didn't delever in Q3, notwithstanding the volatility and the current portfolio delivers the dividend. And as we laid out our projected returns, which are up quarter-over-quarter, new money gets us there as well. So we're comfortable with where the dividend is at today.

Your next question comes from the line of Crispin Love from Piper Sandler.

David, on that last point, the market level returns kind of as you showed out on Slide 7, it looks like each strategy is a little bit higher than last quarter. Can you just discuss some of the dynamics there, driving returns a little bit higher? And then also just where you're most interested in adding incremental capital today in the macro environment? And I do appreciate you guys -- 3 businesses that you want to add, but like maybe if you could stack right?

Sure. So I'll start with the end of your question on capital allocation, then we'll go through each of the 3 businesses in terms of how the returns evolve heading into Q4. So in terms of capital allocation, it's not much different than last quarter, returns across the 3 businesses are incrementally higher. And as we did say last quarter, we still want to grow the residential credit business responsibly, considerate of credit that's at the margin where we'd like to grow, and agency returns are ample and certainly compelling, and so that would be second.

And then MSR, we still have room to grow. Obviously, those headline returns are a little bit lower than Agency and resi. But one point to note is that position is largely funded with capital of very little leverage. So we do have room to grow and maintain a 20% capital allocation to the sector. So the order is resi first; close second, agency; and then not far behind is MSR. So let's just talk about returns in each, and I'll start with Srini on the agency and then go to Mike and Ken.

Sure, David. So basically, Agency spreads for the quarter widened about 20 basis points. Now when we say spreads widened about 20 basis points, we generally refer to current coupon spreads. And given that only is [ 5 and 6.5s ] are over par, we really can't invest in current coupons. So we are slightly below current coupon, call it, 5.5 or 6s is our preferred coupon. And for those -- compared to where current coupon was at the last quarter spends are about 10 basis points wider. So that gets us to 15 to 17 basis points with about 100 basis point increase in prospective results.

Sure, Crispin, this is Mike. On the resi side, what those returns reflect the 13% to 16%. First, it will reflect the equity that we're retaining through our securitization. So call that $0.06 to $0.07 of capital on the retained OBX securities using maybe, call it, a turn of leverage. So we'll retain, call it, 10% to 12%, 1 turn of leverage gets to that $0.06 to $0.07 of deployment.

Given spreads have widened, we've seen our equity basis has been able to widen as well. And given the volatility, we're pricing in incremental premium. We can also earn mid-teens returns on just residential loans, putting on nonmark-to-market facilities. Our non-mark-to-market facilities are very accretive in the current environment and call it maybe 4 to 5 turns of leverage, and this is non-mark-to-market, you're calling it 15%, 16%.

And lastly, there is an opportunity to buy BB non-QM bonds. So these are new issue third-party shelves. Right now, they trade, call it, [ 4 25 ] per swaps. You can use 20% to 25% haircuts on those. And the financing there is in the low 100. So that would actually get you closer to that 16%, 17%. So there's a number of options at which we'll be able to get mid-teens or potentially a little bit above mid-teens.

Yes. Thanks. This is Ken. On the MSR front, the change in return from the prior quarter is largely driven by all rates rising. And as capital is deployed, that capital earns a higher rate of return. Additionally, with the MSR, a bulk of the negative duration, certainly on the lower note rate collateral, is driven by the float income as we manage the borrowers' escrow accounts. So as rates rise, we, as the servicer earn a higher rate of return on those escrow balances, and that applies to prospective investments. So those 2 items are really driving the change in prospective return quarter-over-quarter.

Yes. And Crispin, just to add to that point, we entered Q3 with about 1.25 hikes priced in to the market, and we ended the quarter and sit today with about 4, including the hike that occurred in September. So just that float income increase in income alone gets you a lot more yield.

Great. That makes sense. And then just one last question for me. Just on just the recent rate fall in the third quarter and then just a little bit of a change in the fourth quarter. Have [indiscernible] any state changes to your hedging strategy in kind of recent months, recent weeks, especially as rates were rising, you had a little bit of a different environment in October. So just curious on a little bit of the change in the second half of 3Q [ and ] October.

Yes. Look, as the market was selling off, we did dynamically hedge, and we predominantly used the futures market to achieve that. And we entered Q4 with a relatively higher percentage of futures than we normally operate with. So heading into this quarter, our anticipation will be to find opportunities to convert some of those futures into swaps, which gives us a little bit more yield and keeps a good balance on our hedge profile.

But generally speaking, over the last couple of weeks, we've been somewhat encouraged by the [ vol ] subsiding to some extent. You see it both in realized and an implied vols somewhat. And so we'd like to think we're out of the woods. We're still very, very vigilant when it comes to our hedge profile and making sure that we're managing the portfolio responsibly.

When we look at the environment today and the level of rates, we understand why rates are higher. Obviously, inflation is a big driver, and we are in a hiking cycle, as shallow as that may end up being heavy debt issuance. And also, the economy has proven to be able to grow at higher rates. And so the neutral rate is higher. And so we feel like the new normal is higher rates. And so the floor on rates is higher. But we do generally like the rates market. We're carrying a little bit of duration here, and we think that's appropriate given the attractiveness of rates, and we're comfortable with the positioning.

Your next question comes from the line of Doug Harter from BTIG.

You guys put up a smaller decline in economic return than your peers. Clearly, diversification helped that. But I was wondering if you could help us think how, like the agency portfolio performed this quarter as we try to compare that to peers?

Yes. I would -- look, I think -- I have a brief understanding of how others performed. And I think the agency sector was largely pretty well clustered, close to one another for the most part. I think my understanding is that folks were deliberate about managing duration exposure.

And I'll tell you something, Doug, agency -- it's not that easy to differentiate an agency portfolio, which may not sound too attractive to agency monoline peers. But at the end of the day, there's a lot of correlation amongst agency assets. You can be up in coupon, down in coupon, specs, TBAs. But when the agency market cheapens, it tends to affect the entire sector and performance, ex how you manage duration can be somewhat uniform. I think this quarter, we were probably somewhat contextual with the -- our agency portfolio with how others perform because I think everybody was pretty responsible about navigating the rates market and hedging.

I appreciate that, David. And then on the residential credit, you talked a little bit about some of the spread widening you've seen on new issue deals. Can you just talk about whether there have been any kind of other structural changes or what the depth of the investor base looks like kind of as we've gone through this market?

Sure, Doug. This is Mike. I would say at the top of the capital stack, we ended Q2, call it, [ 1 30 ] over the curve. That's to treasuries. At the end of Q3, we're 5, 10 basis points wider, call it [ 1 40 ]. We just priced our latest deal, our latest transaction post quarter end, non-QM 16. That was done at [ 1 50 ]. We have seen other AAA sponsors and other shelves probably price, call it 5 to 15 basis points wider. I do think reflecting the strength of the OBX main, the programmatic nature of the platform and then also the performance as well. So I do think we're still firmly in that kind of Tier 1 category, and we're benefiting from that.

In terms of structural changes, what we have seen, it's been fairly modest, right? So the deals that have been coming, they call it maybe low 7% gross WACC, low to mid-7% gross WACC. The current coupon within non-QM right now, the 102.5 rate is probably closer to 8%. So these deals are modestly out of the money.

What the market has really demanded as a concession to be able to move the risk is that the AAA bond, which traditionally is pro rata with the AA and the single A, has turned into a full sequential. So it's a fairly modest change. The BBB and down, the M1 and down has always been a sequential pay. So you're really changing the structure of the waterfall of 2 bonds. And then what you're seeing is those AA and those single A bonds because instead of being pro rata and factoring down, they become sequential pay in the initial period before the call.

