Annaly Capital Management (NLY) Q4 2024 Earnings Call Transcript

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Annaly Capital Management (NYSE: NLY)
Q4 2024 Earnings Call
Jan 30, 2025, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and welcome to the Q4 2024 Annaly Capital Management earnings conference call. [Operator instructions] Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Sean Kensil, director of investor relations. Sir, please go ahead.

Sean Kensil -- Director, Investor Relations

Good morning, and welcome to the fourth-quarter 2024 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.

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Content referenced in today's call can be found in our fourth-quarter 2024 and investor presentation and fourth-quarter 2024 supplemental information, those 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.

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

David L. Finkelstein -- Chief Executive Officer and Chief Investment Officer

Thank you, Sean. Good morning, and thank you all for joining us on our fourth-quarter earnings call. Today, I'll briefly review the macro and market environment, along with our performance during the fourth quarter and the full year, and then I'll provide an update on each of our three businesses and then with our outlook for 2025. Serena will then discuss our financials, after which we'll open the call up to Q&A.

Now starting with the macro landscape. The U.S. economy continued to perform well in the fourth quarter, recording strong growth on the back of healthy consumption. Labor market strengthened in November and December, reducing concerns of a more meaningful slowdown.

Given the health of the economy and the consumers continued willingness to spend inflation remained elevated in Q4, though the most recent December data did show signs of improvement. During the quarter, interest rates moved contrary to market expectations from September when the onset of the Federal Reserve cuts was seen as supportive of rates markets. The yield curve subsequently bears steepened in Q4 with 10-year treasury yields rising nearly 80 basis points as a stronger economic growth and inflation data combined with increased attention to the long-term budget outlook led to a meaningful rise in term premium. An additional factor contributing to higher yields was the shift in tone from the Fed during the quarter as officials argued that after 100 basis points of cuts, the Fed funds rate is now less restrictive than during the summer and further downward adjustments will depend on incoming data and progress toward lower inflation.

In line with treasury yields, primary mortgage rates increased to nearly 7%, which reversed some of the pickup in housing demand when mortgage rates touched as low as 6% in late Q3. Available for sale housing supply continues to slowly increase with current levels of inventory, now only 25% lower than pre-pandemic averages. But despite these factors, home prices on a national level continue to increase modestly. Now against this backdrop, our portfolio generated an economic return of 1.3% for the fourth quarter with all 3 businesses contributing positive returns.

In Annaly's full-year 2024 economic return of 11.9% underscores the strength and diversity of our housing finance portfolio in light of volatile fixed income markets. Economic leverage decreased to 5.5 turns in the quarter, driven by increased capital deployment within our lower levered credit and MSR businesses including positioning the portfolio for $385 million in market value of MSR that is anticipated to settle in Q1. Despite our lower economic leverage, earnings available for distribution rose $0.06 to $0.72 in the quarter, led by lower financing costs given the commencement of the Fed cutting cycle as well as the steepening of the yield curve. Lastly, we raised over $400 million of accretive common equity through our ATM in Q4, bringing the total capital raised in 2024 to $1.6 billion.

Now turning to our investment strategies and beginning with agency. The portfolio ended the year roughly $71 billion in market value with $7.4 billion of dedicated equity, representing 59% of the firm's capital. We continue to migrate up in coupon in the quarter by primarily rotating into 6 and 6.5, modestly increasing our weighted average coupon of 5%. Our allocation to TBAs remain minimal, given elevated implied roll financing rates that prevailed in Q4 and a preference for better convexity with specified pools.

Now Agency MBS began the quarter on weaker footing with spreads widening in late October as markets higher rates and increased volatility leading up to the election, spreads reverse course postelection and tightened as Agency MBS participated in a positive risk sentiment displayed across fixed income and equities. MBS spreads on average ended the quarter a couple of basis points wider, but performance varied significantly across the coupon stack. Five and a halves and higher outperformed, while intermediate coupons, the primary outperformers in the third quarter widened by half a point. Accordingly, our portfolio benefited in Q4 from our ongoing up in coupon allocation as approximately 50% of our holdings are five and a halves and higher.

