Doug Harter

Doug Harter inquired about the competitive dynamics within the lower middle market, including the presence of various players and the resulting outlook for loan spreads.

Answer

Josh Weinstein, Chief Investment Officer, explained that competitive dynamics haven't significantly changed in the last six months, noting regional banks occasionally entering and exiting the unitranche space. He highlighted reduced competition from BDC peers due to dividend cuts and lower trading multiples. Michael Sarner, CEO, added that the new joint venture is expected to strengthen their competitive position. Weinstein further stated that spread compression has stabilized over the past year, with new deals maintaining mid-sixes spreads at conservative leverage, projecting spreads to remain between 7% and 7.25% for the next 12 months.

Doug Harter asked about the competitive dynamics within the lower middle market, including the types of players, any shifts in market participation, and the resulting outlook for loan spreads.

Answer

Josh Weinstein, Chief Investment Officer, explained that the competitive landscape hasn't significantly changed in the last six months, noting regional banks occasionally underwriting full unitranche loans. He highlighted reduced competition from BDC peers due to recent dividend cuts and emphasized Capital Southwest's strong competitive position, further enhanced by the new joint venture. Regarding spreads, Mr. Weinstein indicated that spread compression has stabilized over the last 12 months, with new originations in the mid-sixes, and he expects spreads to remain between 7% and 7.25% for the next 12 months.

Doug Harter from UBS asked about the composition of new delinquency notices (NODs) by vintage and how reduced home price appreciation (HPA) might influence cure rates for more recent vintages.

Answer

CFO and Chief Risk Officer Nathan Colson reported no significant divergence in cure activity across vintages, with all remaining within a tight range and better than pre-COVID levels. He noted that the 2022 vintage shows modestly higher delinquency rates compared to 2019-2021, but newer vintages are tracking similarly or better, aligning with the expected normalization of credit conditions.

Doug Harter asked about the composition of new delinquency notices (NODs) by vintage and how less home price appreciation (HPA) in newer vintages might impact cure rates.

Answer

Nathan Colson, Chief Financial Officer and Chief Risk Officer, noted that there hasn't been much divergence in cure activity based on vintage, with all vintages within a tight band and better than pre-COVID levels. He added that the 2022 vintage is running modestly higher in delinquency rates than 2019-2021, but recent vintages are tracking close to or inside that, consistent with credit condition normalization.

Doug Harter inquired about the company's approach to leverage, given comments on the MBS market, and their interest in adding assets at current spreads, seeking an overall view on risk-reward.

Answer

CIO Nick Letica explained that the company has adopted a more defensive stance due to the administration's efforts to tighten spreads, acknowledging both symmetric and asymmetric risks. He emphasized the value of their paired portfolio construction and confirmed a reduction in leverage and mortgage risk.

Doug Harter asked about the various risk metrics considered for portfolio sizing following the litigation settlement, beyond just leverage. He also questioned whether the return potential slide on corporate expenses factored in anticipated cost savings.

Answer

Nick Letica (Chief Investment Officer) stated that the company considers a range of risk metrics, including economic debt to equity, overall spread risk, asset returns, market context, financing rates, and asset yields versus risk, aiming to maximize returns against asset risk. Bill Greenberg (President and CEO) added that overall leverage, liquidity, drawdown risk, and scenario analyses are also crucial. Bill Greenberg confirmed that the return potential slide reflects current costs, implying potential upside as cost savings are realized.

Doug Harter asked about the various risk metrics, particularly leverage, that Two Harbors considers following the recent settlement, and whether potential corporate cost savings are already factored into the return potential slide.

Answer

Nick Letica, Chief Investment Officer, stated that Two Harbors evaluates numerous risk metrics, including asset returns, portfolio mix, market leverage, financing rates, and asset yields versus security risk. Bill Greenberg, President and CEO, emphasized that while economic debt to equity increased, mortgage spread risk decreased, highlighting the importance of considering multiple metrics beyond just leverage. Bill Greenberg also confirmed that the potential cost savings on corporate expenses are not yet factored into the return potential slide, suggesting potential future upside.

Doug Harter asked about the anticipated benefits of PennyMac Financial's Vesta technology deployment, specifically whether it aims to reduce origination costs or primarily build capacity for future volume.

Answer

Chairman and CEO David Spector stated the answer is both. He expects immediate efficiency gains from Vesta's Q1 deployment on both sales and fulfillment. Throughout 2026, he anticipates further deployment of AI tools and agents to significantly reduce origination costs, increase speed, and improve loan closing times, making PennyMac highly competitive in the industry.

