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spk04: Good day and welcome to the fourth quarter 2023 Annalee Capital Management Earnings Conference. Please note that today's event is being recorded. I would now like to turn the conference over to Mr. Sean Kinsel, Director and Investor Relations. Please go ahead, sir.
spk08: Good morning and welcome to the fourth quarter 2023 Earnings Call for Annalee 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 2023 investor presentation and fourth quarter 2023 supplemental information, both found under the presentation 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 Chief Investment Officer, Serena Wolf, Chief Financial Officer, Mike Fania, Deputy Chief Investment Officer and Head of Residential Credit, V.S. Sreenivasan, Head of Agency, and Ken Adler, Head of Mortgage Service and Rights. And with that, I'll turn the call over to David.
spk11: Thank you, Sean. Good morning, everyone, and thanks for joining us today. I'll begin with a brief review of the fourth quarter market environment and our portfolio performance, then discuss the current macro landscape, followed by an update on our businesses and our outlook for 2024. Serena will then discuss our financials before opening up the call for Q&A. Now, as all are aware, fixed income markets exhibited considerable volatility in the fourth quarter, as evidenced by the 10-year Treasury trading in 120 basis point range, peaking at 5% in mid-October, before rallying throughout November and December. The second half of the quarter proved beneficial to mortgage assets, as implied volatility declined, the yield curve modestly steepened, and agency spreads tightened meaningfully. We were well positioned to take advantage of this environment, delivering a 10.1% economic return for the quarter, and we out-earned our dividend with earnings available for distribution of 68 cents per share. And we achieved these results with lower economic leverage, which declined to 5.7 turns at the end of the quarter. And as we reflect on 2023, we're pleased to have generated a 6% economic return in a year characterized by numerous unforeseen risk events. We believe that our performance on the year demonstrates the value of our diversified housing finance model and our disciplined portfolio and risk management. Now, turning to the macro environment, the primary driver of the strong demand for fixed income since November can largely be attributed to a shift in the Federal Reserve's communications. Moving away from the hire for longer narrative, Fed officials began to express comfort around the decline in inflation, suggesting that risks around the monetary policy outlook are more balanced. A normalization of policy is likely to begin in 2024, as long as inflation continues to moderate. And while not declaring victory just yet, as evidenced by Chair Powell's recent statements, policymakers are keen to ensure that a soft landing can actually occur. Powell also highlighted that future balance sheet discussions will occur in the upcoming March meeting, noting policy rates and the potential tapering of the balance sheet as independent tools. And while existing financing conditions remain ample, we're encouraged that the Fed appears to be signaling a conservative approach with regard to its balance sheet and liquidity in the financial system. Now, a second factor leading to the decline in yields in the fourth quarter is the change in debt issuance dynamics as the Treasury chose to issue incremental supply in the front end of the yield curve, taking advantage of the record amount of cash in money market funds while exerting less pressure on longer-term yields. Now, the broader domestic economy remains strong with Q4 GDP at 3.3%, the unemployment rate at 3.7%, and consumers still exhibiting spending strength. Inflation, meanwhile, has moderated meaningfully, and absent a shock, core PCEs should benefit from base effects to bring year-over-year measures towards 2.5% in the coming months. Now, looking at the housing sector, home prices outperformed the market's expectations over the last couple of years, despite mortgage rates reaching 20-year highs. HBA has continued to benefit from existing homeowners experiencing lock-in effect, resulting in low available for sale inventory, as borrowers who struck below current market mortgage rates are unwilling to move or trade up. Housing activity remains subdued, although we have seen modest signs of an uptick in demand following the recent decline in mortgage rates. And all told, we're constructive on the housing sector should the labor market and the consumer remain resilient and in line with the soft landing scenario. Now, shifting to our portfolio and beginning with the agency sector, much of our agency reduction occurred at the very outset of the quarter, which left us well prepared for the spread widening and volatility the market experienced as October progressed. And as volatility subsided and spreads normalized, we rotated out of lower coupons and TBAs and into higher coupon specified pools. We remained disciplined in our selection of specified pool stories, favoring high-quality prepaid protected securities, which represented the vast majority of our higher coupon purchases. In addition, we opportunistically grew our agency CMBS holdings by $1.2 billion as the sector did lag the move tighter in agency MBS, locking in attractive spreads and increasing the portfolio size to $3.2 billion in market value. Fixed-rate agency CMBS is a complementary asset to our agency portfolio as it provides a high-yielding, stable cash flow with minimal convexity exposure. Now, our agency strategy overall represented 62% of our dedicated equity at quarter end, down from 64% the quarter prior as we further reallocated out of agency in favor of resi credit and MSR late in the quarter. As it relates to our hedges, our balanced liability position helped protect us from