So very modest changes, but I would say that the market is still healthy. The market is very resilient. We've seen 95 billion of non-QM issuance this year. Last year, the entire year was 80 billion. 45% of all issuance we've seen in non-Agency has been within the non-QM market. So I haven't really seen any change in terms of investor depth, and it's a slight structural change to be able to absorb modestly out of the money transactions.

Your next question comes from the line of Jason Stewart from Compass Point.

We noticed a decent uptick in home equity securitization volume. Just maybe if you could talk, Mike, about the 2 sides there, how you're approaching sizing that as an asset and then how the market is pricing those liabilities today?

Sure. Thanks, Jason. So on home equity, we'll classify that as both HELOCs and closed-end seconds. We've seen, in terms of total issuance, right, in the size of the entire market. We've seen about $220 billion of issuance within the non-agency market. About 15% of that has been closed-end seconds and HELOCs. It's around $33 billion. In terms of our production and what we really focus on, it's probably, call it, 5% to 6% of our production that we see through the correspondent.

We are active predominantly in full documentation, HELOCs and closed-end seconds. We've talked about that before. There's a small kind of niche market within the alternative stock. But really, the focus continues to be on non-QM and DSCR. A lot of it is scalability. A lot of it is our competitive advantages are within non-QM and DSCR. Close-end seconds and HELOCs, they trade at very large premiums. Even to be able to aggregate them through a correspondent, you need to be willing to pay [ 1 06, 1 07 ] type dollar prices. So that is something where we've been, I think a little bit more conservative than the rest of the market.

But in terms of the distribution, the securitization market, similar to non-QM, it's very healthy. It's not the same size. But I will say that it's -- we continue to see transactions, we continue to see deals. If you call AAA, non-QM right now for Tier 1 issuers, if we call that [ 1 50 to 1 55 ], I would say for Tier 1 closed-end second issuers, it's probably 5 to 10 basis points inside of non-QM. And part of that is that the market does believe it's a better convexity profile. But in terms of our strategy, we'll continue to buy those assets, but I think we're probably a little bit more conservative in terms of our scenario analysis, analytics and are willing to pay premiums. But market is open, it's healthy. And I would say, maybe, call it, 5 to 10 basis points inside the non-QM AAA market right now.

Your next question comes from the line of Marissa Lobo from UBS.

Just on MSRs, historically, MSRs have provided you a natural offset to the negative convexity in Agency MBS. But as we're seeing the mortgage universe become more fully extended and the convexity profile improving, how are you thinking about the role of MSRs in the portfolio today? And should we think about them more as a stand-alone return opportunity? Or do they continue to provide more diversification across rate scenarios?

This is Ken. Thanks for the question. I would answer as both. The stand-alone return is certainly ample and we talked about that earlier. In terms of the hedging properties, beyond the gamma, the convexity sort of hedging, there's another form of hedging that's going on, and that's the model hedging. We use prepayment models to measure our duration, convexities and other risk measures. To the extent prepayment speeds for some other reason, come in faster or slower than the model, MSR provides a direct hedge to the portfolio. Considering if speeds come in slower than expected, that's always good for MSR. And that's in today's market with the mortgage [ university ] discount, just not good for the Agency MBS portfolio. So there's this model error that's being hedged through on the MSR.

Yes. One more point, Marissa, I'll say is in -- following up on Ken's point, is that to the extent that the mortgage market's at a reasonable discount like it is, and turnover is actually lower than natural turnover, which should be the case in the MSR portfolio is going to hedge that as well. And as I talked about a moment ago in terms of float income, it's a hedge for short rates, higher short rates increases in float income and MSR benefits from that as well. So there's still a very productive balancing component to the MSR portfolio in the current environment.

I would also add that away from models and all of that, agency MBS has been trading directionally with rates. So when rates sell off, MBS spreads have been under pressure. And what we have observed over the last 3 years is when rates sell off, MSR actually trades very, very well. So from a pure mark-to-market trading perspective, it does provide cushion on book value loads.

Okay. Great. And then just shifting to residential credit and thinking about home price appreciation, can you talk to your home price outlook and its flat HPA manageable? And what are the assumptions that are underlying that 13% to 16% residential credit return?

Sure. So thanks, Marissa. I'll address the second part of it, the 13% to 16%. Again, that's mostly the OBX platform. It's non-QM and DSCR. I will say that that's modeled to, call it, maybe a 20% lifetime speed, which is generally where non-QM has come in. In terms of [ cume ] losses, that probably represents close to 75 basis points of [ cume ] loss in terms of what our projections are. So there's significant room for upside.

If you look at the totality of our securitization program, we've issued, I think, close to $67 billion life to date. The actual amount of realized losses we have taken inside the trust is around $6 million. So it's been less than 1 basis point. So one of the areas where we've outperformed our initial expectations has been within credit modeling. We do expect to take more losses and like time to losses on a lot of non-term DSCR, maybe closer to 10 to 15 basis points as they season. But it just shows you that there is a level of conservatism in terms of those projections.

In terms of the housing market, a lot of it will depend upon what mortgage rates do and where mortgage rates ultimately settle. If we stay at [ 7 and 3/8 ] to 7.5% for an extended period of time, we do believe housing can go negative. It can go negative by a couple of points nationally. So a lot of it is dependent upon mortgage rates.

In terms of where we sit today, what we would say, the modestly bullish case for housing, still positive. September was up 8 basis points month-over-month. It's up 1% year-over-year. If you look at ZIP code level, 77% have positive year-over-year increases. There's a significant amount of homeowner equity, call it, $35 trillion to $40 trillion, depending upon what you think that the size of the market is. The average borrower is locked into a [ 4 65 ] rate. Inventory is still 15% below 2019. And new listings, which is reflecting that mortgage rate, they haven't really increased. It's only up 1% to 2%.

The caution, and this is what a lot of people are seeing now, and we do have a level of conservatism in terms of just not only our purchase assumptions but also the quality of the portfolio, as Dave mentioned, the Southeast is very weak. Texas, Florida, you see the public builders talking about competing with resale, month supply is at a 10-year high. And [ 7 and 3/8 ] mortgage payment, that mortgage payment is up 6% to 7% just over the last quarter relative to Q3. And everyone knows the affordability issues that we have, right? So if we stay at these rates, yes, we do think it could go down 2% to 3%, 3% to 4%.

But manageable within the -- yes. I guess within the equity cushion that you...

Yes, it's very manageable. As Dave mentioned in the script, our average borrower has close to 400,000 of equity. It's a 64 mark-to-market LTV in our portfolio. The D60 plus of our portfolio right now is 160 basis points. And we are predominantly targeting upper middle-class borrowers, right? So it is not necessarily this first-time home buyer. It is not necessarily the borrower who has been challenged with their discretionary income in this inflationary environment. So I think from that perspective, we feel pretty good about the strategy.

Yes. Marissa, there's also very little layered risk in the portfolio. So we can manage and wouldn't even mind seeing HPA home prices come down a little bit to increase the affordability equation to get turnover up.

Your next question comes from the line of Rick Shane from JPM.

There's been a lot of great questions this time so. Just wanted to talk a little bit -- I mean empirically, it's one thing to understand what's going on in MSR, but there are, I would describe, a lot of exogenous factors that are impacting -- potentially impacting valuation, mortgage volumes, industry capacity, potentially the impact of AI affecting speeds. I am curious when we think about, again, sort of your empirical models and then overlay all of these different structural things that are happening in mortgage right now, how is that impacting value pricing demand and where you see attractive opportunity within MSR?

Yes. Thanks for the question, and those are certainly things we're thinking about all day and actually all night. Look, I mean, the mortgage industry is in a place because of consolidation, because of technology, where people are operating much more efficiently and are operating at much lower profit margins. So because the efficiency that's priced in because there's overcapacity, because there's technology, because there's consolidation, it's tough to decouple all the reasons.

