Harsh Hemnani

Harsh Hemnani asked about the expected impact of upcoming events, such as a new Federal Reserve nominee, on rate volatility and Agency MBS funding markets. He also inquired about any shift towards shorter-duration hedges in the portfolio.

Answer

CIO Nick Letica anticipated a mild increase in volatility due to the new Fed chair and macro uncertainty, which supports a defensive stance on mortgage spreads. He noted stable funding markets with no disturbances on the horizon and clarified that there hasn't been a significant shift to shorter-duration hedges, maintaining a curve steepening bias.

Harsh Hemnani inquired about the expected impact of upcoming calendar events, particularly a new Federal Reserve chair, on rate volatility and agency MBS funding markets. He also asked about any shifts towards shorter-duration hedges in the portfolio.

Answer

Nick Letica, CIO, anticipated a mild increase in volatility due to the new Fed chair and macro uncertainties, which supports a defensive stance on mortgage spreads. He noted funding markets have been stable. Regarding hedges, he clarified that the company maintained a mild curve steepening bias, not a significant shift to shorter-duration hedges.

Harsh Hemnani questioned whether Two Harbors' cost-saving strategies might hinder the direct-to-consumer (DTC) originations platform's ability to scale and act as a hedge for MSRs as prepayment speeds increase. He also asked if the current coupon positioning implies an expectation for mortgage rates to remain stable in the near term.

Answer

Bill Greenberg, President and CEO, clarified that the DTC platform is intended to hedge only the faster-than-expected prepayment speeds of the MSR portfolio, not its entire interest rate risk. He emphasized the need for smart technology investments to ensure the platform can scale effectively as mortgage rates decline, noting that current recapture rates are exceeding models despite a small portion of the portfolio being refinanceable. Nick Letica, Chief Investment Officer, stated that the coupon positioning should not be interpreted as a forecast for stable mortgage rates. He explained that it reflects dynamic adjustments to the portfolio in response to rate movements and the relative value of specified pools versus TVAs, with TVAs often used for hedging current coupon risk due to their flexibility.

Harsh Hemnani questioned whether the company's cost-saving strategies might impede the direct-to-consumer (DTC) originations platform's ability to scale and provide a hedge against MSRs as prepayment speeds rise. He also asked if the coupon positioning, particularly higher TVA exposure in intermediate coupons, indicated an expectation for mortgage rates to remain stable.

Answer

Bill Greenberg (President and CEO) clarified that the DTC platform is intended to hedge only the faster-than-expected prepayment speeds, not the entire interest rate risk of the MSR portfolio. He emphasized the need for strategic investment in technology to scale the DTC business, rather than across-the-board cost cuts, noting that current recapture rates are exceeding models. Nick Letica (Chief Investment Officer) advised against inferring rate expectations from coupon positioning, explaining that TVA concentration is a dynamic adjustment based on relative value between specified pools and TVAs, and TVAs offer flexibility for hedging current coupon risk.

Harsh Hemnani from Green Street Advisors, LLC asked about Two Harbors' financing strategy, specifically seeking the rationale behind issuing an unsecured baby bond this quarter rather than relying on repo financing.

Answer

William Dellal, VP & CFO, explained that the primary reason for the unsecured baby bond issuance was to pre-finance the upcoming maturity of the company's convertible notes. He noted this was the main driver of the change in financing structure for the quarter.

Harsh Hemnani of Green Street Advisors, LLC asked if elevated market volatility and the portfolio's negative convexity have necessitated increased hedging that could affect static return estimates. He also inquired if the 'up-in-coupon' bias remains as the firm adds back spread exposure.

Answer

Chief Investment Officer Nick Letica acknowledged that higher realized volatility increases convexity costs but stated that wider spreads offer compensation, mitigating the impact. He confirmed the firm's strategy is to keep risk tight. Letica also affirmed that the 'up-in-coupon' bias remains the preferred strategy, as lower coupon MBS trade in a highly technical and less intuitive manner.

Harsh Hemnani of Green Street Advisors, LLC inquired about the projected long-term recapture rate for the RoundPoint platform and asked for the company's view on the relative investment value between MSRs and the securities portfolio.

Answer

President and CEO Bill Greenberg stated it's too soon to project long-term recapture rates as the DTC channel is still scaling up, though they aim for industry-level rates. Chief Investment Officer Nicholas Letica commented that currently, the mortgage securities side looks very attractive due to recent spread widening. However, from a longer-term perspective, the company continues to favor its MSR assets for their stable cash flows and favorable risk-reward profile.

Harsh Hemnani asked about Annaly's capital allocation strategy, noting the uneven tightening of spreads across housing finance assets and the faster growth in credit exposure this quarter. He sought clarification on how much credit and MSR exposure could increase beyond the long-term target of 20% each, relative to Agency MBS.

Answer

David Finkelstein, CEO and Co-Chief Investment Officer, confirmed that while Agency grew 30% and RESI/MSR grew 15% in 2025, the current objective is to increase MSR and RESI at a faster pace (e.g., 30% growth for them, less for Agency). He reiterated a longer-term weighting objective of 50% Agency, 30% RESI, and 20% MSR, emphasizing comfort with the credit quality of current acquisitions.

