Annaly Capital Management Inc (NLY) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Fourth Quarter 2017 Annaly Capital Management Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded.

With that, I'd like to turn the conference over to Jessica LaScala of Investor Relations. Please go ahead.

Good morning, and welcome to the fourth quarter 2017 earnings call for Annaly Capital Management Inc. Any forward-looking statements made during today's call are subject to 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 forward-looking statements 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 of the earnings call. 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. Please also note that this event is being recorded.

Participants on this morning's call include Kevin Keyes, Chairman, Chief Executive Officer and President; David Finkelstein, Chief Investment Officer; Glenn Votek, Chief Financial Officer; Tim Coffey, Chief Credit Officer; and Michael Quinn, Head of Commercial Investments.

I'll now turn the conference over to Kevin.

Good morning, everyone. On our last earnings call in November, I ended my introductory comments by saying something has got to give. I was referring to the unsustainable excessive valuations and record low levels of volatility in the broader markets at the time. Now that some chaos has begun to surface, the market has seemingly rediscovered these same indicators, I was talking about a couple of months ago, for first time in years. The VIX sharp ratios and various valuation methodologies of risk versus lower risk assets have now been discussed daily and ad nauseam. So rather than focusing on the causes and measurements of this sudden activity, I prefer to take a more in-depth look into the meaning, impact and opportunities this new bull market of volatility presents for Annaly.

The recent shocks clearly highlight the relative valuation discrepancies of asset classes and structures in almost every market, which is a healthy occurrence. For instance, the return of volatility not only quickly depreciated the value of high-priced equities, the highest risk asset class, but more importantly for Annaly, the fundamental shift has begun to reverse the long-term credit curve flattening that had occurred between most lower and higher risk fixed income asset classes. Although you'd never know it reading the mainstream press or even most fixed income research, volatility in the equity markets has spilled over into the credit markets, which have yet to bounce back to the same extent as equities. In fact, the effective yield on high-yield bonds has increased by nearly 100 basis points since October to a 14-month high. With half of that increase coming in the last month alone. Additionally, CDS on noninvestment-grade credit closed last Thursday at its widest level since December of 2016. It's also significant to note that the underperformance of higher risk assets and the subordinated debt instruments in the capital stack has persisted across the CMBS, CRT and ABS markets. The volatility in risk assets has in part been triggered by rising interest rates as long-end rates over 50 basis points higher year-to-date, steepening the 2s, 10s treasury yield curve nearly 40% in a matter of a month, a development we welcome. Agency MBS has not been immune from the volatility. However, ahead of this sell-off, we opportunistically raised capital in the fourth quarter, and again, in the second week of January, increased our hedges and lowered leverage to mitigate the impact to our book value. We entered this higher rate environment with a much healthier convexity backdrop for Agency MBS than the last time we saw such a risk off move in both the rates and credit markets. And our current team is significantly more effective in hedging the risk mortgage investors face today than before. We've anticipated and talked about momentum investing, a catalyst for much of the run-up in asset prices over the last few years not lasting indefinitely. This conservatism is a primary reason we have been increasing our liquidity profile, adding origination partners and optionality across our 4 businesses and enhancing our financing and hedging instruments to best prepare us for more volatile and challenging marketplace. The combined effect of these initiatives has been our ability to demonstrate core earnings of $0.29 to $0.31 over the last 2 years, despite the fed hiking the target rate 5x over the same period. In fact, Annaly's fourth quarter 2017 core ROE of 10.7% represents a larger premium versus the spread on a high-yield index today than it did before the first fed hike. A comparative level of 760 basis points versus 550 basis points in December 2015, signaling that our return is not contracted nearly as much as other yield-oriented alternatives. What also needs to be measured during these times of upheaval in addition to relative valuations is how the relative liquidity and structure of certain vehicles factors into performance. Passive ownership of the equity in high-yield universe through the less liquid exchange traded and risk parity funds contributed to the sharp and convergent selling of these asset classes, resulting in record outflows last week. Annaly by contrast has strong institutional sponsorship, superior trading liquidity and our beta of 0.5 is lower than every single industry sector in the S&P 500, helping to shield our shareholders from the volatility of the broader marketplace. Also Annaly's average daily trading volume is currently 18x the median mortgage REIT, 9x the median yield stock, of which we've measured about 400 of them and a 100x that of an equity ETF, of which there are 1,473 in the U.S., each with a median market cap of only $108 million. Our high trading liquidity and low relative beta have now -- have been undervalued for the past couple of years in the commerce market since 1928. But now with the VIXs, last week, touching a level of 4x its recent historical average, investors seeking stability and attractive risk-adjusted returns should more easily recognize the value of a liquid high-margin low beta vehicle, which owns underlying assets predominantly traded in the second most active market in the world.