The profitability of the origination part of the business is very low. And the value of a newly created MSR today is somewhere depending on the loan type between 1 point and 1.5 points. And the profitability of the mortgage industry is substantially lower than that. And on average, when you look at the MBA numbers is in the 20 basis point range now. And since they've been measuring it on average is in the 40 basis point range.

So originators are just forced to sell MSR going forward in our view. So if loan production picks up, they have to sell MSR because they're not making as much money. Historically, when volumes picked up, margins picked up, and they picked up because of the shortage of capacity that occurred. We think because of technology that won't occur anymore. So as a result, there'll be lots of MSRs selling volumes pick up because the profitability will not increase on a per unit basis, allowing more MSR retention.

And then we think, if origination volumes don't pick up, what we're seeing is capitulation, consolidation, needs for liquidity to keep the platforms going until profitability might increase, and that's creating MSR selling as well. So we just see a continual restructuring of how the industry works. Where folks without a cost of capital like ours or better are not really going to be able to hold MSR and they're still holding a lot of legacy MSR and then go forward the new MSR, we have a tough time on seeing how they'll be able to retain that. And I think when you look at the MSR transfer data, that's public, you'll see who the sellers are, the bulk sellers are. And you'll see this thesis kind of playing out already.

Yes, Rick, I'll jump in here and just talk about the demand side and valuation. The market -- the bid for MSR is somewhat bifurcated. You have folks like us, capital participants in the market that have obviously accumulated a lot of MSR. And you also have banks, which, particularly given the likelihood of MSR not being a constraint when it comes to the Basel re-proposal, which we expect to get out the final which in the next couple of months, banks have been a strong source of demand, particularly in lower loan balance type MSR that carry a lot of escrow balances relative to the capital committed.

And so they've been a significant bid. As we talked about last quarter, we sold into the bank bid at levels that we thought were quite attractive. And then folks like us, we benefited from all the liquidity that's been generated with the activity in the MSR market and have traded quite a bit an MSR, and we still have a fair amount of appetite to add MSR and as do others like us that are portfolio companies. So we understand the market pricing. We still think it's fair. When there's a rich bid out there, we'll sell MSRs we've evidenced very recently. And I think we're -- from a portfolio standpoint, we're positioned conservatively and our pricing is -- on our portfolio is probably the most conservative in the industry.

Look, I appreciate the answer. And it's an interesting thing. I think 25 years ago, we wrote something that said the procyclicality of margins would start to erode because of technology. And it feels like we're finally on the cusp of that, and I do think that there's probably no industry that's -- financial services industry that's going to be more transformed by AI than mortgage. So it's a really interesting time, and I do appreciate your insights.

Your next question comes from the line of Jason Weaver from JonesTrading.

So first, Dave, since the beginning of the year, we thought of the GSEs is showing a stabilizing bid behind the BS spreads. And I don't think we've seen any data since August. But do you have any sense as to the extent they've been involved or stepped away from purchases over the past several weeks?

Yes. Look, everything is anecdotal, subsequent to August because we don't have that data either. It did appear as though the activity was a little bit slow in the summer. But anecdotally, we have heard that they have been involved in the market. And I think -- you even got a tweet out of the FHFA director in September talking about the GSEs buying and some adjective to describe a considerable quality or quantity of MSR. So our understanding is that they probably are. They still do have a fair amount of dry powder. I think a less look at the end of August. Total capacity under the PSPA caps for loans and MBS was like $140 billion. They do still have to keep a lot of dry powder for loan buyouts and things like that. But our understanding is that they still have some ammunition left.

Got it. And second, I think you mentioned layering into some higher coupon TBAs in your prepared remarks. And I wonder if you could talk just a bit about how you see the risk reward in current coupon production, where under a sharp uptick in prepayments could occur under a flight to quality?

Sure. I mean -- before we go there, I just want to define what higher coupon is. We refer to [indiscernible] [ 5.5s or 6s ] as higher coupon now, 6.5 float is quite small. They're going to start getting more issuance in 6.5 in the coming months. But 5.5s and 6s are [indiscernible] right now. And at this point, they're both with convictions. The only coupon that's changing at a [ $1 trillion ] price is 6.5. So most of the PPAs we bought were [ 5.5s and 6s ].

In terms of prepayments, we think -- TBA, particularly in production coupon, continues to deteriorate at an accelerating pace because more and more collateral is being carved out in the specified pools. And so what is left for TBA is significantly more inevitably convex. So up the coupon side, we generally don't like being in TBA for very long. We obviously -- when we want to add margin exposure, we typically do it in TBA and then over time, swap it into pools. So right now, we're not worried about our TBAs at [ 5.5s and 6s ] mainly because they are discounts, but at some point, particularly for 6s, we will swap them into specified pools.

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

Just at a higher level, curious as to how you'd characterize your overall risk appetite just given the current rate outlook and the potential trade-off between market vol and return opportunity as you see across the various asset categories?

Yes. Thanks, Ken. Good question. So look, we're reasonably optimistic on the outlook here. Rates are higher. We do think there's somewhat of a ceiling to rate. I think when you look at the level of interest rates, it's obviously being driven by strong growth in inflation. And there's some real costs associated with these high rate levels. Obviously, the AI sector is continuing to borrow and continuing to invest. But the rest of the economy, to some extent, is being crowded out. That's households, corporates, and it's becoming more expensive for government to issue debt. So we feel like there's limits to how high rates can go, but there's also a new floor on the level of rates, given we are, as I spoke about in this new normal environment.

So that -- what that says to us or suggests to us is that vol should come down. And it has, to some extent, as we started the fourth quarter, we've reset. And our view is that things are going to stabilize or continue to stabilize, and you will see implied vols coming down because realized vols are a little bit lower. So that gives us a little more optimism in terms of our appetite for risk. And I think the position is, to a large extent, reflecting that. We let our leverage organically increase this past quarter. We didn't delever. We did delever the capital structure a little bit on the prep side. And I'll just tell you a little bit about that because that was really about capital structure and leverage optimization.

When we issued prep a year ago, we issued it at [ 8 and 7 As ] and agency spreads were 18% to 19% or thereabout. So the spread on that was about 1,000 basis points. And then you fast forward to when we made the decision to reduce our structural leverage, which was right after earnings, I believe. And at that time, we had floating rate prep outstanding and we've gone from 2 cuts priced into the market over the prior year to 4 hikes. And so the cost of that increased to around 10%.

Meanwhile, Agency spreads were relatively tight at that time and levered returns, as we spoke about on the last call, could be -- were as low as 14% to 15%. So that spread compressed quite a bit. We reduced capital structure leverage, and we felt good about it. And then you fast forward and the market cheapened again, obviously, to get closer to the higher teens returns. So here we are again and things look pretty appealing from that standpoint. And we're comfortable with our leverage. We have a little capacity to increase it tactically, but we're generating the returns we need with current leverage. And should spreads tighten, I think we show in our spread shocks for a 25 basis point tightening, it's just over 10% return from that. So we're in a position where we like to be and we're comfortable with the risk in the market, and we think all will continue to come down, and we'll be back in business like we were prior to the episode of vol in the late summer.

Your final question comes from the line of Trevor Cranston from Citizens JMP.

Okay. Question on the non-QM market. Obviously, it's less rate sensitive in general than the conventional space, but curious, your outlook on how the increase in rates, particularly if mortgage rates hold up here, how that impacts the non-QM space and what your outlook is for origination volumes there going forward compared to where they've been in the last couple of quarters?

Sure. Thanks for the question, Trevor. This is Mike. In terms of non-QM origination this year, we still think it probably is going to be and, call it, the [ 1 50 to 1 75 ] in terms of 175 billion. I would say it's probably leaning towards the higher number and the higher amount of that range. In terms of total mortgage origination, maybe we'll call it 1.9 trillion to 2 trillion. So we do think it will continue to be around, call it, 8% to 9% of the entire market.