Harsh Hemnani noted the uneven tightening of spreads and the increasing attractiveness of credit, asking how much credit exposure or MSR could increase beyond the 20% long-term target for each, and what the potential allocation bands are.

Answer

David Finkelstein, CEO and Co-Chief Investment Officer, confirmed that Annaly favors RESI credit and MSR from a capital allocation perspective, aiming to grow these segments by 30% while agency grows less. He reiterated the longer-term weighting objective of 50% agency, 30% RESI, and 20% MSR. Finkelstein emphasized comfort with the credit quality of their acquisitions and the consistency of their whole loan correspondent channel, expressing hope to grow these businesses at the margin.

Harsh Hemnani questioned Annaly's strategy of rotating into higher coupon specified pools for prepayment protection, and asked about the breakdown of MSR supply between lower and production coupons.

Answer

V.S. Srinivasan, Head of Agency, explained that specified pools offer long-term option value, making them more attractive than moving down in coupon when higher coupons underperform. Ken Adler, Head of Mortgage Servicing Rights, and David Finkelstein, CEO and Co-Chief Investment Officer, clarified that Annaly prefers taking negative convexity risk in MBS and pass-throughs, and that increased MSR supply is due to higher mortgage origination volumes.

Harsh Hemnani asked about Annaly's strategy for rotating into higher coupon specified pools versus lower coupons for prepayment protection, and the breakdown of MSR supply between lower and production coupons.

Answer

V.S. Srinivasan, Head of Agency, explained that specified pools offer long-term options for prepayment protection, making them more attractive than generic collateral. Ken Adler, Head of Mortgage Servicing Rights, and David Finkelstein, CEO and Co-Chief Investment Officer, discussed preferring negative convexity risk in MBS over MSR and the increase in MSR supply due to higher origination volumes.

Harsh Hemnani from Green Street inquired about the outlook for the arbitrage between whole loan spreads and securitization spreads in residential credit. He also asked about the rationale for reducing capital allocation to Agency MBS despite its perceived attractiveness.

Answer

Co-CIO Mike Fania described the whole loan market as efficient, with acquisition spreads moving in tandem with securitization execution. He noted competition is primarily from PE and REITs, not yet dominated by insurance companies. CEO David Finkelstein explained the lower agency allocation was a temporary result of positioning for a resi transaction and MSR onboarding, confirming the marginal dollar still favors Agency MBS.

Harsh Hemnani from Green Street inquired about the spread between whole loan acquisition costs and securitization execution in the residential credit market. He also asked about the rationale for reducing capital allocation to Agency MBS despite its perceived attractiveness.

Answer

Co-CIO Michael Fania noted the whole loan market is efficient, with acquisition spreads moving in tandem with securitization spreads. CEO David Finkelstein addressed capital allocation, explaining that the decrease in Agency was due to capital being positioned for a residential credit securitization and a pending MSR purchase. He affirmed that, on the margin, new capital would still be deployed into Agency MBS.

Harsh Hemnani inquired how the barbelled composition of the mortgage market, with less outstanding in intermediate coupons (4%-5%) and GSE purchases focused on par coupons, affects AGNC's ability to select pools and deploy capital. He also asked about the expected evolution and boundaries of AGNC's duration gap in coming quarters.

Answer

Peter Federico, President, CEO, and CIO, noted that GSE purchases are likely to focus on par coupons (around 5%) to impact primary mortgage rates, which has led to tighter spreads in that coupon range. He assured that despite the market composition, there is ample liquidity in the $9 trillion market for AGNC to position its portfolio across various coupons. He stated that the duration gap, currently around 0.5 years (up from 0.3 at quarter-end), is expected to operate within a historical range of 0.25 to 0.75 years, potentially widening if the 10-year rate moves higher.

Harsh Hemnani inquired about the impact of the barbelled mortgage market composition, particularly the lower outstanding volume in intermediate coupons, on AGNC's ability to pick pools and deploy capital, and how AGNC's duration gap is expected to evolve.

Answer

Peter Federico agreed that the GSEs' purchases are likely focused around the par coupon to impact primary mortgage rates, which explains the tighter performance of the 5%-ish coupon. He stated that despite the barbelled market, there is ample liquidity in the $9 trillion market across various coupons (4s, 4.5s) for AGNC to position its portfolio. Regarding the duration gap, he noted it was 0.3 at quarter-end, now around 0.5 due to the ten-year backing up. He expects it to widen further if the ten-year stays or moves higher, operating typically between a quarter and three-quarters of a year, as a hedge against lower rates.

Harsh Hemnani of Green Street Advisors, LLC asked about leverage rebalancing triggers in shock scenarios and whether increased certainty from GSE reform would allow for higher leverage.