Now as it relates to our hedging strategy, the portfolio's duration extension was proactively managed by increasing hedges at the long end of the yield curve predominantly through treasury futures. The hedge position remains skewed toward the long end, where we anticipate a greater risk of yields moving higher, while the front end appears to be more anchored at current levels. Those interest rate volatility has remained elevated. We plan to maintain a conservative hedge profile while preserving a mix of swap and treasury hedges across various points on the yield curve, leveraging the advantages of a diversified and liquid hedge portfolio.

It's worth noting that Agency MBS proved much more resilient during the fourth quarter than other recent periods increases in rates, and this dynamic was driven by lower supply and increased demand for MBS as the reduction in financing rates improved MBS carry. And the combination of better technicals, coupled with an ongoing cutting cycle should support a narrower range of MBS spreads going forward, which remain attractive. Now moving to residential credit. The portfolio ended the year at $7 billion in economic market value with $2.7 billion of dedicated equity representing 22% of the firm's capital.

The portfolio grew approximately $500 million quarter over quarter as we continue to prioritize our organic strategy increasing our whole loan and retained OBX assets by $730 million while decreasing our allocation of third-party securities given relatively tight credit spreads. Market conditions for securitization sponsors remain favorable in Q4 as we recorded our tightest AAA spread of the year in our last deal with 2024 at 115 basis points over treasuries. We closed on four securitizations totaling $2.3 billion in Q4, bringing our cumulative issuance on the year to 21 transactions totaling $11 billion, which created $1.1 billion of proprietary assets for Annaly in 2024. Our securitization volume continues to be driven by growth in our conduit as we settled $3.9 billion through the channel, a 32% increase quarter over quarter, and strong momentum within our lock volumes also continued as we process $5.4 billion locks on the quarter, a 24% increase over Q3.

On the year, we closed $11.7 billion of residential whole loans through the correspondent channel with total loan acquisitions of $13 billion. Our locked pipeline remained robust at year end as we had $2.3 billion of high credit loans in the pipeline with a weighted average FICO of 757 and a CLTV of 68%. As our whole loan production continues to increase, credit discipline remains a top priority as evidenced by the shelf continuing to report the lowest delinquencies out of the top 10 largest non-QM issuers. Onslow-based positioning in the market as an industry-leading non-agency correspondent and one of the largest, most liquid residential credit securitization sponsors should allow us to continue to manufacture high-quality assets with double-digit ROEs despite tighter credit spreads.

Now turning to the MSR business. Our portfolio ended the fourth quarter at $3.3 billion in market value, including unsettled commitments, which is a roughly 25% increase year over year. MSR ended the year representing 19% of the firm's capital with $2.5 billion of dedicated equity. During the quarter, we committed to purchase nearly $425 million in market value with a $28 billion principal balance and a weighted average coupon of 3.67%.

We onboarded $58 billion UPB of MSR throughout the year, ending 2024 as the third largest buyer of conforming MSR in the market. While supply declined by nearly 40% in Q4, we anticipate that MSR bulk activity will stay elevated relative to historical levels as the origination market remains challenged with high mortgage rates, tepid origination volumes and compressed gain on sale margins. The valuation on our MSR portfolio increased 3% to a 5.7 multiple on the quarter, resulting from the rise in mortgage rates, a steeper yield curve and modestly tighter spreads. Fundamental performance within the MSR portfolio continues to outperform our expectations with actual realized prepayment speeds and delinquencies lower than initially modeled, while the competition for deposits and resulting flow income has been higher than anticipated.

Portfolio paid 3.7 CPR in the quarter, with current serious delinquencies approximately 50 basis points. And with a weighted average note rate of 3.2%, our portfolio's cash flows should remain durable. While we continue to find lower coupon MSR more attractive in the current environment, the expansion of our flow business and our leading recapture relationships provide us the optionality to invest across both current coupon as well as low note rate MSR. Now to conclude with our outlook, we believe each of our three strategies is well-positioned heading into the new year.

Agency MBS continues to exhibit attractive spreads on both an absolute and relative basis to competing asset classes further supported by a better balanced supply and demand picture and improved carry. Our residential credit business is a clear market leader with strong momentum for continued growth after another year of record loan production and securitization volume. We expect the non-QM origination market to grow in 2025 with Onslow Bay well-positioned to further expand our market share and capabilities. Within MSR, our deep capital base, low leverage and partnerships with originators and servicers all support further growth of the portfolio.