Doug Harter asked David Finkelstein to elaborate on the potential risks that could disrupt the current low-risk market environment, leading to increased volatility.

Answer

David Finkelstein, CEO and Co-Chief Investment Officer, identified global fiscal picture (debt levels) and euphoria in asset markets as macro risks. Specifically for agency markets, he cited tight valuations and housing policy uncertainty (GSEs' role, affordability initiatives) as key risks.

Doug Harter asked how Annaly handicaps the risks that the current low-risk environment with lower volatility could change, and what factors might cause such a shift.

Answer

David Finkelstein, CEO and Co-Chief Investment Officer, identified two primary macro risks: the global fiscal picture, particularly the amount of debt, and potential complacency around asset market euphoria. He also highlighted specific risks in the agency markets, including tight valuations on Agency MBS and housing policy uncertainty, especially regarding the GSEs' role and its impact on the convexity profile of agency markets.

Doug Harter asked for a breakdown of agency returns, distinguishing between OAS returns and contributions from swap spreads, and sought an update on quarter-to-date book value performance.

Answer

V.S. Srinivasan, Head of Agency, explained that spread to swaps versus Treasuries was 35-40 basis points, with a blended yield of about 160 basis points on their hedge mix, resulting in a nearly 17% ROE. David Finkelstein, CEO and Co-Chief Investment Officer, reported that book value pre-dividend accrual was up in the upwards of 1% quarter-to-date.

Doug Harter inquired about the current incremental investment returns, how they compare to year-end and Q3, and the impact of recent spread tightening on the risk-reward profile.

Answer

Robert Colligan, CFO, stated that hedged ROEs are in the mid-teens at 7x leverage, potentially reaching mid-to-high teens at low 8s leverage. He noted spreads are 150-300 basis points tighter than Q3. Smriti L. Popenoe, Co-CEO and President, emphasized that the return of GSE balance sheets reduces tail risk of significant spread widening, improving the risk-return profile despite lower absolute returns compared to the 'generational opportunity' of 2022-2025. T.J. Connelly, CIO, added that scenario planning now indicates a lower probability of spreads widening significantly again.

Doug Harter asked about the current incremental investment returns, how they compare to year-end and Q3, and the impact of recent spread tightening on the risk-reward profile.

Answer

Rob Colligan, Chief Financial Officer, stated that hedged ROEs are in the mid-teens at 7x leverage, potentially reaching mid-to-high teens at low 8x leverage. Smriti L. Popenoe, Co-Chief Executive Officer and President, and T.J. Connelly, Chief Investment Officer, explained that while returns are lower due to spread tightening (150-300 basis points tighter than Q3), the return of GSE balance sheets significantly reduces downside risk, improving the overall risk-return profile compared to the 'generational opportunity' of 2022-2025.

Doug Harter asked for clarification on Dynex Capital's view that mortgage spreads remain wide relative to their history, given that they appear closer to or tighter than their long-run average. He also questioned management's outlook on swap spreads, potential catalysts for change, and the risk of them moving unfavorably.

Answer

T.J. Connelly, Chief Investment Officer, clarified that while spreads versus certain Treasury curve components might appear tighter, mortgage spreads versus interest rate swaps are still in the top quartile of their widest historical levels. He attributed swap spread dynamics to the federal deficit and Treasury supply, noting that current spread levels provide a buffer against more negative swap spreads, allowing Dynex Capital to capture carry over time.

Doug Harter questioned the current trends in new loan spreads, whether they are stabilizing, and how these compare to the company's new financing costs.

Answer

Art Penn, Founder and Managing Partner at PennantPark Investment Advisers, LLC, stated that the new JV secured a credit facility at SOFR plus 175 basis points. He noted that new loan spreads in their core middle market segment are typically in the SOFR plus 475-525 basis point range. Penn emphasized their focus on lower-risk credits with mid-4s debt to EBITDA and approximately 40% loan-to-value, accepting slightly lower yields for strong credit quality, which is reflected in their low 1.8% PIC percentage.

Doug Harter inquired about current new loan spreads, any stabilization observed, and how these compare to new financing costs.

Answer

Chairman and CEO Art Penn stated that the new PSSL2 joint venture secured a credit facility at SOFR plus 175 basis points. He noted that new loan spreads in their core middle market typically range from SOFR plus 475-525 basis points. Art Penn emphasized their focus on lower-risk credits with average debt-to-EBITDA in the mid-4s and loan-to-values around 40%, prioritizing solid credit quality over higher yields.