the elevated rate volatility experienced during the first half of the quarter. One adjustment we did make tactically, however, was we rotated from Treasury futures into SOFR swaps at the very front end of the yield curve, given the particularly tight level of swap spreads experienced in the year end. And overall, we remain conservatively positioned as it relates to our rate exposure as seen through our 106% hedge ratio and rate shock tables. However, given the changing policy landscape, we may reach a point where we'll begin to feel more comfortable adding duration to the portfolio in the near future. And as we begin 2024, With the Fed's pivot to a more neutral monetary policy, the distribution of future rate paths has narrowed, which has resulted in a decline in implied volatility. We'll likely see rate cuts materialize as we approach mid-year, which historically have been a catalyst for inflows in fixed income funds. And furthermore, an earlier end to QT should help stabilize deposits and which along with incremental regulatory clarity should support bank demand. In coincidence with these improving technical factors, MBS are in historically attractive spreads, particularly relative to fixed income alternatives, while convexity and prepayment risk in the market remains relatively low. Now, turning to the residential credit market, The non-agency sector participated in the broader fixed income risk on sentiment to end the year with AAA non-QM spreads 20 basis points tighter and below investment grade CRT 60 basis points tighter quarter over quarter. Our resi portfolio ended the year at $5.7 billion in market value of 14% year over year and currently comprises 20% of the firm's capital. The growth in the portfolio can be attributed to our organic whole loan acquisition and Onslow Bay securitization strategy. And the OBX retained portfolio and whole loan position now account for roughly half of the total RESI portfolio assets. Residential whole loan acquisitions continue to be strong in Q4 as we settled $1.8 billion in loans, of which $1.6 billion was sourced directly through our correspondent channel. Lock volume was robust in the fourth quarter at $2.7 billion, a 13% increase quarter over quarter despite winter seasonals. And our quarter end correspondent pipeline was $1.6 billion with strong credit characteristics as demonstrated by a 748 FICO and 70% CLTV. And since the beginning of the fourth quarter, we've securitized seven OBX transactions for $2.8 billion, inclusive of three transactions priced subsequent to quarter end. And these securitizations generated $290 million of assets at projected mid-teens returns utilizing modest recourse leverage. Onslow Bay continues to be a leader in the residential credit market as we remain the largest non-bank securitizer and second largest overall over the past two years. In addition, we have the lowest delinquency rates across the 10 largest non-QM issuers. And also to note, we were just able to sell the tightest new issue AAA bond executed in 2024 year to date. And our correspondent channel remains our preferred investment option within residential credit, allowing us to organically manufacture assets while maintaining control over pricing, our partners, diligence, credit, and volume. Now, shifting to MSR, our portfolio increased by 18% or $400 million in market value in the fourth quarter through the purchase of three bulk packages, in addition to modest flow acquisitions. And our MSR portfolio, inclusive of forward settling trades, increased nearly 50% throughout 2023 to end December at $2.7 billion in market value, making Onslow Bay a top 10 non-bank owner of servicing rights. The MSR market had an active Q4 with bulk transactions of modestly quarter over quarter, capping a record 2023 that saw over $800 billion in principal balance trade. Annalie was able to capitalize on this significant supply, and we were the fifth largest buyer in the market, onboarding $42 billion in principal balance throughout the year. Consistent with our previous commentary, we continue to favor low note rate, high credit quality collateral, And given the lack of refinance incentive, the portfolio is exhibiting highly stable cash flows and historically low prepayment speeds. The MSR portfolio had a three-month CPR of 2.9% as of December, approximately 40% lower than the MBS universe. And with our unique positioning in the MSR market as a preferred partner to originators in light of our scale and certainty of capital, we've been able to establish new relationships and expand our footprint. In particular, we've started to add flow sourcing partnerships, which we have begun selectively purchasing through this past quarter. And while low no-rate collateral is still our preferred segment of the MSR market, we expect these flow relationships to add a source of more predictable supply. Looking ahead, we anticipate the MSR market to be active this year, though sales may moderate from 2023's elevated levels. And we continue to be well positioned to add MSR with ample warehouse capacity, minimal leverage, and a desire to continue to allocate capital to the strategy. Now, to wrap up before handing off to Serena, I wanted to note that, as always, we're cognizant of the risks on the horizon, and we remain prepared for additional market turbulence and vigilant as the operating environment evolves. That said, we're optimistic with respect to our outlook for each of our three businesses, and we believe that our three complementary, fully skilled strategies should continue to provide Annalise shareholders superior risk-adjusted returns and a strong earnings profile, and stability across different interest rate and macro environments. And with substantial liquidity and prudent leverage, we remain ready to take advantage of opportunities where we believe capital will be most accretive. And now with that, I'll hand it over to Serena to discuss the financials.