We expect the Annaly platform to continue to outperform in the current operating environment as our diversified strategies, conservative leverage and ample liquidity are key differentiators. Now lastly, before I turn it over to Serena, I wanted to congratulate Mike Fania on being named co-chief investment officer. Over the past two years, as deputy CIO, Mike has played a critical role in our portfolio management committee oversees all three of our investment strategies. I look forward to continuing to work closely with Mike and our other investment leaders to manage our portfolios and further our leadership across all aspects of housing finance.

Now with that, I'll hand it over to Serena to talk about the financials.

Serena Wolfe -- Chief Financial Officer

Thank you, David. Today, I will provide brief financial highlights for the fourth quarter and select full-year measures for the period ended December 31, 2024. 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 December 31, 2024, our book value per share decreased 2% from $19.54 in the prior quarter to $19.15.

After accounting for our dividend of $0.65, we achieved an economic return of 1.3% for Q4, and we were pleased to generate an economic return of 11.9% for the full-year 2024. Our portfolio strategy delivered sound results despite higher interest rate volatility and a rate sell off. For the quarter, we incurred losses on our Agency MBS portfolio of $4.14 per share and on our resi credit portfolio of $0.26 per share. However, our hedge position gains of $3.74 as well as $0.21 in gains from our MSR portfolio, nearly offset Agency and resi declines.

Earnings available for distribution per share increased significantly to $0.72 and exceeded our dividend for the quarter due to lower borrowing costs as our average repo rate decreased 57 basis points to 4.3%. Additionally, coupon income increased on higher average agency investment balances and our continued rotation up in coupons. The resi credit business contributed additional income due to the platform's continued growth as the debt securitized $2.3 billion in assets, sourced through the Olivet corresponding channel during the quarter. Lower net interest income on swaps partially offset these increases, which declined due to lower average net rates given the decrease in SOFR during the quarter.

Average asset yields ex PAA increased modestly 1 basis point to 5.26% in Q4. However, the 57-basis-point decline in average repo rates that I mentioned earlier, partially offset by lower swap income and higher securitized debt expense from the four securitizations that closed during the quarter helped fuel a 14-basis-point decline in our economic cost of funds. Based on these factors, and as we had messaged in Q3 and our recent Investor Day, we saw improvement in both NIM and MIS. Our net interest spread ex PAA improved by 15 basis points to 1.47% and our net interest margin ex PAA, improved by 19 basis points to 1.71%.

Our financing strategy continues to be guided by strong market demand for our agency and non-agency security portfolios. Accordingly, we have maintained a consistent repo strategy, positioning the book around Fed meeting dates as term premium in the agency repo market remains somewhat elevated. As a result, our Q4 reported weighted average repo days were 32 days, down two days compared to Q3. Moreover, we have maintained our disciplined approach to diversifying our funding options in our credit businesses.

During Q4, we added $300 million and $150 million in warehouse capacity for MSR and residential credit, respectively, which brings our total warehouse capacity across both businesses to $5.2 billion, with a utilization rate of 41% as of December 31. Post quarter end, we upsized an existing MSR warehouse facility by $250 million, adding to our substantial availability. Annaly's financial strength is further evident in our unencumbered assets, which ended the fourth quarter at $5.8 billion, including cash and unencumbered Agency MBS of $3.9 billion. In addition, we have approximately $1.1 billion in fair value of MSR that has been pledged to committed warehouse facilities, but remains undrawn and can be quickly converted to cash, subject to market advance rates.

Together, we have approximately $6.9 billion in assets available for financing, down approximately $500 million compared to the third quarter, though up approximately $700 million year over year. Finally, turning to expenses. Our efficiency ratios improved during the quarter due to flat G&A costs and higher average equity balances. This resulted in our opex to equity ratio decreasing 9 basis points to 1.39% for the quarter.

On a full-year basis, our opex to equity ratio remains in line with historical levels at 1.44%. Now that concludes our prepared remarks. We will now open the line for questions. Thank you, operator.

Questions & Answers:

Operator

[Operator instructions] Our first question today comes from Bose George from KBW. Please go ahead with your question.

Bose George -- Analyst

Hey, everyone. Good morning. Actually, I wanted to first ask about the stronger earnings power this quarter. That $0.72 EAD looks like it equates to around a 15% net ROE.

