Earnings Call Transcript - NLY Q4 2023

Operator, Operator

Good day, and welcome to the Fourth Quarter 2023 Annaly 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 Kensil, Director and Investor Relations. Please go ahead, sir.

Sean Kensil, Director and Investor Relations

Good morning, and welcome to the Fourth Quarter 2023 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 2023 Investor Presentation and Fourth Quarter 2023 Supplemental Information, 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 Chief Investment Officer; Serena Wolfe, Chief Financial Officer; Mike Fania, Deputy 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.

David L. Finkelstein, CEO and Chief Investment Officer

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. Then Serena will 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 a 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 $0.68 per share. We achieved these results with lower economic leverage, which declined to 5.7 turns at the end of the quarter. 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 higher 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. 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. Existing financing conditions remain ample, and we're encouraged that the Fed appears to be signaling a conservative approach regarding its balance sheet and liquidity in the financial system. A second factor leading to the decline in yields in the fourth quarter is this 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. 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 in absence of a shock, core PCE should benefit from base effects to bring year-over-year measures towards 2.5% in the coming months. 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. Existing homeowners are experiencing a lock-in effect, resulting in low available-for-sale inventory as borrowers who locked in 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. Overall, we're constructive on the housing sector should the labor market and the consumer remain resilient and in line with the soft landing scenario. Shifting to our portfolio, beginning with the Agency sector, much of our agency reduction occurred at the very start of the quarter, which left us well prepared for the spread widening and volatility that the market experienced as October progressed. As volatility subsided and spreads normalized, we rotated out of lower coupons and TBAs and into higher coupon specified pools. We remain disciplined in our selection of specified pool stories, favoring high-quality prepaid protected securities, which represented the vast majority of our higher coupon purchases. We opportunistically grew our Agency CMBS holdings by $1.2 billion as the sector lagged 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 provides a high-yielding stable cash flow with minimal convexity exposure. Our agency strategy overall represented 62% of our dedicated equity at quarter-end, down from 64% the previous quarter, as we reallocated further out of agency in favor of residential credit and MSR late in the quarter. Our balance liability position helped protect us from the elevated rate volatility experienced during the first half of the quarter. One tactical adjustment we made was rotating from treasury futures into short-term swaps at the very front-end of the yield curve, given the particularly tight level of swap spreads experienced during the year-end. Overall, we remain conservatively positioned concerning 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 begin to feel more comfortable adding duration to the portfolio in the near future. 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 led to a decline in implied volatility. We anticipate that rate cuts will materialize as we approach mid-year, which historically have been a catalyst for inflows into fixed income funds. An earlier end to quantitative tightening should help stabilize deposits, which, alongside incremental regulatory clarity, should support bank demand. Coinciding with these improving technical factors, mortgage-backed securities are offering historically attractive spreads, particularly relative to fixed income alternatives, while convexity and prepayment risk in the market remain relatively low. Turning to the residential credit market, the non-Agency sector participated in the broader fixed income risk 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 residential portfolio ended the year at $5.7 billion in market value, up 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-based securitization strategy. The OBX retained portfolio and whole loan position now account for roughly half of the total residential portfolio assets. Residential whole loan acquisitions were 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. Our quarter-end correspondent pipeline was $1.6 billion with strong credit characteristics, as demonstrated by 748 FICO and 70% CLTV. 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. 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, maintaining the position as the largest non-bank securitizer and second largest overall over the past two years. Additionally, we have the lowest delinquency rates across the ten largest Non-QM issuers and we recently sold the tightest new issue AAA bond executed in 2024 year-to-date. 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. 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 and modest flow acquisitions. 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 moderately increasing quarter-over-quarter, capping a record 2023 that saw over $800 billion in principal balance trade. Annaly was able to capitalize on this significant supply, ranking as 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. With our unique position in the MSR market as a preferred partner to originators, we have been able to establish new relationships and expand our footprint. In particular, we've begun selectively purchasing through flow sourcing partnerships. While low note rate collateral remains 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. We continue to be well-positioned to add MSR with ample warehouse capacity, minimal leverage, and a desire to allocate capital to the strategy. In conclusion, as always, we're cognizant of the risks on the horizon, and we remain prepared for additional market turbulence while being vigilant as the operating environment evolves. That said, we're optimistic about our outlook for each of our three businesses and believe that our three complementary fully-scaled strategies should continue to provide Annaly shareholders with superior risk-adjusted returns, a strong earnings profile, and stability across different interest rate and macro environments. With substantial liquidity and prudent leverage, we're 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.