The reason that non-QM is still an elevated percentage of originations, a lot of it is just because mortgage rates are elevated. It is a purchase market, right? And non-QM is targeting to a lot of investors, right? So over 50% of this market is investor. Investors right now are about 20% of all real estate purchases, which is a higher share. So we are getting a higher percentage of the end borrower at this point. And also, to your point, self-employed borrowers are a little bit more inelastic in terms of -- at this level of rates.

So I don't know if the share itself will grow. I think a lot of what you've seen over the last number of years has been maturation. But originators, at this point, pretty much to a T, have rolled out the product. It's still higher gross margins than the conforming market than the government market. And it's a product that originators need to have to be able to serve their brokers or serve their LOs on the retail side. So I would expect it to continue to be 8% to 9% of originations at this point.

In terms of if the market rallies, right, if the market rallies and the mortgage rate is at 6, 6.75, that percentage is going to shrink exponentially because you're going to see a lot of rate and term refinance of government and conventional. So the share is outsized a lot just because it is a purchase market. This market does target the purchase borrower, high investor share. And there's not a lot of rate and term and cash out at this point.

And that concludes our question-and-answer session. I will now turn the call back over to CEO, David Finkelstein, for closing remarks.

Thank you, and thank you, everybody, for joining us. We'll talk to you soon.

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Thank you for standing by, and welcome everyone, to the Annaly Capital Management Second Quarter 2026 Earnings Conference Call.

[Operator Instructions]

At this time, I would like to turn the conference over to Sean Kensil, Director of Investor Relations. Please go ahead.

Good morning, and welcome to the Second Quarter 2026 Earnings Call for Annaly Capital Management. Please note that this call is being recorded. As a reminder, materials for today's call are available on our website at www.annaly.com. Today's call may include forward-looking statements. which are subject to certain risks and uncertainties that could cause actual results to differ materially and refer to certain non-GAAP measures. Please see the notices in our earnings release for important information regarding forward-looking statements and non-GAAP measures.

Participants on this morning's call include David Finkelstein, Chief Executive Officer and Co-Chief Investment Officer; Serena Wolfe, Chief Financial Officer; Mike Fania, Co-Chief Investment Officer and Head of Residential Credit; V.S. Srinivasan, Head of Agency and Ken Adler, Head of Mortgage servicing rights. And with that, I'll turn the call over to David.

Thank you, Sean. Good morning, everyone, and thanks for joining us. Today, I'll open with a brief macro update for discussing our performance for the quarter, then I'll provide further detail on each of our 3 investment strategies and finish with our outlook. Serena will then discuss our financials in more detail before opening up the call to Q&A.

Now starting with the macro landscape. The U.S. economy continued to display resiliency during the second quarter with healthy consumer spending and tech-related investment activity drove economic growth. Also, the labor market appears to have gained some momentum in recent months, which is a welcome shift from the softer trends seen in the second half of 2025. Now that said, beneficials have become increasingly concerned about persistent elevated inflation, notwithstanding last week's softer CPI [indiscernible]. Price pressures have been driven by a confluence of factors, including the energy price shock and the conflict in the Middle East, residual effects from tariffs with strong demand for computing equipment given the AI build-out. And with policymakers more vocal about the potential to tighten policy, interest rates continue to rise, led by the front end of the yield curve. And after pricing roughly 225 basis point cuts earlier this year current market pricing suggest the tend to hike at least once in 2026.

Now despite this pressure on the bond market, lower rate volatility provided a tailwind for our portfolio this past quarter, and we delivered a 5.5% economic return once again demonstrating a strong performance of our diversified housing finance model.

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Additionally, we generated $0.79 of earnings available for distribution, marking the ninth consecutive quarter that our EAD has exceeded the dividend, and the reinforced durability of our earnings power helped inform our recent increase in our quarterly common dividend to $0.75 per share. And also to note, we continue to operate with conservative economic leverage of 5.6 turns, and we raised roughly $450 million in equity through our ATM program during the quarter.

Now turning to our investment strategies and beginning with the agency sector. Spreads tightened in the second quarter as deescalation in the Middle East led to a decline in both realized and implied rate volatility and demand for agency MBS remains strong, driven by healthy fixed income inflows, increased purchases from overseas investors and a robust CMO market, which is absorbing roughly 30% of gross issuance and broadly distributing the risk to a diversified set of ambassadors.

Given this attractive environment, we grew our Agency portfolio by roughly $3 billion, ending the quarter at $95 billion in market value, which increased our capital allocation to Agency to 57%. As far as portfolio activity, we rotated slightly up in coupon by reducing our exposure to [indiscernible] in favor of 5.5s and 6s and we invested capital raised, primarily in the production coupon MBS and Agency CMBS. Over the first half of the year, specified pools outperformed in spite of relatively benign rate volatility and a subdued prepayment outlook, which typically favors more generic collateral and TBAs. Notably, pull out performance was largely driven by strong GSE demand, and we took advantage of these valuations and reduced our pay-up exposure by moving to lower pay-up pools and increasing our TBA holdings.

Late in the second quarter, pool valuations became more attractive as GSE demand waned. And as a consequence, we expect new investments to be more balanced across TBAs distress [indiscernible] pools. And with respect to our hedge profile, we were conservative in managing our rate exposure and proactively added additional swap hedges to impact against rising rates. Our portfolio remains diversified across treasury futures and swaps with the preference for the latter given more attractive carry and comfort around balance sheet availability going forward.

Now moving to residential credit. Our portfolio ended the second quarter at $10.4 billion in market value, virtually unchanged quarter-over-quarter and representing 22% of the firm's capital. Resi credit spreads moved in tandem with broader fixed income markets with AAAs ending the quarter approximately 10 basis points tighter. Our Onslow Bay correspondent channel produced another strong quarter of volume of $6.7 billion of lots and $5.1 billion of fundings, including whole loan bulk purchases and our partnerships, Annaly purchased $7.1 billion of loans in Q2, which is a new quarterly record for the business.

And despite record volumes, the credit quality of our loan pipeline continues to improve, best evidenced by the lock pipeline 765 FICO to 67% CLTV. Non-agency gross securitization issuance totaled over $150 billion year-to-date, up approximately 50% year-over-year, putting the private label market on pace for its largest gross issuance year since 2007. And Annaly remains the largest issuer of expanded credit mortgages and the second largest issuer overall as we closed 13 deals for $6.8 billion in principal balance in the second quarter, creating approximately $780 million of proprietary investments.

Year-to-date, the OBX platforms priced 25 transactions totaling $14.2 billion. And notably, we have securitized 8 different forms of residential collateral, underscoring the depth and diversity of our platform. The OBX securitization program also had a [indiscernible] on closing the first $1 billion new origination non-QM transaction, demonstrating Annaly's leadership position in the non-agency market. This inaugural $1 billion deal was well-received by investors, which allowed us to price a second equally sizable transaction approximately 2 weeks later. Our residential credit platform is well positioned for continued growth in the non-agency market, given the substantial investments we've made over the last number of years, which we believe is a key differentiator and should continue to result in Annaly manufacturing, high-yielding, proprietary investments difficult to duplicate and scale.

Now shifting to MSR. Our portfolio was roughly unchanged at $4.1 billion in market value with our allocation of the sector representing 21% of the firm's capital. During the quarter, we modestly rotated the portfolio higher in loan balance as we committed to purchase approximately $200 million in market value of MSR across our various sourcing channels while also committing to sell 2 bulk pools with lower loan balances for $220 million in proceeds. These transactions capitalized on differing buyer economics across the MSR market, highlighting our relative value approach and portfolio flexibility.

Moving into higher average loan balance in MSR meaningfully enhances our return profile is our cost to service is contractually a fixed amount per loan in contrast to in-house servicers with high fixed costs and a variable cost per incremental loan. Bulk supply in the second quarter decreased modestly from Q1, though we expect supply to remain healthy throughout the balance of the year given ongoing originator profitability constraints and industry consolidation.