Would you characterize this level of EAD in line with the current normalized economic return of your portfolio?

David L. Finkelstein -- Chief Executive Officer and Chief Investment Officer

Generally, Bose, over the course of the quarter, we didn't really see much of a change in spreads, and you could see agency at 15% to 17%, probably at the higher end of that. With expenses, which are now lower given the equity raise, that's reasonably contextual. In terms of run rate, we don't have longer-term guidance, but for the first quarter, we feel like earnings with all we know today will be contextual with where we are at in Q4.

Bose George -- Analyst

OK. Great. Then just in terms of an update on the dividend, just given the run rate of earnings, I guess it's fair to say the dividend looks well-covered?

David L. Finkelstein -- Chief Executive Officer and Chief Investment Officer

Yes. I think we feel that for 2025, the dividend certainly feels safe and it's obviously a conversation we have every quarter with our board. As we evaluate the dividend, we always look for durability. We don't take those decisions lightly.

We go through a thorough evaluation, we feel good about where things are at. Our outlook is optimistic that we'll be able to maintain this run rate.

Bose George -- Analyst

Great. Thank you.

Operator

Our next question comes from Rick Shane from J.P. Morgan. Please go ahead with your question.

Rick Shane -- Analyst

Good morning. Thanks for taking my question. Look, obviously, investment in MSR is a really important part of the strategy. One of the things that you've noted over the last couple of quarters is a migration from sort of low coupon to hire sort of on the run MSR.

The competitive dynamics in that space are changing pretty significantly as you've got a lot of originators focused on recapture. We're now looking potentially at a expectations for lower origination volumes in '25 versus what we were looking for even three or four months ago. Curious how that's impacting the competitive landscape and if that sort of shifts your view at all in terms of that opportunity in the short term.

Ken Adler -- Head of Mortgage Servicing Rights

Thanks for the question. This is Ken. Look, we're actually super excited about the opportunity because as there is lower volume, there's also lower profitability within the mortgage industry. These lenders are less able to retain MSR.

While there might be less MSR created industrywide, there's also less industry that is retained by those lenders originating it. They really are in need to kind of monetize that MSR very quickly as those loans are originated in a way that hasn't been the case in the last few years. We're super excited to set up for that opportunity. As we continually mentioned, we are the strategic partner to the lending world.

Yes, we're out there growing our network of partners that will need this execution.

David L. Finkelstein -- Chief Executive Officer and Chief Investment Officer

Yes. Rick, I'll just add. That's how we set up the business to be a capital partner for the origination community. While bulk volumes, as I mentioned, have slowed down, there is still ample amounts of MSR on originator balance sheets, and we're here to provide liquidity.

Rick Shane -- Analyst

Got it. Guys, that's a really helpful answer. In some ways, not in some ways, but you guys answered that question from a supply perspective. Ken, it's really great context, and it's a good reminder.

I guess what I would say is that totally makes sense, but also it does feel like the demand side has picked up a lot as well. Is the supply opportunity offsetting that demand increase?

David L. Finkelstein -- Chief Executive Officer and Chief Investment Officer

Yes. Look, the assets performed well. There's a lot of capital that there is capital that's flowed in the space. The advantage we have is we're just a reliable source of partner a reliable source of capital, and we are this great partner.

It's not just bond trading. It's really establishing this network of relationships and kind of being there on a regular basis. We do notice most of the lenders are operationally constrained and they really do limit themselves to one, two, or three partners, and we just show very well given how much capital we have and how kind of reliable we can be as an execution.

Rick Shane -- Analyst

Got it. I really appreciate it. Thank you, guys.

Operator

Our next question comes from Jason Stewart from Janney Montgomery Scott. Please go ahead with your question.

Jason Stewart -- Janney Montgomery Scott -- Analyst

Hey. Thanks for taking the question. On GSE reform and the expanded credit market, maybe you can give us some thoughts on how you see that progressing and what opportunities you see emerging as we go down that path.

David L. Finkelstein -- Chief Executive Officer and Chief Investment Officer

Yes. It's a good question. There's obviously been a lot of talk about the GSEs as of late, Jason. Look, our view is that the hurdles for meaningful transformation of the GSEs are quite high.