Serena Wolfe, Chief Financial Officer

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 GAAP and non-GAAP earnings metrics, my comments will focus on our non-GAAP 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 $0.02 per share to $0.68 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, excluding PAA, 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 a portfolio generating 158 basis points of NIM, ex-PAA, a 10 basis point increase from Q3. The 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 impacted our 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 noted in funding markets around quarter-end, funding markets remain ample and liquid. We continue to see strong demand for funding for our Agency and non-Agency security portfolios. 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. We upsized our committed MSR financing by $500 million during the quarter and renewed a $400 million residential whole loan facility incorporating a non-mark-to-market sub-limit. As of December 31, 2023, we have $3.6 billion in warehouse and 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. Additionally, 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. 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 31, 2022. That concludes our prepared remarks and we will now open the line for questions. Thank you, operator.

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question will come from Bose George with KBW. Please go ahead.

Bose George, Analyst

Hi, everyone, good morning. Just wanted to start with the question about the best place for allocating new capital. You seem to lean into credit a little more; just curious if we could see that continue in 2024?

David L. Finkelstein, CEO and Chief Investment Officer

Sure. Good morning, Bose. Yes, 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 the market share that Mike has captured in the Non-QM market has been impressive. We had our highest lock volume and purchase volume last quarter in a quarter where origination declines. So, we feel really good about it and would expect to increase capital toward that effort.

Bose George, Analyst

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?

David L. Finkelstein, CEO and Chief Investment Officer

Well, Agency has a better headline ROE, but you have to consider volatility and the overall capital allocation. It still makes sense on a risk-adjusted basis to continue to rotate further into both residential and MSR on a risk-adjusted basis.

Bose George, Analyst

Okay, great. Can I get an update on book value quarter-to-date?

David L. Finkelstein, CEO and Chief Investment Officer

Sure. 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.

Bose George, Analyst

Okay, great. Thanks.

David L. Finkelstein, CEO and Chief Investment Officer

You bet, Bose.

Operator, Operator

The next question will come from Crispin Love with Piper Sandler. Please go ahead.

Crispin Love, Analyst

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 over the last several months? So, 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?

David L. Finkelstein, CEO and Chief Investment Officer

Sure, Crispin. We'll let Srini fill that one.

V.S. Srinivasan, Head of Agency

Hi, Crispin. The kind of volume spread that 150 basis points over the blended treasury curve is materially tighter than the ones we saw in 2023. But the economic environment is also very different. David had mentioned that the Fed is most likely going to ease market policy in 2024; they're also going to taper quantitative tightening. Through the first three quarters of 2023, they shed over $200 billion in MBS, and in the fourth quarter of 2023, they reinvested all of their paydowns. Our base case here 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 we are pretty constructive on agency spreads. Absent a no-lag scenario where the Fed is forced to hike rates again, we do not expect MBS spreads to get back to the levels we saw in 2023. Overall, I believe MBS spreads will play towards the tighter range than they did in the last couple of years.

Crispin Love, Analyst

Great. Thank you for the color. And second question from 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 $0.65 quarterly dividend?

David L. Finkelstein, CEO and Chief Investment Officer

Sure, we did moderate those return estimates given the tightening that occurred later in the quarter. But, look, Crispin, we out-earned the dividend modestly in the fourth quarter. As it relates to the first quarter here, we do expect EAD to be consistent with the dividend, which we feel good about. At this time, 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.

Crispin Love, Analyst

Thanks, David. Appreciate you taking my questions.