As I first stated years ago, one of our overriding mantras here is that volatility equals opportunity. The first quarter of 2018 is shaping up much like the first quarter of 2016, when the decline in oil prices triggered to sell off across the higher risk equity in credit markets, creating the opportunity for us to make the $1.5 billion acquisition of Hatteras Financial, amidst similar market -- volatile market conditions. Certain market participants today are still not equipped nor prepared for the recent market challenges and turmoil. Companies operating in a single asset class with the lack of liquidity, excessive leverage and a high fixed operating cost have typically suffered in performance and valuation during these testing times. While we are not isolated from market challenges, we are poised to be opportunistic as the destruction in the market favors the largest, most diverse and liquid participants. Annaly will continue to be a consolidator, especially in environments like these.

Finally, well before ESG became a more popular acronym, we have been highly focused on all aspects of corporate governance, since my role transitioned a few years ago. In November, we announced the addition of 2 independent directors, Vicki Williams and Katie Fallon, both with experience that is diverse and complementary to our existing board members. Also, since I became Chairman at the start of the year, we have refreshed the members on each of the board committees and named new board committee chairs. We've added a new public responsibility committee to oversee and drive our socially dedicated initiatives, including our joint venture with Capital Impact Partners, which is now fully invested as of the fourth quarter. Also, in the fourth quarter, we initiated a firm-wide women's interactive network. And as the most recent endorsement of our corporate culture, Annaly was named as 1 of only 103 companies in the U.S. to the Bloomberg Gender-Equality Index; following a year in which we hired and promoted talented female leadership, which now makes up over 1/3 of the company's senior management.

Lastly, under our employee stock purchase plan, our executives voluntarily increased their ownership commitments and holdings in the fourth quarter. And now a 100% of Annaly's officers, 45 people in total own stock. Stock not granted to them, but rather shares they purchased with their own after-tax dollars in the open market.

Now I'll turn it over to David to expand upon our investment activity and outlook.

Thank you, Kevin. Amidst the market environment in the fourth quarter that Kevin described, agency spreads were roughly unchanged. And our activity in the agency sector focused on rotating into specified pools and reducing our TBA position. Additionally, we replaced $8 billion of legacy swaps with current rate contracts, which will serve to lower the fixed rate on our swap position going forward.

In credit, we continue to grow both our residential whole loan portfolio as well as our middle market lending portfolio, each of which have eclipsed $1 billion in assets as of January. Our commercial portfolio was roughly unchanged, as we remain highly selective in the market. But we were able to reinvest runoff in the sector, and we maintained an active pipeline. Also of note in the fourth quarter, we reduced economic leverage from 6.9x to 6.6x, which was helped by our capital raise early in the quarter and allowed us to enter into new year with enhanced liquidity.

Now given the rise in interest rates and alleviative volatility experience thus far in 2018, I will take the opportunity to expand on Kevin's comments as to how we are managing our portfolio in light of the current market landscape. While we are not immune to recent turbulence, as we have demonstrated in the past, we are defensive in rising rate environments, and this has certainly been the case as of late. While MBS durations have extended meaningfully since the beginning of the year, we have proactively managed this extension by further adding to our hedge positions, reducing our MBS base's exposure and locking in more fixed rate term repo. As a result, we have maintained the downside protection of the portfolio consistent with year-end shocks through dynamic hedging as well as managing leverage consistent with year-end levels. Upside potential, however, should rates retrace, has materially improved, owing to the much better convexity profile of the portfolio at current levels, as Kevin mentioned. In fact, the convexity profile of the Agency market is the most benign since the end of the taper tantrum, which is a fundamental positive for the Agency sector. That being said, we are acutely attentive to the recent rise in volatility as well as the technical backdrop for mortgages given the Fed's exit, which is guiding our conservative approach. Our MBS portfolio is fundamentally strong and well-balanced, which makes navigating the current landscape a manageable proposition and the re-steepening of the yield curve is beneficial to reinvestment rates on the portfolio. And one further point to note, with respect to our agency business and the financing of that portfolio, we have continued to add direct repo counterparties within our brokered dealer, creating greater diversity beyond FICC financing.