In a minor note, our flow purchase channel is picking up with $31 million in market value purchase this quarter, and it should become an increasingly important avenue to acquire current coupon MSR and allows us to offset portfolio paydowns. Our MSR portfolio fundamentals remain compelling as prepayment speeds increased in line with seasonals to 5.2 CPR in Q2. They were still below our initial model projections providing potential upside to returns. The credit quality of the portfolio remains exceptional with serious delinquencies range-bound at approximately 50 basis points. At a weighted average note rate of 3.3%, the lowest among the 20 largest MSR holders, our portfolio continues to generate durable, predictable cash flows with meaningful prepayment protection. The MSR valuations remain well supported in the current interest rate environment and our multiple increased marginally to 5.97 largely driven by the increase in rates offset by a flatter curve.

And finally, to touch on our outlook, we continue to see compelling opportunities across our 3 strategies underpinned by a healthy fixed income and housing finance investment environment. Agency spreads remain at attractive levels with mid-teens levered returns and very favorable technicals and we'll look to further deploy new capital in the sector, balanced against relative value opportunities in our other businesses. Our residential credit platform continues to exhibit substantial growth, supported by our loan sourcing and capital markets capabilities, long-standing originator relationships and scaled platform.

Our MSR business is performing well ahead of our expectations, anchored by a deliberately constructed portfolio, low note rate, high credit quality that would be difficult to replicate at scale in today's market. Importantly, Annaly offers investors a differentiated way to access value across the housing finance sector without assuming the operational intensity and volume dependency of a traditional origination model. We're not relying on loan volumes to sustain the economics of our portfolios, which allows us to remain selective, invest with scale and allocate capital to the opportunities offering the most attractive risk-adjusted returns. And that is a structural advantage that transcends market cycles, and it has contributed to our ability to generate double-digit economic returns while operating with less leverage than our peers and in an environment that continues to challenge origination dependent business models, the capital efficiency, scale and flexibility of our platform meaningfully sets us apart.

And now with that, I'll hand it over to Serena to discuss the financials.

Thank you, David. Today, I will briefly review the financial highlights for the quarter ended June 30, 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. As David noted, the second quarter was characterized by a constructive fixed income investment environment despite geopolitical uncertainty and rising yields. Against this backdrop, our diversified platform delivered strong performance, elevated portfolio yields, tighter mortgage spreads, favorable hedge performance and disciplined risk management supported both earnings and book value during the quarter. As of June 30, 2026, our book value per share increased by 1.7% from the prior quarter to $20.15. Including our $0.75 quarterly dividend, we generated a positive economic return of 5.5% for the quarter, bringing our economic return for the first half of the year to 6.9%. earnings available for distribution per share increased by $0.03 to $0.79 per share and exceeded our newly increased quarterly dividend of $0.75 per share. The increase was primarily driven by higher average yields on our agency portfolio as our weighted average coupon increased 11 basis points to 5.11% as well as higher securitization volumes within our residential credit business and favorable funding costs with average repo rate declining 6 basis points to 3.84% during the quarter.

These benefits were partially offset by lower levels of swap income, reflecting lower average receive rate as [indiscernible] declined during the quarter. Net interest margin increased 5 basis points to 1.76%, while net interest spread improved 8 basis points to 1.5%, with both measures benefiting from higher asset yields, which more than offset modest increases in economic funding costs. Our balance sheet remains conservatively positioned with economic leverage declined slightly to 5.6x from 5.7x in the prior quarter, a reflection of the increase in our hope value for Q2. Our reported ending repo rate decreased 2 basis points to 3.85% while weighted average Grupo days to maturity ended the quarter at 33 days, down 3 days from the prior quarter. Our residential credit platform continued to demonstrate strong momentum, generating significant securitization activity during the quarter, as David discussed earlier.

Additionally, to support continued growth across our residential credit and MSR businesses, total warehouse capacity increased to $8.3 billion, including $2.8 billion of committed capacity. We maintain ample available capacity in both businesses, with utilization rate of 61% for residential credit and 50% for MSR. We ended the second quarter with $8 billion in unencumbered assets, including $5.5 billion in cash and unencumbered agency MBS. In addition, we had approximately $1.6 billion in fair value of MSR pledged to committed warehouse facilities, which remains undrawn and provides an additional source of liquidity subject to market advance rates. In total, we had $9.6 billion of total assets available for financing at quarter end, up approximately $580 million from the prior quarter. This represented approximately 57% of our total capital base and provides us with significant liquidity and financial flexibility to support portfolio growth while maintaining a conservative risk profile.

Finally, our OpEx to equity ratio increased 11 basis points to 1.4% this quarter, bringing our year-to-date ratio to 1.34%. The increase was driven in part by elevated expenses incurred during the quarter, which we expect to moderate in future periods. Overall, the quarter highlighted the benefits of our diversified housing finance platform and disciplined risk management approach. We generated book value growth, a positive economic return, strong earnings and maintained our conservative yet collectible balance sheet positioning. That concludes our remarks. We will now take questions. Thank you, operator.

[Operator Instructions]

We'll take our first question from Bose George at KBW.

Actually, first, a question just on the mark-to-market book value. Could we get an update?

Sure, Bose. So as of Friday, book value was off a little over 1%. So economic return of roughly 0.5%.

Okay. Great. And then I just wanted to ask about dividend coverage. Obviously, you raised the dividend. So clearly, you're comfortable with it. But just can you just discuss the economic return of the portfolio relative to of the required ROE that's needed to cover the dividend, which looks like it's a little under 15%.

Sure. So in terms of the economic return and the returns available in the market, we obviously show that depiction in the investor supplement with Agency 14% to 16% and upwards of 15% in resi and upwards up 13% per MSR funded through warehouse financing. So the way we look at it is we have line of sight, I think, into the near term using the forwards. And when the Board sets the dividend, they're very methodical, and we want to make sure that it is earnable and we don't take these decisions lightly. So we were certainly encouraged by the fact that we feel like it's earnable over the foreseeable future, and we're on track to modestly outran the dividend this quarter, all else equal.

Now in terms of the portfolio, where we own our assets is in a very good position, and it covers very well. And prepayments are relatively low, and we have assets locked in for a very long time. So generally, we feel very good about dividend coverage on a go-forward basis.

We'll move next to Crispin Love at Piper Sandler.

David, can you -- kind of build in on that prior question, but just give us a little bit of a view of where you're looking to add incremental capital across our 3 strategies, looking at at Slide 7 and the returns you referenced. The returns are pretty stable with last quarter or are stable with last quarter. And last quarter, you seem to be leaning a little bit more into resi credit. So just curious on any shifts that you have, kind of where you're most interested in putting the incremental dollar across the 3 strategies, especially as agency technicals remain strong.

Sure, Crispin. So both Agency technicals and MSR technicals are very strong, the strongest we've seen in quite some time. However, residential credit, we believe, exhibits the best risk-adjusted returns. So yes, we would like to incrementally add to residential credit, but we have to be responsible as it relates to the underlying credit, but we're making a lot of progress. We priced 4 transactions already in July, and we're in the market with another deal as we speak. So we do expect to add in resi credit. But agency is certainly very investable, particularly when you consider the technicals and how broad the demand is. And so we feel it's a safe place to invest. [indiscernible] has come down, notwithstanding the recent turbulence geopolitically. And so we feel good about it.

So I'd say the marginal dollar will probably go into agency with resi credit as we can add in MSR is still right there. As a matter of fact, we added a package just yesterday, we purchased an MSR package with a sub-3% note rate that we feel very good about with a strong OAS. And so that's it. When it comes to raising capital, Crispin, and investing it. I think we would like to just take a second here and talk about what we've accomplished over the past couple of years when we started raising capital again beginning in the third quarter of 2024. We raised $5.4 billion in capital in the last 2 years, including our preferred last summer and it's been very intentional.