David L. Finkelstein, CEO and Chief Investment Officer

Thank you, Crispin.

Operator, Operator

The next question will come from Doug Harter with UBS. Please go ahead.

Doug Harter, Analyst

Thanks. Can you talk about what the target leverage level would be going forward given your current mix of assets?

David L. Finkelstein, CEO and Chief Investment Officer

Sure. Look, obviously, our overall leverage is going to be a function of capital allocation and the decline in leverage is attributable to some extent to a lower weighting in Agency, but also the fact that we're still kind of living under the lion's paw as it relates to risk events in the market. So we're playing it conservatively. The good news is we're able to earn a good return with the current level of leverage. To summarize, we're comfortable with where we're at here. Our overall leverage will depend on reallocation into either residential or MSR, and we feel good about where we're at. We're not of the mindset to immediately increase leverage nor really take it down.

Doug Harter, Analyst

I guess just to follow-up on that David, what are the types of events or markers you're looking for that would cause you to feel comfortable taking leverage up? And how do you balance that with wanting to avoid leveraging less attractive assets?

David L. Finkelstein, CEO and Chief Investment Officer

Sure. Give us rate cuts, give us a tapering quantitative tightening, and give us stability around the world, and we will certainly raise leverage. At the end of the day, if you look at our spread shocks, 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. We are generating a more stable return with less leverage than what a mono-line agency firm would deliver and we feel very good about it. To the extent there are some real green shoots out there relating to volatility in the market, we can increase leverage if spreads are attractive. If we get a widening in spreads, we have ample liquidity and a balance sheet that allows leverage to organically increase without worrying about selling to manage our leverage. It's a really good position to be in right now, Doug. That could change if market conditions improve.

Doug Harter, Analyst

Thank you.

David L. Finkelstein, CEO and Chief Investment Officer

You bet, Doug.

Operator, Operator

Your next question will come from Jason Weaver with Jones Trading. Please go ahead.

Jason Weaver, Analyst

Hi, good morning. Thanks for taking my question. I'm just going to dovetail off Bose's question with a bit of refinement. I was wondering if you could ballpark the incremental ROE range for new deployment across both Agency and residential credit today?

David L. Finkelstein, CEO and Chief Investment Officer

Yes, I think we'll go around the room here. In Agency, we could achieve mid-teens returns, upper teens returns on specified pools, for example, moderate loan balance production coupon pools—depending on availability. Some scarcity exists, but you can achieve upper teens in those assets. Mike, do you want to provide a rundown on the residential front?

Mike Fania, Deputy Chief Investment Officer and Head of Residential Credit

Sure. Hi, Jason, this is Mike. In terms of securitization, the organic whole loan strategy would call that mid-teens using a modest amount of recourse leverage. Within the securities part of our portfolio, call CRT, we're probably looking at high-single-digits on two turns of leverage for below-investment-grade M2s. In terms of NPL, RPL, it's probably low-teens on three turns of leverage. So, the majority of our capital deployment within residential has been in the whole loan and OBX strategy given those returns.

Ken Adler, Head of Mortgage Servicing Rights

Hi, Jason, actually it's Ken. We can give you a little color on MSR as well. Yes, I mean the MSR margin is providing us with returns around 10% to 12%. Those returns are a little lower because we do not have material amounts of leverage on that strategy at this moment. We have the liquidity line and the ability to leverage that asset and drive those returns higher, but we manage that in the context of the entire portfolio; that return is additive to the overall target.

Mike Fania, Deputy Chief Investment Officer and Head of Residential Credit

And Jason, just to add to that on MSR, we're running that portfolio at four-tenths of a turn of leverage. Given the low note rate nature 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. Considering that benefit gets those returns into the teens.

Jason Weaver, Analyst

Alright. Thank you for that. That's actually very helpful. I know David, you said in your prepared remarks about the shift from treasury-based hedges over to SOPR swaps. Obviously, we've seen what's happened in swap spreads for the last 2.5 months since the end of November. Can you elaborate on that shift in strategy a little bit?