spk01: Thank you, David. Today, I will provide brief financial highlights for the fourth quarter and select year-to-date metrics for the year ended December 31, 2023. Consistent with prior quarters, while our earnings release discloses gap and non-gap earnings metrics, my comments will focus on our non-gap EAD and related key performance metrics, which exclude PAA. As David mentioned earlier, 2023 was a year filled with substantial volatility, and our team managed the markets admirably, finishing the year strong, as demonstrated by our results for the quarter and full year. Our book value per share at year end increased from the prior quarter to $19.44. And with our fourth quarter dividend of $0.65, we generated an economic return for the quarter of 10.1% and 6% for the year ended December 31, 2023. In November and December, we experienced the inverse of the prior quarter with a sharp rally in rates and strong performance of mortgage-related assets. which led to a net book value contribution of $6.74 per share from our agency residential credit and MSR portfolios. These investment gains outpaced the losses on our hedging portfolio of roughly $5.56 per share. Earnings available for distribution increased compared to the third quarter by 2 cents per share to 68 cents for the fourth quarter. EAD benefited from a higher coupon on investments and lower repo expense due to lower average balances despite higher average repo rates. Partially offset by a lower net interest income on swaps and certain positions rolled off with favorable net receive rates. David referenced our continued rotation up in coupon in agency MBS. We also saw an increase in weighted average coupon for our residential credit investments. Altogether, this portfolio positioning continues to provide increased yields as average yields, XPAA, rose again quarter over quarter, 18 basis points higher than the prior quarter at 4.64%. Similarly, NIM followed the same trajectory as EAD for the quarter with the portfolio generating 158 basis points of NIM, XPAA, a 10 basis point increase from Q3. Net interest spread increased four basis points quarter over quarter at 122 basis points compared to 118 basis points in Q3, as agency yields increased at a higher rate than repo rates, net of swap interest. The total cost of funds continued to increase quarter over quarter, albeit at a reduced pace in comparison to prior periods, rising 14 basis points to 3.42% for the quarter. Meanwhile, our average repo rate for the quarter was 556 basis points compared to 544 basis points for the previous quarter. Despite this increase, our total economic interest expense was only up marginally at $665 million compared to $652 million in the prior quarter, primarily due to the decrease in average repo balances from $66 billion to $62 billion. As noted above, our swaps impact on the cost of funds further normalized due to the maturity of specific contracts, resulting in the net interest component of interest rate swaps declining by 15 million, which negatively impacted our cost of funds by approximately four basis points. Turning to details on financing, notwithstanding modest pressure we had noted in funding markets around quarter ends, funding markets remain ample and liquid. We continue to see strong demand for funding for our agency and non-agency security portfolios. And while we keep an eye on RRP volumes and treasury supply, we acknowledge that the Fed is very focused on liquidity and funding markets. Our repo strategy is consistent with prior quarters, and our Q4 reported weighted average repo days were 44 days, down from 52 days in Q3, due to the roll-down of longer-term trades completed in prior quarters. Our Treasury team continued to source additional funding options for our credit businesses and had another busy quarter focusing on expanding warehouse capacity and achieving competitive financing terms for existing and new warehouse lenders. During the quarter, we upsized our committed MSR financing by $500 million and renewed a $400 million residential whole-own facility, incorporating a non-mark-to-market supplement. As of December 31st, 2023, we have 3.6 billion of warehouse at a 38% utilization rate, leaving substantial capacity. Market fundamentals for the quarter aided our liquidity profile with unencumbered assets of 5.2 billion compared to 4.7 billion in Q3, including cash and unencumbered agency assets of 3.8 billion, an increase of 1 billion compared to the prior quarter. In addition, we have approximately 1 billion in fair value of MSR that has been pledged to committed warehouse facilities that remain undrawn. Together, we have roughly 6.2 billion in assets available for financing. Our disciplined approach to financing our credit businesses and prudent risk and cash management strategies have resulted in a very comfortable liquidity position to end the year. And lastly, despite continued growth in our operating businesses during 2023, We efficiently managed our expenses, resulting in an OPEX to equity ratio of 1.42% for the year, compared to 1.4% for the year ended December 31st, 2022. That concludes our prepared remarks, and we will now open the line for questions. Thank you, operator.