There is still the matter of the liquidation preference whereby treasuries of $334 billion, which we don't see being going away, certainly in so far as a towed to the taxpayer. In addition, you do have an ROE constraint among the GSEs. It's hard with the capital requirements that are prescribed for the GSEs to raise capital at current ROEs. Also, there is a considerable amount of industry pushback, with respect to the model and what could happen.

It's not just the industry. It's a lot of policymakers as well. I think the way we look at the GSEs is it's an incredibly effective mechanism to provide housing finance. If you think about it, private capital takes rate convexity and credit risk, the GSEs and originators do a very effective job of intermediating that risk and the government provides catastrophic risk, which works very well.

Government just prices that risk much more commonly than private markets. We're certainly hopeful that, that's well-recognized and we're having every conversation you could have to make sure that everybody understands the criticality of the GSEs and the association with the government. But we're watching it closely, and we're eyes wide open. With respect to opportunities in credit, and that is the silver lining with respect to changes with this administration.

At a minimum, we do feel like the footprint of the GSEs will be somewhat reduced going forward. If you think about it, roughly 20% of what the GSEs guarantee is what's considered non-core. For example, loans on second homes, investor properties, higher loan balance loans and cash out refis, you could see higher LLPAs on those types of products, which opens the door for private capital. Mike and his business is perfectly set up to provide that liquidity.

If you think about the growth of the residential securitization market, I think it was $140 billion last year. There continues to be strong demand for residential credit, and I think the market would welcome a reduction in the footprint because private capital is right here.

Jason Stewart -- Janney Montgomery Scott -- Analyst

Great. That's helpful. Mike, congratulations on the new role, well deserved. Then just a quick follow-up in case I missed it.

I didn't hear a book value update if it was given, I apologize.

David L. Finkelstein -- Chief Executive Officer and Chief Investment Officer

No, we didn't, actually. Heading into the week as of weekend, we were up just a fraction of a percent, pre-dividend accrual with the dividend, call it, a little over percent. There's been a little bit of improvement this week. As of last night, all in, a little over 2%.

Jason Stewart -- Janney Montgomery Scott -- Analyst

Great. Thanks a lot.

Operator

Our next question comes from Doug Harter from UBS. Please go ahead with your question.

Douglas Harter -- Analyst

Thanks. I was hoping you could talk about the outlook you have for of your businesses and kind of how you think about the cost of volatility in that and then kind of in that construct, kind of how you're thinking about the outlook for volatility this year?

David L. Finkelstein -- Chief Executive Officer and Chief Investment Officer

Sure. I missed the first part of your question. You just said the outlook for return.

Douglas Harter -- Analyst

Return. Yes. Sorry, just the return ranges that you give, whether that includes kind of your estimate of the cost of volatility or if that could be a drag on those returns?

David L. Finkelstein -- Chief Executive Officer and Chief Investment Officer

Well, with respect to Agency, what I'll say is volatility does erode those returns to some extent. That's the nominal return on Agency MBS. And our objective is to manage the portfolio in a way that extracts the vast majority of that nominal spread and minimize our hedging costs, which I think we've done a very effective job in. But to the extent volatility materializes, then there is always a cost associated with that.

In resi and MSR, given residential credit, there is negative convexity in a lot of the securities, but it's not meaningful. I wouldn't characterize it as material at all. Then our MSR portfolio is certainly subject to some level of volatility. But when you consider the note rate of 3.2% that volatility is quite minimal associated with that.

To sum it up, yes, if volatility picks up, agency, you don't extract that entire amount of return, but I think we've done as good a job at any managing the hedge position and dynamically hedging the portfolio to get the most of that return. Then part of the benefit of having a diversified model is you can rely on resi and our MSR portfolio, to buffer a lot of that. It enables us because really, you're only talking about 60% of your portfolio roughly of your capital being subjected to that volatility. It enables us to sit on our hands a little bit more when a market is oscillating and not have to be as reactive.

I think if you look at the last couple of years, of our returns, that really shows up in the economic return, 12% last year, 6% the prior year. We're pretty happy with how it's performed.

Douglas Harter -- Analyst

Great. I guess just then how do you think about the outlook for volatility this year?

David L. Finkelstein -- Chief Executive Officer and Chief Investment Officer

There's a couple of components to that question. First of all, is rate volatility. Then the second is spread volatility. As it relates to rate volatility, some of that is uncertain.