David L. Finkelstein, CEO and Chief Investment Officer

Yes, sure. So, both November and December month-ends, we did have a little pressure in financing markets, which suggests that balance sheet assets might be a little heavy. That led to the swap spread tightening we experienced. For example, in the very front end of the yield curve at the two-year level, the swap rate got to negative 21 basis points against treasury. We viewed this situation as temporary and made the decision to transition some of our two-year futures over to pay on swap. Since the end of the year, those swap spreads have improved from negative 20 basis points to negative 14 this morning, so it was a good trade. We still think swap spreads are on the tight side regarding the 10-year swaps at negative 36 basis points, that does look somewhat tight.

Jason Weaver, Analyst

That's helpful. Some of that is due to the last two months' $200 billion of issuance, but that's neither here nor there.

David L. Finkelstein, CEO and Chief Investment Officer

Yes.

Jason Weaver, Analyst

Alright. Thank you for that. Yes, I appreciate the time.

David L. Finkelstein, CEO and Chief Investment Officer

You bet.

Operator, Operator

The next question will come from Rick Shane with JPMorgan. Please go ahead.

Rick Shane, Analyst

Hi, good morning, everybody. 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, it appears that most of what was added was up in coupon 6s and 6.5s. I'm curious how you feel about adding premium securities at this point in the cycle, given that we could see significant bifurcation in the book and speeds could pick up in those coupons fairly quickly.

David L. Finkelstein, CEO and Chief Investment Officer

Let me pass it to Srini to talk about what we're doing with higher coupons.

V.S. Srinivasan, Head of Agency

Sure. We've highlighted this over the last few quarters. Our core strategy is to move up in coupon and specify both production. What we have done over the last two quarters is execute that strategy, given the sharp move in the coupon stack traded with a lot of volatility in the first quarter. This gave us an opportunity to move up in coupon at relatively attractive levels. Our pace of moving up in coupon is somewhat dictated by our ability to source high-quality specified rules at reasonable valuations. That's why the pace has moderated as we move up in coupon. However, we continue to like specified growth up in coupon. If you look at TBA, it's pricing in the loan size that new production is. The new production loan size has gone up almost $75,000 over the last year or so and is now running at around $450,000, so these pools are likely to have very steep S curves and a very poor convexity profile. The payoffs will compensate for one of the weakening we see in the TBA collateral.

David L. Finkelstein, CEO and Chief Investment Officer

One more point to note: if you look at the overall portfolio, the average dollar price is still $98 notwithstanding the rally we experienced in the fourth quarter. The most spread can be found in higher coupons. While we do take on more convexity risk, we try to mitigate that through specified pool selection. Ultimately, we get paid to manage convexity risk, and if you're heavily weighted in low dollar price securities, you won't generate the necessary spread. This informs our strategy.

Rick Shane, Analyst

Got it. It is as you make the point; one of the things that shifted is not just where you are in coupon, but also the percentage of generics, to your point, also went down. 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, 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 didn't want to take risk into year-end balance sheet contraction. Some of that was just run-off of the long-duration borrowings rolling down, but I'm also wondering if what we're seeing reflects a little more bullish positioning on rates with you shortening the funding as well.

David L. Finkelstein, CEO and Chief Investment Officer

Yes. To your first point about extending term in the third quarter, you are correct, and that reflects the roll-down. Another notable point about the repo market today—relative to a number of years ago—is that most of the liquidity is concentrated in the front end of the curve. To extract value in the repo market, we need to stay somewhat short. We had several good opportunities to establish long-term trades last year that we benefitted from. Moving forward, the term of the repo will likely remain relatively short because that’s where liquidity is. If the Fed eases, we can capture those lower rates. Hence, to an extent, that's part of the strategy as well.

Rick Shane, Analyst

Perfect. Okay. Thank you. Term was the phrase I was struggling to find at 6:30 in the morning; I apologize. Thank you.

David L. Finkelstein, CEO and Chief Investment Officer

We understand that.