spk04: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Boast George with KBW. Please go ahead.
spk07: Hey, everyone. Good morning. Just wanted to start with the question just about the sort of the best place for allocating new capital. You seem to lean into credit a little more. Just curious if you could see that continue in 2024.
spk11: Sure. Good morning, both. We could see that continuing. I think one of the points we noted is just the acceleration in activity in the conduit channel and ultimate financing through securitization. So we do feel good about growing the credit portfolio. primarily through the Onslow Bay Channel, and we'll look for more opportunities to do so. I think, you know, the market share that Mike has captured as it relates to the non-QM market, I think it's been impressive. You know, we had our highest lock volume and purchase volume last quarter in a quarter where origination declined, so we feel really good about it, and we would expect to increase capital towards that effort.
spk07: Okay. But just in terms of incremental ROEs, are they still a bit better in the agency versus that channel, or how does it compare?
spk11: Well, agency has a better headline ROE, but, you know, you've got to consider volatility and, you know, the overall capital allocation and still make sense on a risk-adjusted basis to continue to rotate further into both REZI and MSR on a risk-adjusted basis.
spk07: Okay, great. And can I get an update on book value, quarters to date?
spk11: Sure. You know, we actually just closed the books for January yesterday, so I have a good month end number for you, which was up 2%. Rates have drifted a little bit higher over the last couple of days, so we've softened a bit since then, but nothing to write home about.
spk07: Okay, great. Thanks.
spk11: You bet.
spk04: The next question will come from Crispin Love with Piper Sandler. Please go ahead.
spk02: Thanks. Good morning, everyone. Appreciate you taking my questions. First, can you just update us on your outlook for agency spread, just given the significant tightening we've seen since over the last several months? So, I'm curious on your view there on potential spread ranges with rate cuts likely coming in mid-24 and hopefully a less volatile rate environment here.
spk11: Sure, Kristen. We'll let Srini fill that one.
spk00: Hi, Kristen. Current coupons spread at 150 basis points over the bend of the Treasury curve. It's materially tighter than the winds we saw in 2023, but the economic environment is also very different. David had mentioned that the Fed is most likely going to ease monetary policy in 2024. They're also going to taper QT. And through the first three quarters of 2023, banks shed about over $200 billion in MBS, and in the fourth quarter of 2023, they reinvested all of their paydowns. The in-case view is that they will continue to reinvest paydowns in 2024, and there's potentially some upside that they might add MBS in the second half of the year. So overall, they're pretty constructive on agency spreads. Absent the no-landing scenario where banks where the Fed is forced to hike rates again, we do not expect MBS Feds to get back to the whites that we saw in 2023. Overall, in 2024, I think MBS Feds will trade in a tighter range than they did in the last couple of years. And MBS has underperformed other fixed income asset classes for two years in a row, and we are very hopeful that in 2024 they will outperform.
spk02: Great. Thank you there for the color. And second question for me, just can you speak to how you're thinking about the dividend level right now and sustainability in the current environment? You lowered your return assumptions across your strategies in the presentation. So curious how that plays into how you think about the dividend level and core earnings power and returns relative to the 65 cent quarterly dividends.
spk11: Sure, we did moderate those return estimates given the tightening that did occur later in the quarter. But look, Kristen, we out-earned the dividend modestly in the fourth quarter. As it relates to the first quarter here, we do expect EAD to be contextual with the dividend. which we feel good about. And at this time, you know, our view is that it's not our recommendation to the board to make an adjustment to the dividend. We'll see how things progress throughout the rest of the year. But we feel good about this quarter.
spk02: Thanks, David. I appreciate you taking my questions.
spk11: Thank you, Kristen.
spk04: The next question will come from Doug Harder with UBS. Please go ahead.
spk06: Thanks. Can you talk about, you know, kind of what the target leverage level would, you know, can be going forward, kind of given your current mix of assets?