But what we've seen as of late, has been somewhat encouraging in terms of vol. We think we're in somewhat of a range-bound market, the long end of the yield curve is going to stay elevated for reasons that everybody understands with respect to deficits and debt. It's a little bit fragile, but with real yields, 10-year part of the curve north of 2%. We feel like it's reasonably well priced.

Then the front end, with the two-year note at 420 just sitting right below where short-term rates are, we feel like it's somewhat anchored. We do think the curve could steepen a little bit more. But generally, we think the outlook for rate volatility is better today than it has been in the past couple of years. As it relates to spread volatility, and that's something that's a really important point as it relates to the agency business.

What we've seen over the recent past is much lower spread volatility in the agency market. The agency market is healing well from volatility in 2022 and 2023. We've gone from 4 basis points a day of spread volatility to today, it's less than 1 basis point, which is quite encouraging. We feel like spread volatility is contained and it gives us a lot of comfort in investing in the agency market.

A lot of that has to do with the fact that the market and the agency market is just a much better balance today from a technical standpoint. You have much broader participation banks are back involved. Money managers are taking in a lot of AUMs. REITs are growing a little bit and supply is relatively light, that's still running off the portfolio, but that's reasonably predictable.

We feel like the market is in good balance and when spreads widen, we see demand come in. We feel generally good about it.

Douglas Harter -- Analyst

Great. Appreciate it. Thank you.

Operator

Our next question comes from Matthew Erdner from JonesTrading. Please go ahead with your question.

Matthew Erdner -- JonesTrading -- Analyst

Hey. Good morning, guys. Thanks for taking the question. Turning to non-agency, with the expected growth to kind of be 20% year over year there, how do you guys keep and grow your market share with increased competition in the space? Then as a follow-up to that, with second liens and HELOCs, how big of a player do you guys want to be when it comes to those kind of products?

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

Sure. Thanks, Matt. This is Mike. I appreciate the question.

I think in terms of our current market share and where we're at, we did $13 billion of loans that we closed on throughout 2024. If you look at our correspondent channel, it was $11.7 billion. We think total origination is probably, call it, $75 billion to $80 billion. A lot of the industry publications they undercount non-QM DSCR origination.

But we think that we have a fairly consistent market share I would say that we've addressed this on previous calls in terms of the competitive landscape. I think what we provide our correspondence is a certainty of execution and stable capital, right? We're in the market since April of 2021 with a stable rate sheet, consistent pricing, and that's from the stability of our capital. A lot of our peers is private equity. There's periods of times where they have to fund raise.

They have to back out their pricing, and they're not providing that certainty of execution. I think the infrastructure that we put together, the architecture that we put in place it's led us to have a competitive advantage virtually across the majority of the market. I'd also say that we are providing a light-up service. We have a fully staffed scenario desk.

We respond to exceptions. We make common sense exceptions and our speed to funding, we think, is an industry standard. I think we're in a good position to keep our market share, potentially grow our market share. When we look at what's growing within the non-QM and DSCR market, a lot of it is the large nonbanks.

The large nonbanks have kind of doubled down their efforts on the product. They like the margins that they're getting within non-QM. The margins are higher than the agency business. and our share with these large non-banks, it is higher than our peers.

They don't necessarily want to have five, six, seven investors. They usually only have two to three investors. Given the stability of our capital and our pricing, we're one of those investors. I think we're as well-positioned as what we could be.

Turning to the HELOC and closed end second liens. We do believe that we're going to have a HELOC transaction, in Q1. We have over $200 million of drawn balances on HELOCs that is closed funded. That's something that we are looking and we're going to evaluate market conditions on.

Closed-end seconds is an incredibly competitive market. I would say that the pricing that we see within that market leads us to believe where the prepay speeds, the longer-term prepay speeds I think we're fading some of the market pricing and the market assumptions. But we price both of those products through our correspondent channel. We are getting some supply.

But I'll say of what we're ultimately getting through the correspondent is first lien non-QM DSCR, and that's going to continue to be the case in the near future.

Matthew Erdner -- JonesTrading -- Analyst

Got it. That's very helpful. Thank you.

Operator

Our next question comes from Eric Hagen from BTIG. Please go ahead with your question.