Doug Harter inquired about Ellington Credit Company's appetite for leverage, specifically in the context of potentially raising unsecured debt, and how management envisions the leverage ratio given the current asset composition.

Answer

Larry Penn (CEO) stated that with the portfolio close to fully invested at $370-$380 million, there's room to grow to around $400 million. He mentioned that they are constrained by 40 Act restrictions, aiming for a little less than 2-to-1 leverage, which is also dependent on the portfolio's composition (more mezzanine debt allows for more leverage, less for equity). He estimated that a $50 million unsecured debt deal could lead to a little less than 2-to-1 assets to that additional debt capital.

Doug Harter of UBS inquired about the market dynamics causing CLO AAA spreads to not fully retrace compared to underlying loan spreads, and asked if this would lead to a continued portfolio allocation favoring CLO debt over equity.

Answer

Portfolio Manager Greg Borenstein explained that the lag in AAA spreads is a technical factor driven by slightly reduced demand compared to earlier in the year when they were priced very tightly relative to other credit products. He confirmed that if the current arbitrage challenge persists, the company would likely continue to favor CLO debt and secondary market opportunities over new issue CLO equity.

Doug Harder asked Better Home & Finance about the required monthly loan volumes to achieve break-even profitability and whether there are different revenue generation models for home equity originations versus traditional first lien mortgages with partners.

Answer

Vishal Garg, Founder and CEO, stated that reaching 'a billion plus' in monthly volume would give them a good shot at break-even, noting higher margins in the partnership business. He explained that home equity originations have smaller loan amounts but higher gain on sale, yielding approximately $6,500 per loan compared to $8,000 for mortgages, without Better taking credit or prepayment risk. He also sees potential to increase home equity origination revenue by another 1-2 points.

Doug Harter asked about plans to upstream capital from the MI subsidiary, including remaining capacity and potential for a large Q4 dividend. He also inquired about the strategy for diversification versus focusing on the MI business, referencing the Title acquisition.

Answer

Mark Casale, Chairman and CEO, confirmed consistency with dividends, with a potentially larger Q4 dividend, citing comfort with upstreaming given PMIERs and credit. He noted that quota share reinsurance also aids capital movement to the holdco. Regarding diversification, Mr. Casale described Title as an 'incubator' performing in line with expectations given high rates, and Essent Re as another 'call option.' He reiterated that Essent's stock remains the best investment, setting a high bar for any future acquisitions to enhance book value per share growth.

Doug Harter asked about Ready Capital's future conservative posture, specifically inquiring about the target leverage level for the business and the desired mix of secured versus unsecured debt in its financing strategy.

Answer

CEO Tom Capasse indicated that current gross leverage is around $3.5 million, with a target of a turn less on a pro forma basis. CFO Andrew Ahlborn stated that the majority of corporate debt is expected to be secured in the immediate future, though the company would consider tapping unsecured markets like the baby bond market if available.

Doug Harter inquired about Ready Capital's future conservative posture, specifically asking about the target leverage level for the business and the desired mix of secured versus unsecured debt in the refinancing strategy.

Answer

CEO Tom Capasse stated that current gross leverage is around $3.5 million, with a target of a turn less on a pro forma basis. CFO Andrew Ahlborn added that the majority of corporate debt is expected to be secured in the immediate future, though the company may tap unsecured markets if available.

Doug Harter of UBS asked about the expected capital that could be freed up from divesting the non-core businesses (mortgage conduit, title, and real estate services), in addition to the previously highlighted cost savings from discontinued operations. He also inquired about the key steps and timeline for Radian to resume its share buyback program.

Answer

Sumita Pandit, President and CFO of Radian Group, stated that the carrying value of the held-for-sale businesses on the balance sheet was approximately $170 million as of Q3, and the company does not expect a significant gain or loss relative to this estimate. Regarding share repurchases, she outlined the expected holding company liquidity build-up, including Q4 2025 and Q1 2026 dividends from Radian Guaranty and the intercompany note, projecting that Radian Group would be in an excess liquidity position within a few quarters post-Inigo purchase, at which point the share repurchase strategy would be revisited.

Doug Harter inquired about Redwood Trust's strategy for managing corporate expenses to maximize overall ROE and the expected ROE potential for third-party investments.

Answer

CFO Brooke Carillo emphasized that the expense base should be viewed in the context of Redwood Trust's rapidly growing operating businesses, highlighting their lean operating expense base relative to the $20 billion of assets managed by 300 people. She stated that the focus is on scaling the model and addressing legacy capital rather than shrinking infrastructure. For third-party investments, Brooke Carillo noted that the focus remains limited to assets meeting their cost of capital, reflecting the strategic pivot to operating businesses.