spk11: Sure. Obviously, our overall leverage is going to be a function of capital allocation, and the decline in leverage is attributable to some extent, a lower weighting to agency, but also the fact that, look, we're When we look at the market, what we've recently experienced, volatility is something that could persist for a little bit longer. We're still living underneath the lion's paw as it relates to risk events in the market. We're playing it very conservatively, but the good news is we're able to earn a good return with the current level of leverage. To sum it up, we're comfortable with where we're at here. Our overall leverage is going to be a function of reallocation into either RESI or MSR, and we feel good about where we're at. We're not of the mindset immediately to increase leverage nor really take it down.
spk06: I guess just to follow up on that, David, you know, kind of what are the types of events or markers you're looking for that would, you know, kind of cause you to feel comfortable taking leverage up? You know, and I guess how do you balance that with, you know, by the time you get those all clears, you know, maybe spreads aren't as attractive and then you're, you know, leveraging less attractive assets. You know, so I guess how do you balance that and what are the signposts you're looking for?
spk11: Sure. Give us rate cuts, give us the end to QT, give us stability around the world, and we'll certainly raise leverage. But, look, at the end of the day here, if you look at our spread shocks, you know, if we do experience spread tightening, we're still going to get very good returns, as we saw in the latter half of last quarter. You know, just in terms of the overall model, you know, we are generating a more stable rate. return with less leverage than what a monoline agency firm would deliver. And we feel very good about it. Now, to the extent there are some real green shoots out there as it relates to volatility in the market, yeah, we could increase leverage if spreads are attractive. And to the extent that we get a widening in spreads, We have ample liquidity in the balance sheet to allow leverage to organically increase without having to worry about, you know, selling to manage our leverage. So it's a really good position to be in right here, Doug. But, you know, to the extent things do change for the better and the market is priced, you know, to that soft landing scenario, it's priced to perfection across all assets with the possible exception of some mortgage-related assets. So we're a little bit cautious here, Doug.
spk12: that could change thank you you bet doug the next question will come from jason weaver with jones trading please go ahead hey good morning thanks for taking my question um i'm just gonna dovetail off uh bose's question with a bit of refinement um i was wondering can you ballpark the incremental roe range for new deployment across both agency and residential credit today
spk11: Yeah, I think we'll go around the room here, but in agency, look, we can get mid-teens returns, upper-teens returns on specified pools, for example, moderate loan balance production coupon pools. To the extent we can find them, there is some scarcity, but you can get upper-teens in those assets. And then, Mike, you want to give a little rundown on the resi front? Sure.
spk13: Hey, Jason. This is Mike. In terms of securitization, the organic hold-on strategy, We'll say that's, you know, call it mid-teens using a modest amount of recourse leverage. Within the security part of our portfolio, call CRT, that's probably high single digits on, you know, call it two turns of leverage for below IG M2s. And then in terms of NPL, RPL, we'll say it's low teens on, you know, call it three turns of leverage. So the majority of our capital deployment within Resi has been in the whole loan and OBX strategy given those returns.
spk11: And actually, Ted, we can give you a little cover on MSR as well.
spk10: Yeah, I mean, the MSR market is providing, like, you know, and we put it in the book, around 10% to 12% return. Now, those returns are a little bit lower because we do not employ material amounts of leverage on that strategy at this moment. Now, we have the liquidity line, the ability to leverage that asset and drive those returns higher, but managing it with the context of, of the entire portfolio, that return is additive to the whole target.
spk11: Yeah, and Jason, just to add to that on MSR, we're running that portfolio at four-tenths of a turn of leverage, and given the low note rate nature of it and how benign the cash flows are, It could be levered to a greater extent. But if you think about it, the agency portfolio is doing some of that levering for it. And so if you consider the benefit of that, then that gets those returns up into the teams.
spk12: All right. Thank you for that. That's actually very helpful. I know, David, you said in your prepared remarks about the shifting from, you know, treasury-based hedges over to SOFR swaps. Yeah, obviously, we've seen what's happened in swap spreads for the last, you know, call it two and a half months or so since the end of November. Can you just elaborate on that shift in strategy a little bit and that's what's behind it?