Now turning to credit. Spreads remain closed to post crisis tights across the spectrum, much of which is justified by strong fundamentals, but the technical tailwinds have also played a significant role in performance. The recent volatility has singled fragility in some credit products and instability could affect other credit sectors, should recent market tremors resurface in the weeks to come. As we have discussed in the past, we view the Fed's portfolio unwind as a indirect negative for credit, as run-off makes its way through the portfolio of balanced channel. We have remained patient and disciplined when it comes to the growth of our 3 credit businesses and increased volatility is likely to create better opportunities. Annaly shared capital model, broad investment options and diversified portfolio is well positioned to take advantage of opportunities in credit and the liquidity the agency portfolio will enable us to act quickly.

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

Thanks, David. Beginning with our GAAP results. Fourth quarter GAAP net income was $747 million or $0.62 per share compared to $0.31 for Q3. Among the factors driving the results for increased net interest income and improved marks on interest rate swaps probably offset by losses on swap terminations and lower gains on trading assets. In terms of core earnings, excluding PAA, we posted $387 million in earnings or $0.31 per share, which was up from last quarter's $0.30. The PAA for the quarter was approximately $0.01 versus $0.04 in Q3. Our full year results were equally strong with core earnings ex PAA at the $1.22 a share and core ROE at 10.6%, both of which were up from prior year, and economic return was approximately 12.4%, more than double last year's performance.

Among the key factors contributing to this quarter's core results was higher interest income, largely driven by the growth in the agency portfolio, along with increased contributions from our MML and resi loan portfolios. Dollar roll income declined due to the portfolio rotation, that David had mentioned earlier. Our repo balances were higher, given the increase in the agency portfolio, which coupled with higher rates resulted in increased interest expense. This increase was partially offset by lower net swaps expense, as our net pay rate continue to trend lower and led to a mere 1 basis point increase in our overall cost of funds, despite another 25 basis points fed hike in the quarter. We had further improvement across all of our key financial metrics, in addition to core ROE, ex PAA increasing 10.7% for the quarter, as Kevin had mentioned, our net interest margin improved to 151 basis points, and our net interest spreads, likewise, improved to 119 basis points. And our operating efficiency metrics continue to demonstrate the scale of benefits of our platform, plus to generate our core earnings is meaningfully less for each of our investment groups relative to peers, and in aggregate, over 35% less than the peer composite reflective of our business mix. And it's important to note that we've been successful in scaling our infrastructure to support our diversification strategy without burdening our shareholders with higher G&A cost. This is reflected in our efficiency metrics, which further improves in the quarter. OpEx to assets at 24 basis points, OpEx to equity at 163 basis points, and finally, OpEx to core earnings ex PAA at a mere 15%.

Turning to the balance sheet. Portfolio assets were up $4.6 billion, while flat when factoring in the reduced TBA position. Our middle market lending business achieved a milestone in the quarter, surpassing a $1 billion in portfolio assets. And the resi business, likewise, demonstrated continued momentum with aggregate portfolio approaching $3 billion in the whole loan portion ending the quarter approaching $1 billion.

From a capital allocation standpoint, the credit portfolio has represented 24% allocated capital. Balance sheet leverage was up modestly to 5.7x given the increased portfolio, while economic leverage declined, as David has mentioned to 6.6x, given the reduced TBA position. And book value declined modestly to $11.34 per share from the $11.42 the prior quarter. Just as we've been optimizing the scale efficiencies of our operating platform, on recent quarters, we've also been optimizing the cost of our capital. Following our recent $425 million offering of 6.5% preferred stock, coupled with the notice to recall certain existing higher rate preferreds, we will have replaced almost $600 million of preferred capital with new preferred equity at over 90 basis points lower cost. The aggregate impact of these actions is a 56 basis point cost deduction.

And one final thought that being the recently enacted Tax Cuts and Jobs Act. While we continue to study the details of the legislation, we're not anticipating any material direct impacts on our financial profile or operations. However, we are pleased to see that the advantage of REIT ownership is preserved with the 20% passthrough deduction on ordinary REIT dividends. And this provides a significant benefit for our shareholders, as the legislation offers the potential for a meaningful increase in after-tax dividend yields earned on our stock.

And with that, Brian, we're ready to open it up to questions.

(Operator Instructions) And our first question comes from Rick Shane with JPMorgan.

I just want to make sure I understand David's comments. You didn't really provide an update on book value movements quarter-to-date other than sort of to say that it was in line with expectations, given the rate move. But I think what you were really describing was the true dynamic hedging you've effectively dampened the duration gap sensitivity that we would have expected associated with a roughly 50 basis point move?