Eric Hagen -- Analyst

Hey. Thanks. Good morning. Maybe just building off some of these previous questions.

Do you have perspectives on the level of mortgage spreads and how you're managing leverage from the context that we have with this near-term outlook for a huge supply of treasury issuance, and that having any impact on where along the yield curve you might add incremental hedges going forward?

David L. Finkelstein -- Chief Executive Officer and Chief Investment Officer

Yes. Look, as I said, we've been very happy with how range-bound spreads have been. There is room for tightening, but that will be driven by ball coming down, if it is to do so and also a pickup in bank demand as deposits grow. Generally, we think spreads are fair to inexpensive right here.

There's some room for tightening, but we don't expect a lot. As it relates to treasury supply and hedges, look, we're keeping our hedges at the long end of the yield curve, consistent. There is fragility out there. We expect $2 trillion or thereabouts in net treasury issuance and that has to be absorbed.

Term premium has increased a lot in the treasury market. The market is well priced for it, but there could be an increase in rates, and we're going to maintain discipline as it relates to the hedge profile.

Eric Hagen -- Analyst

Yes. Gotcha. All right. With Annaly being the largest mortgage REIT in the space, do you guys use your stock valuation as sort of a proxy or a benchmark of any kind for like the level of MBS demand? How do you treat the opportunity to maybe grow from here? When you think about the macro drivers for MBS and where the sources of demand might come from and how you kind of retrace that back to your own stock valuation.

David L. Finkelstein -- Chief Executive Officer and Chief Investment Officer

Well, look, we think our valuation is a function of a number of factors. First of all, the economic return that we generate our EAD, which we've obviously just exhibited acceleration in our low leverage and the health and liquidity of our balance sheet and the stability of the model. That's the key to valuation of the company, all of which I think we hit on all cylinders. As it relates to being a proxy for the broader MBS market.

Look, it's a massive market, a $7-odd trillion market, you have many large players, and we happen to be one of them. It's the collective demand from all sources of capital, whether it be REITs, banks, money managers, I think it's the movement of all of those participants that drive the valuation. Right now, it feels as though demand is widespread, but spreads are elevated. They're going to stay elevated.

We think, for the foreseeable future with some, again, room for some tightening, the back half of your question, I'm sorry, Eric.

Eric Hagen -- Analyst

No, I think you got it. I mean that was really helpful. I appreciate you, guys.

Operator

Our next question comes from Harsh Hemnani from Green Street. Please go ahead with your question.

Harsh Hemnani -- Green Street Advisors -- Analyst

Thank you. We spoke a little bit about the competitive landscape and residential credit. Maybe one more thing that I wanted to touch on there is what's your outlook on sort of the difference between whole loan spreads and the spreads on private label monetization. You mentioned that securitizations have tightened quite a bit, especially at the end of last year.

But at the same time, we've sort of seen competition on the whole loan side coming not just from private equity firms, but also insurance companies and asset managers. That's the demand side on that front, but it seems like there might also be some more private label whole loan supply because of lower footprint on the GSEs. When you sort of put that all together, what's your outlook on the difference between the whole loan spreads where you acquired these and where you can securitize these?

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

Sure, Harsh. Thanks for the question. I would say that the whole loan market is incredibly efficient in terms of when securitization spreads tighten as what we've seen. Whole loan spreads also will subsequently tighten.

We've issued 20 securitizations since the beginning of 2024. The spreads at which we issued those AAA securities, it's been incredibly stable. It's been the 115 basis points over last deal of 2024 to 145 basis points. So we've issued within a 30-basis-point range.

But when you do see that execution move up and down, you do see corresponding changes to your whole loan spreads. I think that the majority of the competition that we face is still private equity, it is other REITs. It's asset managers. We think that 60% to 65% of the production of non-QM DSCR ultimately goes to entities like ourselves.

Given the stability that we've seen within spreads, it's allowed us to grow the platform. There is a lot of commentary on insurance companies. This has been the commentary that we've heard over the past number of years. The reality is, yes, they are an active participant, but in terms of their size and their scale, we don't think that they drive the market.

If you look at the end of 2023 insurance companies, and this is SNL filings, it's all public, insurance companies had $88 billion of residential whole loans on their balance sheet. If you look at Q2 of 2024, so through the first half of 2024, the number was $93 billion. The insurance companies only increased their residential holdings by $5 billion over that six-month period. That also includes jumbo loans, non-QM DSCR loans and RPL loans.