Obviously, price to book has to be accretive, assets have to be attractive. And to your question, we have to be able to nurture these other businesses, namely resi and MSR. And when you look at the capital allocation associated with those raises, we added $2.6 billion in capital to both residential credit and MSR over the past 2 years. And that's helped grow those businesses. And so the capital raising has fostered the development of these businesses and has been very accretive. We generated nearly $280 million in accretion.

It's added considerable scale enabled us to develop more partnerships and really been a game changer for us. And as a consequence, over the past 2 years, we've generated just over 33% economic returns and starting to raise capital again. and the shareholder has noticed, and we've delivered a 53% TSR in those 8 quarters. So we feel really good about what we've accomplished, but from a capital allocation standpoint as well as a capital raising standpoint.

Great, David. I appreciate that. Just 1 last question for me, just on the administration, FHFAGSEs. From your seat, how do you think they've been acting, just the impacts of the mortgage markets and spreads. They were definitely very vocal earlier in the year. Would you expect additional actions in the balance of the year? Do you think it's enough for the GSEs to continue buying Agency MBS, which they have been doing in what seems to be a pretty prudent way with definitely some more room to go in the coming months.

Yes. So we can't say whether there will be more action, whether it be raising the caps or anything otherwise. But they do have plenty of dry powder left. I think through May, they've settled roughly $45 billion in pools. And obviously, the mandate was $200 billion. What I'd say about the GSEs and their approach broadly is it's been very constructive for the agency market. In January, when spreads tightened as much as they did on the announcement, we were obviously quite concerned about being crowded out, -- but what it feels like today is they are acting much like a relative value market participant when spreads are wider they provide support and add and they slow down the pace or stop buying when spreads tighten. And so that's served to help stabilize mortgage spreads, and it's made it an easier investment environment, and we welcome their participation.

When it's all said and done, let's say, they get to the $200 billion, and that's it. We expect them to be generally responsible participant. They're very good. We know the people there. A lot of them are from prior lives that we worked with in the past, and we respect them a great deal. And so we're we're welcoming their participation, and we expect them to be a positive force in the agency market.

We'll move next to Marissa Lobo at UBS.

Just looking at current coupon spreads compared to prior periods of Fed leadership transitions, do you feel that today's mortgage market is pricing in a larger uncertainty premium than normal or how much of the current coupon spread do you think reflects the uncertainty?

Thanks, Lisa. I think when you look at mortgages today, what's really driving it is realized and implied [indiscernible] is very low and the supply-demand technicals are very strong. We have said -- as David mentioned, after the Iran crisis, we saw -- after the deescalation, we saw both realized and implied walls come down, and the base is tightened. And supply has been more muted than what we expected at the beginning of the year with most people expecting that supply around $160 billion for 2026 compared to what we have sensed in at about $200 billion at the beginning of the year. And fixed income flows have been really strong, 30% of gross issuance is going into CMOs, which is distributed to a wide range of accounts. So I think market pricing is really not looking at the uncertainty from the fed, they're basically looking at where market pricing on bloody. And markets basically pricing mortality there is not a lot of uncertainty from the Fed.

That's helpful. And just shifting to growth in the other segments. So you've spoken about scale being a competitive advantage. And as you grow resi credit and MSRs, where do you still see the greatest opportunities for operating leverage here?

When it comes to operating leverage, we are an operating light company, and it served us very well. I talked in the prepared remarks about the lack of origination and servicing. And we feel like we can scale these businesses with the current operating leverage, and it's been beneficial for us. We're not obligated to invest in any 1 sector because we don't have a lot of operating leverage. Relying on partnerships has been a distinct advantage, particularly in times like these. And we're here ready with capital to deploy it. To the extent there's an opportunity to add operating leverage, we'll look at it. But for the time being, being a capital participant has served us very well. And given where we're at in the cycle, we think it will continue to for the foreseeable future, Marissa.

We'll take our next question from Doug Harter at BTIG.

Can you talk a little bit about on the resi credit side, the ability to source the magnitude of loans and the diversity of loans and talking to others across the industry. It definitely seems like sourcing is enough volume is a challenge. Can you sort of talk about where you're seeing the volume coming from the advantages you have there and kind of how that translates into the returns of the portfolio.

Sure. Thanks, Doug. This is Mike. I think that there's a number of key advantages that we have. One is that we've been in this market. We've been buying non-QM and DSCR loans for over 10 years. We've been doing it through the correspondent channel for over 5 years. Annaly has -- given the capital that we've raised, we've always delivered consistent pricing I think that's something that not all of our peers and competitors can say. A lot of our peers are private equity. There are certain times where they're not able to deliver a rate sheet that is competitive because they are raising capital in a different component of the fund's life.

So I think having that stability, having that capital, the reputation that we've earned, I think, has been well earned. I think it's been hard earned. We've been buying loans during coded, where we've honored commitments that others have not done. Originators don't always have short memory. So I think that there's a lot of goodwill that's been built up through time. On the operational side, we are much deeper than a lot of our competitors and a lot of our peers. We face at this point now over 350 correspondents. When you look at a lot of the other correspondent channels that we're competing against, they may be trying to face the top 50 originators we have gone much further down the chain.

We also recently expanded into non-delegated correspondent. We did that in the beginning of the year. So that's added significant volume, and it's added volume that's a little bit more price insensitive than the delegated channel. The service level is very strong. We have a fully staffed scenario desk. We have a fully staffed exception desk. We've invested a lot, as David mentioned, in terms of technology infrastructure, the ability to face 350 originators is very challenging.

And then lastly, I'll say that our execution on the back end is better than our peers and better than our competitors. We are pricing larger deals, which is able to spread fixed costs and have lower fixed costs because it's a larger balance. Our variable costs, including the underwriting fees are lower than our peers because of the size of the deals that we're able to bring. And then we're also pricing tighter than the majority of other issuers. So that means at the same level of margin as some of our peers and competitors we're able to offer a higher price, right? So we're getting the same ROE at a higher price given some of that secondary execution. So there's a lot of new entrants and the market is competitive. We actually -- our lot volume actually decreased quarter-over-quarter. It was $6.7 billion. It's actually down 9% to 10%. Part of that is because, as David mentioned, we're looking to earn mid-teens ROEs, we're not just going to be out in the market and leading with pricing and leading with the rate sheet. So we'll be diligent. But I think the infrastructure that we've built, the number of originators, the relationships that we had, the pricing advantages. That has allowed us to source these assets at a greater clip than a lot of our competitors.

I appreciate that, Mike. And then just one clarification. In the -- you talked about in thepresentation how kind of like the economic assets in residential credit were relatively flat. How do I square that with the level of activity that you talked about, kind of what are the puts and takes there?

Yes. So if you look at the actual portfolio, loans are effectively flat quarter-over-quarter, $4.7 billion of residential loans. So this is on an economic basis. Those are loans that are held on balance sheet that have yet to be securitized. Then when you look at our OBX portfolio on an economic basis, obviously, we report GAAP. But when you look at an economic basis, the OBX portfolio was up $400 million. That's through retained securities. But the third-party securities portfolio was down a little over $350 million. We sold $260 million of AAA CRE CLOs as they tightened in. We took advantage of redeploying that into Agency. And then our CRT portfolio was also down close to $65 million. So credit spreads did tighten and especially across third-party securities, we have the ability to monetize that. So that's really why you see that the flattish portfolio quarter-over-quarter.

Yes. And Doug, just to add, OBX and whole loans represent over 80% of the resi credit balance sheet. And that's been the objective. We've used third-party securities to generate yield over time, but manufactured securities in-house our higher returning assets. And so the objective is to have the portfolio predominantly characterized by OBX related assets.