Yes, Rick. I think you understood that correctly. So if you look at the rate shocks, it tends to get elevated as rates move further and further out of favor. And I think what we've done by dynamically hedging is making small interest rate -- the effects from small interest rate moves linear, as you go out the rate range spectrum. Does that makes sense?

It absolutely does. And is there -- when we think about the hedging strategy, is there anything -- you talk about linear for small moves. Is there anything to -- in the portfolio to dampen it, if the moves become more of a shock, so that it becomes nonlinear at a certain point?

Well, we do continue to hold swaptions, but I think the day-to-day management is the best tool for us right now. And we continued to dynamically hedge the portfolio. So for example, beginning in the first week of January, as rates did increase, we continued to sell assets or increase hedges. Quarter-to-date, we've added about $8 billion in swaps and futures and we've reduced the TBA position by about $4 billion. So that hedge ratio that the market seems to look at which we think is a very vague instrument to gauge our interest rate exposure, given the fact it doesn't consider the quality of the hedges in terms of duration of those hedges nor on the asset side, the fact that we do hold a lot of very short duration ARMs and floating rate ARMs as well as residential credit. We don't think it's the best measure but that hedge ratio through dynamic hedging has gone from 70% to about 87% today.

And Rick, I would just say, over the top, as we said before, the best way to manage in these environments is to reduce leverage. And that's what we've done as you've seen in our results. While we've enhanced our liquidity profile, as things have steepened backup and gotten cheaper. So that's the overlay over the hedging strategy.

Our next question comes from Doug Harter with Crédit Suisse.

Can you talk about what agency spreads have done in the first quarter to date and how that would impact book value?

Yes, Doug. This is David. I would say, if you look at nominal spreads, just regarding the impact from volatility on OAS as well as the curve steepening, it's roughly about 10 basis points wider quarter-to-date. Does that help?

And if you were to look at OAS -- bringing in those other impacts?

Sure, OAS has benefited from the steeper curve, which reduces the value, the option widens OAS. But the spike in volatility we've experienced over the last couple of weeks has served to tighten OAS. So it's a little ambiguous when you look at OAS, but it's a touch wider.

All right. And then back to, if you guys have been rightfully reducing leverage into the volatility. I guess what are the signs you would be looking forward to sort of put that -- put those assets back on and take advantage of the opportunity. I guess how do you factor in kind of when is the right time to start that versus or in a longer period of a challenging environment?

Well, Doug, I'll do the big picture, and then, David can dig in if he'd like. I mean, the -- we answer that question differently than everybody else because we have 4 businesses, right? So when we look at the floating rate opportunities out there in our credit businesses, our pipeline today for resi credit, commercial real estate and middle market lending within our shared capital model, we have a pipeline that is north of the credit that we underwrote last year. Last year, we did about $3.1 billion gross in credit assets. So this is a very competitive place that we're in. So when it comes to the catalyst for levering up in the Agency strategy, frankly, we've obviously shown our ability to do that over the past 4 years quite effectively at the right time. But for us, it's really not a timing game, it's a relative valuation game and a relative risk-adjusted return game. So it's not just the catalysts are increasing repo on agency to get return. For us it's -- what's the best cash flow matrix we can create -- over not just every quarter or every month, but over the longer term. So when you have competing capital, it's 2 basic things that I think you've heard us talk about. It's a risk mitigant because no one here has paid just to grow their strategy, even if there is a short-term opportunity, right? And the second thing is what it's equated to is a balance of risk-adjusted return and a cash flow that's insulated us from the shock of what the market has felt, albeit, not entirely but a heck of a lot better than most. So I think that's how we look at it. I think David can probably speak to your single question on leverage and when we would tick it up.

I'm sure. So, I mean, we could see a little bit more widening in the agency sector, given the Fed is increasing its runoff. And we are also approaching the spring and summer months, where you do see a little bit more net supply, but we think that spread widening would be contained, just given the attractiveness of the sector, the convexity profile. And the fact that there is money on the sideline that we think could go into the agency sector. So if we got 5 to 10 basis points of widening, we'd certainly look at adding to the agency portfolio. But right now, we are in a defensive mode as we see how this plays out.

Our next question comes from Fred Small with Compass Point.

Just on the sort of nonmortgage credit side. How much impact do you think that the widening of credit spreads has had on book value this quarter?