spk11: Yeah, sure. So, you know, both November and December month ends, we did have a little bit of pressure in financing markets. which, you know, suggests that balance sheet assets, you know, might be a little bit heavy. And that's what led to a lot of the swap spread tightening that we experienced. And, for example, in the very front end of the yield curve at the two-year level, two-year rate, we got to negative 21 basis points on swap spreads. uh versus treasury so uh versus so far so um you know the way we viewed it is that that will gravitate to zero through the passage of time over the two years and it made perfect sense to us to transition some of our two-year futures over to uh paying on swap and and uh you know just since the end of the year those swap spreads have gone from negative 20 or thereabouts to negative 14 this morning so It's been a good trade. We do still think that swap spreads are on the tight side, particularly even out the curve. You know, with 10-year swaps at negative 36 basis points, that to us looks a little bit tight. The Fed has obviously begun discussing the tapering of QT. And as the chair noted last week, that would be an active conversation at the March meeting. to the extent they're, you know, they do move on that this spring, then we will get, you know, a little bit of relief as it relates to balance sheet, and that should help swap spreads widen back out.
spk12: That's helpful, and maybe some of that's due to the last two months, $200 billion of issuance, but that's what you heard there.
spk04: Yeah.
spk12: All right, thank you for that. I appreciate the time.
spk04: You bet. The next question will come from Rick Shane with J.P. Morgan. Please go ahead.
spk03: Hey, good morning, everybody. I have two questions, one on each side of the balance sheet. When we look at the growth in the fourth quarter in terms of the agency book, you guys were most of what was added appears to be up in coupon sixes and six and a half. I'm curious at this point in the cycle, how you feel about adding premium securities, given that we sort of reached that inflection point, we could see pretty significant bifurcation in the book and speeds could pick up in those coupons fairly quickly.
spk11: Yeah, let me pass it to Srini to talk about what we're exactly doing in higher coupons.
spk00: Sure. I think we've highlighted this over the last few quarters. Our core strategy is to move up in coupon and specify both with card predictions. and what we've done over the last two quarters is execute that strategy. Basically, the coupon stack, given the sharp move in rates, the coupon stack traded with a lot of volatility in the first quarter, so this gave us an opportunity to move up in coupon at relatively attractive levels. And the pace at which we move up in coupon is somewhat dictated by our ability to source high-quality specified pools at reasonable valuations. So that's why the pace has been somewhat moderated at which we move up in coupon, but we continue to like specified foods up in coupon. I think if you look at PBA, it's pricing in the loan size that new production is, and new production loan size has gone up almost $75,000 over the last year or so, and it's now running at around $450,000. So these pools are likely to have very steep S-curve and very poor convexity profile. And so the payouts for specified pools will compensate for one of the weakening we see in the DBA collateral. And one more point to make, Rick.
spk11: I was just going to say that if you look at the overall portfolio, the average dollar price is still 98, notwithstanding the rally we experienced in 2019. in the fourth quarter, and you do get the most spread in, you know, the higher coupons. So you take more convexity risk, but we try and mitigate that, as Srini said, through specified pool selection. But at the end of the day, we get paid to manage convexity risk, and, you know, if you're way down the coupon stack in low dollar price securities, you're not going to get the spread you need. So that informs the strategy.
spk03: Got it. And it is, as you make the point, I realize that one of the things that shifted not only is where you are in coupon, but the percentage of generics, to your point, also went down. So that's consistent. Turning to the right side for a second, if we look at the repo funding from the third to the fourth quarter, the duration went down or the funding time went down slightly. I'm assuming in the third quarter you extended funding with the idea that you were, didn't want to take risk into year-end balance sheet contraction and that some of that was just runoff of the 120s, the over 120s and the longer duration borrowings rolling down. But I'm also wondering if what we're seeing here is a little bit more bullish positioning on rates with you shortening the funding also.
spk11: Yes. So to your first point about adding term in the third quarter, you are correct in that, and that does reflect the roll down. And I'll tell you, you know, another point to note about the repo market today, Rick, relative to a number of years ago, is that the vast majority of the liquidity is in the very front end of the curve there. And, you know, To really extract the value in the repo market, you do need to stay somewhat short. We did have some very good opportunities to put on some long-term trades last year that we benefit from. But generally speaking, the term of the repo is going to remain relatively short because that's where the liquidity is. And to the extent that, you know, the Fed does ease, certainly, then you benefit from that by being able to capture those lower rates. So to a certain extent, that's the case as well, to your second point.
spk03: Perfect. Okay, thank you. And term was the phrase I was struggling to find at 6.30 in the morning. I apologize. Thank you.