We'll move to our next question from Harsh Hemnani at Green Street.

I guess, given what we've seen happen with recently, prepayment risk in the market has certainly decreased. And we're sort of seeing base average coupons move up again across mortgage REIT portfolios. How are you sort of balancing that against maybe your outlook for prepayments going forward? I know you added some agency CMBS. But is there anything we should be thinking about on how you may see Dubois and the other directions and deal with them?

I mean our strategies for the last 2 or 3 years has been that when we move up in coupon, we prefer to do it in quality specified pools. As we have kind of -- if you look at on Page 11 of our investor presentation, we disclosed the quality of our pools by coupon and so we don't have a lot of -- we have a lot of call protection in most of our 6 and 6.5 coupons. On 5.5, we kind of will tactically take on some generic pools or some TBAs as and then pricing is attractive convert then the despecified pool. So our main strategy to decrease prepayment risk is to buy footwall protection. And that's not of how we've built is constructed this portfolio for the last 3 years, and it was very deliberate. That's why it took us a while to go up in coupon because we didn't want to be exposed to a sharp rally in rates at the TDA [indiscernible] space. And we'll continue that strategy. It's just that in the first half of this year, with GSE participation, [indiscernible] valuations went up. [indiscernible] are pretty tight. So if you noticed in the first half of the year, we went down in coupon. In the first quarter, we actually went down in coupon into 4.5 because we didn't want to add a lot of TBA filing [indiscernible], but over the second quarter, we've kind of moved up in coupon and expect full valuations are starting to look more attractive. So we will continue to [indiscernible].

Again, Harsh, from another big picture standpoint, if you look at the overall prepayment risk and where we take it, we're taking prepayment risk in the agency portfolio with higher note rate collateral, obviously, but we're taking virtually no prepayment risk in the MSR portfolio. And the reason being is you want your prepayment risk in more liquid securities because you can trade around them easier when there are surprises. And then the MSR portfolio being very stable. We don't have to worry about prepayment risk nearly to that extent.

We'll go next to Jason Stewart at Compass Point.

A question on the MSR market, it sounds with activity was pretty consistent and the market remains relatively liquid throughout the second quarter. Can you just give us some more color on whether there are any opportunities to be opportunistic, I mean, to your about originators needing or being more reliant on selling MSR for test. Has that created any idiosyncratic opportunities or any impact from that trend?

Yes. This is Ken. Thanks for the question. Our model, as Dave mentioned in the comments being operational light and kind of working with partners and gain primarily variable cost has really allowed us to kind of participate in a way most others can't. So those MSR holders who service their own loans, when they need liquidity if they sell MSR to another buyer who also services their own loans, not only do they have the the gain or loss from selling the MSR, but they're left often with stranded costs. So our model is pretty unique because we're operating at this scale and utilizing subservices. So we're generally the favorite buyer because we're not competing for those units on our platform. So that's been a real niche that we've been able to capitalize. So we have this portfolio not just subservicers, but many of them are also MSR sellers to us.

And in those situations, we're really not competing with the bulk of the buyers. I think another niche is in the flow market. Dave mentioned we kind of picked up some activity there. What's going on there is we're also an opportunistic buyer there, and we're not forced to generically buy flow. So now we've increased, and we're seeing that volume increase because we've grown our network of sellers. We're now up to over close to 200 over 175.

What we're seeing there is we're utilizing very granular pricing. So we're the only large MSR holder who also maintains a large specified pool portfolio. So all the analytics that go into our specified pool pricing goes into very granular MSR pricing that we don't really see others doing. So we're able to pick up better OS, better convexity in that way, and we think we're very differentiated there as well.

Yes, Jason, another way to characterize it is we don't want to compete with banks and banks do have demand for MSR in the current environment, particularly considering the capital proposals. And the way we operate, the channel in which we operate using subservicers and buying MSR servicing retained, we're not competing in that channel, and that enables us to extract better value than that, which appears to be apparent in the market in headline pricing.

Yes. Okay. That makes sense. And then a follow-up to Doug's question, Mike, on resi credit. To the extent pricing on the origination side changes, is there, in theory, a point in which you would find -- and I guess, I understand this completely theoretical, a point you would find secondary security opportunities more attractive. And if it were, would you pivot back to securities rather than organically created assets?

Yes. And I think that -- thanks, Jason. I think that we did show that in Q1 where there was significant growth part of the CRE CLO portfolio that got to be $395 million was -- it was a reallocation from Agency MBS tightening early in January, given the GSE announcement. As that has tightened 5 to 10 basis points, we've subsequently taken that off and redeployed. In the first quarter, we also were active in buying non-QM B1s from third-party shelves, we were also active by unrated A2s and NPL RPLs, which at the time, were like 13% to 14% ROEs. Now most of the third-party securities that we see, they're closer to 11% to 12% ROEs, but Q2 is actually a really good environment to show how important it is to have a manufacturing entity.

So when you look at actual spreads, AAA spreads, as Dave mentioned on the call, they were 10 basis points tighter quarter-over-quarter on the AAA level. On the BBB level, spreads were actually 25 basis points tighter. The credit curve actually flattened. So I think this quarter was a reflection of our ability to move out of third-party securities and continue to invest in the proprietary assets that we have better line of sight, and we also have the ability to set those margins.

But yes, I think that we have a flexible capital allocation model, both on the actual 3 businesses, but then also within the 3 businesses. So if that becomes an opportunity, we certainly have the acumen and the personnel to be able to capitalize on it.

We'll go next to Hong Ling Zhang at JPMorgan.

I guess how do you guys think about your ability to tap the equity markets at your current stock price?

Well, look, the 3 criteria, obviously, price to book assets need to be attractive. And as I mentioned, we need to be able to feed the businesses. So when we look at the stock price, we certainly think it warrants a premium given what we in the franchise value and the fact that nobody can replicate what we can do in our track record. We've just completed the 11th straight quarter of a positive economic return and investors are valuing it where our premium is isn't very high. It's modest. We think it's actually low given the value creation and what we built in the proprietary ability to acquire assets and manage those. And as we look at raising capital, we want to be gentle with the market. We did raise nearly $450 million last quarter. We were very, very soft with respect to our footprint. We weren't in the market when -- on days when the stock wasn't performing well. We are very low percentage of volume. And in fact, the overall capital raise was a little over 2.5% of the outstanding, which relative to some participants in the space is very low as a percentage of -- as a percentage of overall capital. So that's how we'll behave. We don't want to disrupt the stock price. We need to make sure we can buy assets and we need to make sure we could generate positive returns. And to the extent that's available and we're gentle and we respect the stock, we'll continue to do so.

We'll move to our next question from Trevor Cranston at Citizens JMP.

One more question on the residential credit side. You guys mentioned that you were able to price a couple of large non-QM transactions. I was curious, as you look ahead to the second half of the year, if there's any particular collateral type that you guys are focused on as the best opportunity to deploy capital. And generally, if you see much kind of dispersion and risk-adjusted returns available across the different collateral types you guys are focused on?

Yes. Thanks, Trevor. This is Mike. So as Steve mentioned, we've priced 25 deals, $14.2 billion of that number, 70% is non-QM and SCR. That will continue to remain the core collateral that Annaly is well suited to purchase. We still believe that, that actually is the highest ROE, but it's also the highest capital that you can commit relative to some of these other products. So owner-occupied agency loans, investor loans, HELOCs, close in seconds. They are not as scalable at this point in time. And a lot of it is just our competitive advantage is the infrastructure.

It is facing those 350 originators. So our cost base is lower because we're able to buy that much deeper in the chain. So I think what the point we're trying to make is that we have the ability to flex into other areas of the residential credit market, but non-QSR really will remain the core competency of the company. In terms of some of our goals for this year, it really was to bring larger deals. So Dave mentioned it again on the script, but we did a $1 billion deal. It was non-[indiscernible] and then subsequently, we did another $1 billion deal within 2 weeks, non-QM9. A lot of that is just a reflection of the growth in the market itself. There's already been $65 billion of non-QM issuance this year, probably be north of $100 billion. So it's 40% of the entire residential credit market.