Doug Harter asked about Blackstone Mortgage Trust's expected pace of net deployment in the coming quarters and the target leverage level for the business at this point in the cycle.

Answer

Tim Johnson, Chair of the Expertise Board and Global Head of BREDS, indicated that the company expects a consistent run rate for both repayment activity and new investment deployment. He also stated that the current leverage of 3.5x is within their target range, and they are comfortable with the balance sheet's position.

Doug Harter with UBS inquired about Blackstone Mortgage Trust's expected pace of net deployment in the coming quarters and the company's target leverage level. He also sought clarification on what the right level of leverage is for the business at this specific point in the market cycle.

Answer

Tim Johnson, Chairman and Incoming CEO, indicated that the company expects a consistent run rate for repayments and new investment activity, suggesting a steady pace of deployment. He stated that the current debt-to-equity ratio of 3.5 times is within the middle of their target range, and the company has sufficient liquidity and capacity to increase leverage slightly if opportunities arise. He reiterated comfort with the current balance sheet position.

Doug Harter asked about the expected pace of exits in the near term and its influence on portfolio turnover and fee income velocity.

Answer

Kort Schnabel (CEO) explained that exits generally move in lockstep with overall transaction volume and new originations, making the net number a more important metric. He stated that he couldn't provide specific forward-looking insights beyond this correlation.

Doug Harter asked about Ares Capital Corporation's expected pace of exits in the near term and how that might influence the velocity of portfolio turnover and fee income generation.

Answer

CEO Kort Schnabel explained that the pace of exits typically moves in lockstep with overall market transaction volume and new originations. He noted that while exits increased this quarter, net deployment was also very strong, suggesting that these metrics tend to move together, making the net number a more important indicator.

Doug Harter inquired about the current returns on incremental investments, the significance of hedge choices in market attractiveness, and the outlook for swap spreads.

Answer

Co-Chief Investment Officer Desmond Macauley stated expected hedged ROEs are in the 16%-18% range, noting a slight decrease from June due to tighter mortgage spreads. He highlighted the constructive medium-term outlook given the normalization cycle. Co-Chief Investment Officer Sergey Losyev added that swap spreads are expected to normalize further, with 87% of notional allocated to SOFR and OIS swaps, positioning the portfolio well for potential balance sheet expansion and changes in the Fed's target policy rate.

Doug Harter with UBS inquired about current returns on incremental investments, the role of hedge choices in market attractiveness, and the outlook for swap spreads, specifically how mortgage spreads appear on an OIS basis.

Answer

Co-Chief Investment Officer Desmond Macauley stated expected hedged ROEs are in the 16% to 18% range, slightly lower than Q2 due to tighter mortgage spreads, but remain attractive medium-term. Co-Chief Investment Officer Sergey Losyev added that swap spreads are expected to normalize, acting as a tailwind for the portfolio, with 87% of notional allocated to SOFR and OIS swaps.

Cory Johnson, on behalf of Doug Harter from UBS, asked about the pace of decline and potential for additional realized losses in the middle market portfolio, and also questioned the exit strategy for the lower middle market positions.

Answer

CEO Dwayne Hyzak and Managing Director Nicholas T. Meserve clarified that Q1 realized losses were from two long-underperforming middle market names that had been marked down for years, and the portfolio is now de minimis. Regarding the lower middle market, Dwayne Hyzak stated its wind-down will be a very long process as exit timing is controlled by their owner-operator partners, and the fund views these as valuable long-term investments.

Inquired about potential M&A opportunities in the current environment and the appetite of limited partners (LPs) for fundraising amidst recent market volatility.

Answer

The M&A pipeline is very active, particularly for scaling the credit, energy, and infrastructure businesses, with recent market dislocation making valuations more attractive. LP appetite for fundraising remains strong, and the company is focused on building deep, strategic partnerships with investors rather than just transactional fundraising.

Marissa Lobo, on behalf of Doug Harter from UBS Group AG, asked for a comparison of the relative attractiveness between non-QM and home equity assets, including their respective securitization markets, and questioned the strategy for managing the increased costs from preferred stock rolling to floating rates.

Answer

Chief Investment Officer Nicholas Smith explained that home equity is a newer, large addressable market where MITT sees a first-mover advantage, making it currently more attractive, though non-QM still offers relative value. CEO T.J. Durkin addressed the preferreds, stating the company had anticipated the floating rate switch and expects other financing efficiencies coming later in the year to help offset the increased cost at a corporate level.