Rick Shane, Analyst

Thanks, guys. Have a great day.

David L. Finkelstein, CEO and Chief Investment Officer

Thanks, Rick.

Operator, Operator

Our next question will come from Trevor Cranston with JMP Securities. Please go ahead.

Trevor Cranston, Analyst

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 talk a little about what kind of catalyst you'd be looking for and just generally your outlook on rates at the long end of the curve.

David L. Finkelstein, CEO and Chief Investment Officer

Yes. So, we've added duration organically a little since the end of the quarter just through higher rates, but what we're looking for are more persistent signs that inflation has moderated to a point where the Fed feels good about cutting rates. We think we’ll see that. If inflation prints for the next three months reflect what we've seen recently, the Fed will likely start easing around May, irrespective of economic outcomes. Once we see those signs, we’ll feel more comfortable increasing duration because real rates still look attractive. Ultimately, we believe the long end of the yield curve should settle inside of 4% and we're watching for signs of diminishing volatility, which would be beneficial to the portfolio.

Trevor Cranston, Analyst

Got it. Okay. That's helpful. In the last several days, there have been a lot of headlines coming out about NYCB in particular. Can you talk about how you think about the CRE market and if you see any sort of incremental risks coming out this year from banks potentially sitting on unrecognized CRE losses and how that would impact markets overall?

David L. Finkelstein, CEO and Chief Investment Officer

Certainly. One point to notice is we're glad that we sold our commercial platform a little over two years ago. We're also thankful we reduced our CMBX position last year to minimize securitized exposure. Currently, we own roughly $220 million of AAA CLOs, which are almost exclusively multifamily, so we have very little exposure there. As for the broader CRE market, we do believe there are some isolated risks. However, we think this particular episode will be contained. Other banks will have to work off some of those CRE loans. The larger banks are in good shape, but this will impact a lot of regional banks in the near term. We don't see it as a systemic issue, notwithstanding some volatility we’re observing in markets due to New York Community Bank's situation. Overall, we're thankful for our lack of exposure and think this will have muted market effects, but it does necessitate some adjustments at the bank level.

Trevor Cranston, Analyst

Okay. That's helpful. Thank you.

David L. Finkelstein, CEO and Chief Investment Officer

Thanks, Trevor.

Operator, Operator

The next question will come from Eric Hagen with BTIG. Please go ahead.

Eric Hagen, Analyst

Hey, thanks. Good morning. Just continuing on that topic of the regional banks. How do you feel like mortgage spreads and liquidity have responded to pressure there over the last week, and do you see that creating an opportunity to buy MSRs potentially? Also, what's your outlook for the supply of MSRs this year, and how aggressively do you expect to bid for bulk MSRs at different levels of interest rates?

David L. Finkelstein, CEO and Chief Investment Officer

Sure. I'll start off with just the overall mortgage market, and then Ken can elaborate on MSR specifically. There has been some volatility in spreads over the past week, and it does create opportunities; however, it's not the type of event that compels us to jump into the market. We reinvested runoff at better levels, but we're monitoring the situation rather than acting hastily. Ken?

Ken Adler, Head of Mortgage Servicing Rights

Yes. Over the last year, regional banks have been buyers of MSR, while some have sold their holdings. The names are available in the transfer data. On the margin, we believe this will reduce the number of buyers, particularly among those regional banks. It doesn't appear that large portfolio events are coming from distressed institutions. On the positive side, this will help our strategy since we are an opportunistic participant.

David L. Finkelstein, CEO and Chief Investment Officer

We'll also evaluate how banking regulation evolves and what impact that may have. Generally speaking, we're reasonably optimistic about our ability to source MSR in a less competitive environment.

Eric Hagen, Analyst

Alright. I appreciate it, guys. Thank you.

David L. Finkelstein, CEO and Chief Investment Officer

Thanks, Eric.

Operator, Operator

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.

David L. Finkelstein, CEO and Chief Investment Officer

Thanks, Chuck, and thank you everybody. Good luck, and we will talk to you in Spring.

Operator, Operator

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