I would say, Fred, a pretty negligible amount. What we saw in credit, just giving you some on-the-run metrics, for example, credit risk transferred at the end of the year, we're about 190 off and it got as wide as 225. And then retraced back to about 200. The CMBX market is a barometer for credit, down the credit stack, it went from 390 on 11s, newly issued 11s. 390 to 460 and then back to 435. So there's been some -- there's been certainly some turbulence, but I wouldn't consider credit to add a meaningful impact on book.

Okay, great. And then on what's the -- either at the end of the quarter, what was the net rate on the forward starting swaps?

186 pay rate.

Our next question comes from Bose George with KBW.

Just one more question on book value, just wanted to tie the different comments on credit, on rate, biggest rate spreads widened a little bit on agency, credit is flat. So If I tie all that together, does it suggest book value down maybe 1%-ish or a little in that range 1% to 2%?

Bose, this is David. I'll just tell you at the end of January book was off a little over 3%.

Okay, perfect. And then in terms of your leverage, since -- after the capital raise, is your leverage down a little further since -- from where it was at the end of 4Q?

I would say it's reasonably close to unchanged.

Okay.

Bose, I think what is kind of lost in the market is just our overall economic leverage for the firm and by business. And I think one of the levers, no pun intended, that we have that others don't is not just the diversification on the asset side, but the financing side. And right now, we are very conservative in our positioning in terms of leverage of the credit businesses. All in, we're sitting at about 1.5x levered on a blended basis for those 3 businesses, which is, I would argue, comparatively very low. So when it comes to our earnings generation capability and capacity, this year, we will -- all things being equal, we have the ability because we have the financing -- dedicated financing in place to more optimally put to work our capital and finance that capital. So we can increase these leverage ratios across the board not even close to what the peers are as high as they are, but we can increase that leverage to generate higher returns and higher earnings without even making an incremental investment. So when we look at the overall leverage for the firm, again, it's not just a repo. There's 10 other financing sources that we have across the 4 businesses that we can calibrate in order to create the income that we're distributing.

Okay. That makes sense. And then just a question on buybacks. The stocks below book, how does buybacks -- share buybacks rank among the investment opportunities?

Well, the last count I had I think we have 42 investment options in the 4 businesses in terms of different assets and structures and buybacks is -- the buyback question that we've gotten over the years is always -- it's always a relative value comparison, Bose, I think you and I've had that conversation. But again, like I said in my prepared remarks, I think today it looks a lot like February of 2016 and I'd much rather buy a company on an accretive basis to book an earnings and add an asset base that's complementary. So you kind of hit -- you check 3 boxes there with an acquisition versus buying my own stock back. And also I think personally that the credit -- our credit business is specifically resi credit and middle market lending with the partnerships we've formed and the sponsors that we finance even in this volatile market, especially in this volatile market that's where you'll see us gain more market share. So in fact, it's part of the equation, but we have ways to grow our capital base and appreciate externally as well as internally without doing -- without buying back stock.

Our next question comes from Ken Bruce with Bank of America Merrill Lynch.

I guess with the defensive position that you've taken in the current market, which is understandable. The obvious question is, what do you need to see -- what factors need to be introduced into the market for you to be less defensive?

Well, I think it's a relative -- Ken, it's a relative question of defensiveness because we're always defensive. I think in terms of the catalysts, I would step back. I'm kind of surprise that the mortgage reaction to, for instance, for fiscal policy, I mean, it was signaled what needed to be issued late last year into this year in terms of how to pay for what the government's plan is. So I'm just kind of surprised on a look back basis as to how the market's reacted. Looking forward, that just tells you no one here is Nostradamus. So what we've done is, I think it's really episodic, I think we grow our businesses literally on a week-to-week basis as well as we shrink them. So we don't look at, if it's 3 hikes or 4 hikes, how that impacts what we do. And I'll ask David to comment as well. But the overlay here is, I'm assuming this market thankfully is going to return to some data dependency. You could see that with the preoccupation yesterday and today with just the numbers because we have a Federal Reserve that -- with a different person in the seat that is probably going to be more or like that than the predecessor. So that in tune means a more market focused on fundamentals. And I think the market that's focused on more fundamentals was a market that just had a severe shock to it. So we like this volatility, which is the output, I think, for people stepping back and taking a look at the fundamentals, which really hasn't been done that -- I think that deeply in the past couple of years. So there is a confluence of events. I don't think we'd look at any one event as the one that flashes green for us. We have fiscal policy, we have tax policy, we have a new Fed chair. And not to mention, the global risk that are always out there. So I think we're just built to anticipate, not to speculate, and that's kind of how we've delivered. We don't have to be the smartest guy in the room every month because of our options. Our options, by definition, make us very competitive.