Certainly, they are a competitor in terms of how they buy, they don't really buy through correspondent. They're not willing to put out the infrastructure and the architecture that we have. We now have 260 plus correspondents. We certainly need to be reactive to market conditions, and we understand where they come out in terms of where they're buying.

But I think we feel very good in terms of where we're positioned. We also do sell loans and insurance companies are one of the take outs in terms of our capital markets distribution. So we think that they're actually accretive and provide liquidity to the market.

Harsh Hemnani -- Green Street Advisors -- Analyst

OK. Got it. That's helpful commentary. Then maybe on the relative value of your three business strategies, it sounded like at the end of the third quarter, you were maybe viewing Agency MBS as more attractive relative to credit and MSRs.

But the allocation over the quarter to agency MBS came down a little bit. Could you maybe touch on what's driving that decision through the quarter and how it might progress going forward?

David L. Finkelstein -- Chief Executive Officer and Chief Investment Officer

Yes. We did allocate capital at year end to agency. Mike was going into the market right at the first day of the year, with the resi transaction. We held a lot of loans unencumbered on our balance sheet, which took some of the capital.

Also to note, as we onboard MSR purchase last quarter, this quarter, you'll actually see all else equal, a further decrease in capital allocated to agency. There will be some leverage put on the MSR, but generally, it should be in the mid- to upper 50s. But look, we would the marginal dollar would go to Agency MBS. We did add a fair amount of agency in the third quarter with capital raised.

To the extent that we have run off or other forms of capital, agencies where the marginal dollar goes for the reasons I mentioned earlier.

Harsh Hemnani -- Green Street Advisors -- Analyst

OK. Thank you.

Operator

Our final question today comes from Trevor Cranston from Citizens JMP. Please go ahead with your question.

Trevor Cranston -- Analyst

Hey. Thanks. Good morning. Another question on the MSR portfolio.

Can you talk a little bit about the profile of bulk packages you guys are seeing in the market today, particularly in terms of like what kind of note rates you're seeing? How do you expect that to look as more packages come out in '25 relative to the super low note rate of the existing portfolio.

Ken Adler -- Head of Mortgage Servicing Rights

Yes, sure. Thanks for the question. This is Ken. Yes.

The vast majority of bulk packages are lower note rate relative to current coupon. They're being sold because mortgage lenders need liquidity and they prefer to sell to customers that are less likely to be active refinance candidates for them in the future. The low note rate MSR, it has actually a higher price because of the prepayment profile and it's also less invaluable as a customer and a future revenue opportunity for a mortgage lender. That's really what folks look to sell first.

Then the overall theme that's going on, is more lenders are holding less MSR overall. When we do see a higher note rate packages, they're often much smaller in size because it's the last one, two, or three months origination. It's not quite flow. But we would use the term like mini bulk or something like that.

David L. Finkelstein -- Chief Executive Officer and Chief Investment Officer

Yes. Trevor, another point to note is that the average note rate of the overall universe is still quite low and a lot of the MSR associated with remains on the balance sheets of originators and banks, and that's likely the type of note rate that would come out with some mixing in a more current note rate MSR.

Trevor Cranston -- Analyst

Right. That makes sense. Thank you.

Operator

At this time, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to David Finkelstein for any closing remarks.

David L. Finkelstein -- Chief Executive Officer and Chief Investment Officer

Thank you, Jamie, and thank you, everybody, for taking the time today, and we will speak with you soon.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Sean Kensil -- Director, Investor Relations

David L. Finkelstein -- Chief Executive Officer and Chief Investment Officer

Serena Wolfe -- Chief Financial Officer

Bose George -- Analyst

David Finkelstein -- Chief Executive Officer and Chief Investment Officer

Rick Shane -- Analyst

Ken Adler -- Head of Mortgage Servicing Rights

Jason Stewart -- Janney Montgomery Scott -- Analyst

Douglas Harter -- Analyst

Doug Harter -- Analyst

Matthew Erdner -- JonesTrading -- Analyst

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

Eric Hagen -- Analyst

Harsh Hemnani -- Green Street Advisors -- Analyst

Trevor Cranston -- Analyst

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