But a lot of it is a reflection of our team's hard work in terms of the securitization. We treat our investors as business partners. We have a long-term view in terms of trying to increase demand towards our securitizations, which has led to us being able to do those $1 billion deals. We certainly want best economics for our shareholders, but I think we act in a little bit more equitable way than some of our peers. We're not trying to tighten and test every single deal that we bring.

We want both our investors and ourselves to walk away from these transactions and feel good about the process and the experience. And the reason is because we're averaging 3.5 deals per month. So it doesn't benefit us to have our investors not have really strong experiences. So I think that we feel really good with where we're positioned. The average deal size within non-QM this year, it's been over $900 million. No other company that can say that. And we really would like to move to a programmatic issuance where we are doing $1 billion-plus transactions and the increase in the non-QM market and then also our investor base has also increased. We've had over 250 investors participate in the OBX securitization platform since 2018. And our average deal, I'll say that we probably have between 45 to 50 different investors participate on our non-QM transactions. So that is where we see the bulk of the opportunity, but we can pivot to other collateral places as we've shown here this quarter.

And next, we'll go to Kenneth Lee at RBC Capital Markets.

Just one more on the recent dividend increase here. I wanted to get your thoughts around the resiliency or how you think about the resiliency of the earnings power, especially in the context of any continued geopolitical uncertainty and the planning yield curve?

Sure. As I mentioned earlier, Ken, we take the dividend decision very seriously and our Board is very thoughtful about it. And we do stress the environment to make sure that the dividend is enable. We expect to be able to cover the dividend over a period of time. There will be quarters where we'll out-earn it, and maybe we might be on top or even a touch below. But over a longer period of time with all the information we have today, we expect to earn the dividend and that's what inform the decision to increase it. Now there is a lot of uncertainty. We're still living beneath the lion's paw, so to speak, as it relates to the geopolitical environment and volatility. But generally speaking, we feel good about it. So we made the decision, and we expect it to be a good one.

Got you. Very helpful there. And just one follow-up, if I may. You mentioned in the prepared remarks, modestly rotating into higher loan balances within MSRs. Wondering if you could just talk a little bit more about that, some of the motivations behind that.

Yes. And as I've mentioned, again, we're on pretty much a completely variable cost model. So we pay a fixed cost per loan to have our collateral subservice. So that impact on the yield changes with the actual average loan size being serviced. So it has less impact on higher loan balance than it does on lower loan balance.

So what we found is the costs we're paying are really the best-in-class of the industry's marginal cost plus a marginal profit margin. as opposed to something closer to the average cost of the industry. So our cost to service our portfolio as we believe, materially lower than the average cost of the industry through using subservicers, again, because we're priced at marginal cost plus profit market. Now when portfolios come out for the market, those participants that service their own loans, they model things at their marginal cost.

So they're much more aggressive on low loan balance collateral. So our selling low loan balance and buying high loan balance is a total pickup in economics and yield for us, where when you service your own loans, you really need to keep units on the platform, right? We can be an opportunistic buyer where these other participants are for buyers. Does that make sense?

Yes, that makes sense. Very helpful there.

And that concludes our Q&A session. I will now turn the conference back over to David for closing remarks.

Much appreciate it, Audra, and thank you, everybody, for joining us and enjoy the rest of your summer, and we'll talk to you soon.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.

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

Good morning, and welcome to the First Quarter 2026 Earnings Call for Annaly Capital Management.

Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the Risk Factors section and our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings.

Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information.

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

Please also note this event is being recorded.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Next question comes from Bose George with KBW.

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

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

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

Inclusive, inclusive of the dividend accrued.

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

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

The next question comes from Marissa Lobo with UBS.

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

Sure. Mike, do you want to take it?

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

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

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

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

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

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

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

The next question comes from Rick Shane with JPMorgan.

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

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

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

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

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

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

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

The next question comes from Harsh Hemnani with Green Street.

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

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

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

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

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

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

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

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

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

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

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

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

The next question comes from Jason Weaver with Jones Trading.

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

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

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

You said Onslow Bay specifically?

Correct.

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

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

Congrats on the quarter.

Next question comes from Trevor Cranston with Citizens JMP.

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

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

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

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

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

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

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

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

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

Good morning, and welcome to the fourth quarter 2025 earnings call for Annaly Capital Management. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the Risk Factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings. .

Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release. Content referenced in today's call can be found in our fourth quarter 2025 Investor Presentation and Fourth Quarter 2025 financial supplement, both found under the Presentations section of our website.

Please also note this event is being recorded. Participants on this morning's call include David Finkelstein, Chief Executive Officer and Co-Chief Investment Officer; Serena Wolfe, Chief Financial Officer; Mike Fania, Co-Chief Investment Officer and Head of Residential Credit; V.S. Srinivasan, Head of Agency and Ken Adler, Head of Mortgage Servicing Rights. And with that, I'll turn the call over to David.

Thank you, Sean. Good morning, everyone, and thank you all for joining us for our fourth quarter earnings call. Today, I'll open with a brief overview of the macro and market environment. and then touch on our performance for the quarter and the year, following which I'll provide an update on each of our 3 investment strategies and conclude with our outlook for 2026. Serena will then discuss our financials before opening up the call to Q&A.

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

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

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

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

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

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

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

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

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

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

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

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

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

And accordingly, while Agency will certainly continue to remain the anchor of our portfolio, our non-agency strategies will likely see additional capital allocation all else equal. We do, however, have the earnings power and the liquidity to be both patient and opportunistic and the scale to maintain our market leadership across housing finance and our diversification enables us to be resilient across different rate cycles and market environments. And now with that, I'll hand it over to Serena to discuss the financials.

Thank you, David. Today, I will provide a brief overview of the financial highlights for the quarter ended December 31, 2025, as well as select -- measures. Consistent with prior quarters, while our earnings release discloses GAAP and non-GAAP earnings metrics, my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA. Starting with book value. As of December 31, 2025, our book value per share increased 5% from 1925 in the prior quarter to 2021. After accounting for our $0.70 dividend, we achieved an economic return of 8.6% in Q4. This brings our full year 2025 economic return to 20.2%. .

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Exactly.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Good morning, and welcome to the Third Quarter 2025 Earnings Call for Annaly Capital Management. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the Risk Factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date hereof.

We do not undertake and specifically disclaim any obligation to update or revise this information. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release. Content referenced in today's call can be found in our third quarter 2025 investor presentation and third quarter 2025 financial supplement, both found under the Presentations section of our website. Please also note, this event is being recorded. Participants on this morning's call include David Finkelstein, Chief Executive Officer and Co-Chief Investment Officer; Serena Wolfe, Chief Financial Officer; Mike Fania, Co-Chief Investment Officer and Head of Residential Credit; V.S. Srinivasan, Head of Agency and Ken Adler, Head of Mortgage Services and rights. And with that, I'll turn the call over to David.

Thank you, Sean. Good morning, everyone, and thank you all for joining us for our third quarter earnings call. Today, as usual, I'll briefly review the macro and market environment as well as our performance for the quarter, then I'll provide an update on each of our 3 businesses, ending with our outlook. Serena will then discuss our financials before opening up the call to Q&A. Now starting with the macro landscape. The U.S. economy remained resilient in the third quarter, with GDP likely to be on pace with that Q2. Growth was supported by healthier consumer spending as well as AI-driven business investment despite lingering uncertainty around tariffs and the immigration.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And with that, I'll turn it over to Serena to discuss the financials.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

You bet. Thanks Rick.

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

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

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

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

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

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

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

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

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

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

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

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

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

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