And Ken, I would just add that the first priority in times of volatility is liquidity of the portfolio. But considerate of that liquidity what we'd look for obviously is cheaper asset prices, not just cheaper asset prices, but also greater clarity. We have gotten good clarity out of the Fed through a lot of transparency. But to Kevin's point, there's not a lot of clarity out of D.C. as to really what the supply pictures going to look like and how that's going to channel through markets, et cetera. So when we have a better sense of how that is going to play out as well as potentially cheaper asset prices, then we would hopefully be able to get back in the market.

Right. I guess part of the question -- loaded question, is that you've been -- you pointed you've produced roughly $0.30 in core earnings per quarter for quite a while now. And you obviously highlighted your ability to potentially lever up if in fact you wanted to do so. So I'm trying to gauge in my own mind as to kind of what the potential is for that $0.30 to go higher? And what may do that if it's just a matter of spread widening that kind of work its way into the equation and into the portfolio over time? Or if it's something specific that you guys can do to obviously increase that? And in fact if -- what would be necessary in the market to do it? And/or whether the market may be just re-rates the earnings from the current level, which I think we've all been a little frustrated by over the past couple of years, but if whether that's get re-rated lower. So I'm trying to understand kind of what the risk on dynamic may look like for you guys as a firm.

I think it's a question that we've talked about before, Ken. I think -- I mentioned in my comments, I went back to 2 years, which was the start of the fed hiking. You go back 4 years, 17 quarters is the $0.30 dividend, but just looking at our core earnings have ranged from $280 million to $350 million, $0.29 to $0.34 over the last 15 quarters. And that's been a combination of things every quarter which is kind of the beauty of the recipe. In terms of risk on or risk off, I mean, I think we're clearly in a market where it doesn't pay to take more risk. And the flip side of this company and the recognition of the stability of this cash flow is that the market's always kind of worried about something else as it relates to the mortgage REIT sector. So for us, and our whole goal is to step out from that lens. Our whole goal is to compare ourselves versus the cash flow enterprises out there. And that's how we measure our performance and that's how we look for our return. We don't go -- we don't do a $0.30 top-down every quarter, we do a bottoms up. And I think what the model has proved over time is what the market has second-guessed, which is very stable and durable earnings, while we protected book 2x or 3x better than others. And that's what we built. So do we need to take more risk to produce more? I certainly don't think of that tradeoff is -- it has been worth it in the past, and we don't think it's really worth it now. I would like to say, frankly, that we have a chance this year to just more efficiently use our capital in term how we finance it. And we have a way with our partners to be more opportunistic to access flow that others can't access. We pay a little bit of vig for it, but we don't have to run a manufacturing facility to originate what we buy. And the third part of it is the external comments I made, I mean, I think all industries that over expand need to consolidate and we are in one of those industries. So we look forward to doing that if this volatility continues.

Thanks for the segue. My last question is just looking through the host of mortgage REITs that are to the right of Annaly on this Chart 10 or Page 10 in the presentation. Are there kind of obvious complementary assets that you see in the crop of mortgage REITs out there?

Ken, do you want me to just hand over my playbook to you?

Feel free.

Coming out of halftime I'm going to give you my first 10 plays. I think look at that chart that -- we've had that chart out there for, as you know 2 or 3 years. I mean, it's meant to just show scale as well -- on both ends of the spectrum. Look, I think anything we do externally, we've said 3 things: the assets number one have to make sense, right, for our current portfolio. And given the size and diversity of our portfolio, most companies assets will fit. And it's not just companies on that page, there's the entire BDC sector that frankly needs to consolidate. So which is as fragmented. So the assets have to fit, it has to be accretive to earnings, it has to be accretive to book. We don't have to make an acquisition in order for us to maintain what we've been maintaining for 4 years. But all things being equal, if we can do what we did like we did in Hatteras, which was an extremely successful deal not just for us but for the sector, in terms of shareholder value creation, then we'll do it. So there is a lot of names on that page, most of them fits well -- fit well within our umbrella.

Okay. Well, I guess maybe just lastly, congratulations on your latest title. We'll refer to you now as Mr. Chairman.

Thank you, but please don't do that.

This will conclude our question-and-answer session. I'd like to now turn the conference back over to Kevin Keyes for any closing remarks.

Thank you, everyone, for your interest in Annaly Capital. And we will speak to you all next quarter.

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