spk11: You understand out west there. Thanks, guys. Have a great day. Thanks, Rick.
spk04: Again, if you have a question, please press star, then 1. Our next question will come from Trevor Cranston with JMP Securities. Please go ahead.
spk09: Hey, thanks. Good morning. David, I think you mentioned in your prepared remarks that you might consider adding duration to the portfolio in the near future. So I was wondering if you could maybe just talk a little bit about what kind of catalysts you'd be looking for for that and maybe just generally your outlook on rates, particularly at the longer end of the curve?
spk11: Yeah, sure. So, duration has been added organically a little bit since the end of the quarter, just through higher rates. But look, what we're looking for is more persistent signs that inflation has moderated to a point where the Fed feels good about cutting rates, and we think we'll get there. If you I do think inflation prints for the next three months are going to be consistent with what they were for the last three months. We do think the Fed will lease beginning in May, irrespective of how the economy plays out. And once we see those signs, we'll be more comfortable with duration because real rates still do look attractive. And ultimately, we think where the long end of the yield curve should settle as we get through this is probably inside of 4%. And we'll look for those signs that volatility dissipates and that might be beneficial to the portfolio.
spk09: Got it. Okay, that's helpful. In the last several days, there's been a lot of headlines coming out about NYCB in particular. Can you guys talk about kind of how you think about the CRE market and if you see any sort of incremental risks coming out this year from banks or others potentially sitting on unrecognized CRE losses and sort of how you think that would impact markets overall? Thanks.
spk11: Yeah, certainly. Well, one point to notice is we're certainly thankful that a little over two years ago we did sell our commercial platform, so we're glad not to be in that sector. We also, you know, last year, for example, we sold all of our CMBX positions to reduce that securitized exposure, and currently what we own is roughly 220 million of AAA CLOs which are almost exclusively multifamily, so very little exposure there. Now, as it relates to the broader CRE market, yeah, there's certainly some isolated risks out there. We do think that this particular episode will be contained. There are other banks out there that will have to work off some of those CRE loans. The big banks are in good shape, but it's something that's going to impact a lot of the regional banks over the near term, but we don't see it as being systemic to any extent, notwithstanding some of the volatility we're experiencing in markets as a consequence of New York Community Bank. So long story short, you know, we don't have exposure, and we're thankful of that, and we think this will be a relatively muted event in the market, but it is some factors that need to be worked through at the bank level.
spk09: Okay. That's helpful. Thank you. Thanks, Trevor.
spk04: The next question will come from Eric Hagan with BTIG. Please go ahead.
spk05: Hey, thanks. Good morning. You know, just continuing on that topic of the regional banks, I mean, how do you feel like mortgage spreads and liquidity have responded to the pressure there over the last week? And do you see that creating an opportunity to buy MSRs potentially? And then even, you know, tacking on to that, I mean, what's your outlook more generally, you know, for the supply of MSRs this year and how aggressive you expect to be in maybe bidding for bulk MSRs at different levels of interest rates?
spk11: Sure. So I'll start off with just the overall mortgage market, and then Ken can talk about MSR specifically. There has been a little bit of volatility in spreads the past week, and it certainly does create opportunities, but it's not the type of event where we're looking to dive into the market. We've reinvested runoff at better levels and things like that, and we're watching, but it's not a catalyst to necessarily jump into the market. than on MSR.
spk10: Yeah, I mean, over the last year, I mean, regional banks have been buyers of MSR, and there's been some regional banks that have been sellers of MSR, and the actual names are available in the transfer data. On the margin, I mean, we definitely think this will take some of those buyers out. The allocation of MSR to the regional banking sector, I mean, it might, you know, it doesn't seem like... the whole news of large portfolios are these stressed institutions. On the margin, we believe it to be a positive event for our strategy specifically because we are an opportunistic participant at times so that more to come.
spk11: Yeah, and we'll also see how, you know, banking regulation plays out and what impact that may have. But generally speaking, we're reasonably optimistic on our ability to source MSR in a less competitive fashion.
spk05: All right. I appreciate you guys. Thank you. Thanks, Eric.
spk04: This concludes our question and answer session. I would like to turn the conference back over to Mr. David Finkelstein for any closing remarks. Please go ahead, sir.
spk11: Thanks, Chuck, and thank you, everybody. Good luck, and we'll talk to you in the spring.
spk04: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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