Answer

Peter Federico, President, CEO & CIO, explained that during Q2's volatility, AGNC rebalanced risk by raising accretive capital rather than selling assets, which preserves long-term value. He confirmed that increased confidence in the market outlook does inform their view on leverage. However, he emphasized that the current leverage of ~7.5x already provides a 'perfect combination' of attractive returns and significant risk management capacity.

Harsh Hemnani asked for the rationale behind potentially reducing swap-based hedges at a time when mortgage-to-swap spreads appear unsustainably wide and attractive.

Answer

Peter Federico, President, CEO, and CIO, clarified that considering a more balanced hedge portfolio is a long-term strategic thought process focused on diversification and risk management. He emphasized that no changes have been made and that, in the short run, AGNC will continue to capitalize on the attractive carry offered by mortgages versus swaps.

Harsh Hemnani asked about the potential risks to AGNC's base case that Agency MBS spreads will remain within their recent trading range, inquiring about catalysts that could drive spreads either significantly wider or tighter.

Answer

Peter Federico, Director, President and CEO, identified two primary risks that could widen spreads: a sharp increase in interest rate volatility and uncertainty surrounding GSE reform. Christopher Kuehl, EVP and CIO, added that on the other side, stronger-than-anticipated bank demand or increased overseas investment could be catalysts for spreads to tighten. However, their base case remains for spreads to stay in a stable, attractive range.

Harsh Hemnani from Green Street asked for an explanation for the significant increase in the portfolio's expected life CPR, given management's outlook for mortgage rates to remain elevated. He also inquired if the portfolio would continue to shift towards higher coupons.

Answer

Peter Federico, President and CEO, clarified that the projected lifetime CPR was calculated based on the lower prevailing and forward interest rates that existed at the end of Q3. He also confirmed that given the current rate environment, the company's strategic inclination is to move back up in coupon, which would likely cause the portfolio's average coupon to rise in the coming quarters.

Harsh Hemnani asked about Blackstone Mortgage Trust's capital allocation strategy, specifically comparing the accretiveness of originating new loans versus share buybacks, and inquired about the portfolio's composition, including the role of net lease and bank loan acquisitions in hedging floating rate exposure.

Answer

Tim Johnson, Chair of the Expertise Board and Global Head of BREDS, explained that the company dynamically evaluates investment opportunities, including share buybacks, based on attractive stock levels and high return on investment. Austin Peña, EVP of Investments, added that net lease and bank loan portfolios provide duration and a natural hedge against floating rate exposure, with bank loan acquisitions offering upside convexity due to discounts to par.

Harsh Hemnani with Green Street inquired about Blackstone Mortgage Trust's strategy for deploying capital, specifically the relative attractiveness of originating new loans versus share buybacks, and at what premium or discount to book value buybacks become more accretive. He also asked about the composition of the investment portfolio, particularly if the increase in net lease and bank loan acquisitions, which are fixed-rate, is intended to reduce floating-rate exposure in anticipation of lower future rates.

Answer

Tim Johnson, Chairman and Incoming CEO, explained that the company dynamically evaluates capital deployment opportunities, including share buybacks, taking advantage when the stock trades at attractive levels to achieve high returns on investment. Austin Peña, EVP of Investments, confirmed that the company deploys capital across various channels, noting that net lease and bank portfolios add duration and provide a natural hedge against the traditional floating-rate business. He highlighted that acquiring bank portfolios at a discount offers upside convexity and helps diversify earnings composition.

Harsh Hemnani of Green Street asked if the types of borrowers and their business plans have shifted post-tariff announcements, particularly if they are less 'heavy transitional'. He also inquired about changes in new loan spreads and whether BXMT is benefiting from widening asset spreads while financing costs remain stable due to the new CLO.

Answer

EVP of Investments Austin Pena confirmed a trend toward lighter value-add business plans, which predated recent tariff news but is now reinforced by it. He noted that asset-side lending spreads are wider by 10-20 bps, but financing costs have moved similarly. CEO Katharine Keenan added that reduced new supply from higher construction costs fundamentally benefits the value of their existing collateral.

Harsh Hemnani asked about the company's willingness to expand its office loan portfolio and if there was a target exposure level. He also inquired how the net lease strategy would affect long-term leverage.

Answer

EVP of Investments Austin Pena and CEO Katharine Keenan explained that while the bar for new office lending is high, they will pursue selective opportunities on high-quality assets, but expect overall office exposure to decline. Keenan added that the net lease strategy is fundamentally lower-levered and will be a positive for the company's overall leverage profile.

Harsh Hemnani of Green Street asked how the company weighs deploying capital into new loans versus share buybacks, particularly as lending spreads appear to be tightening. He also questioned if BXMT is incorporating higher SOFR floors into its new loan originations given the uncertain path of rate cuts.

Answer

CEO Katie Keenan explained that the company strategically allocates capital and did "all of the above" in the last quarter. She emphasized that new originations are highly attractive, with 60% LTVs and mid-teens levered returns. Keenan clarified that while asset spreads have tightened, financing costs have also decreased, keeping the net spread attractive. She confirmed that adding SOFR floors is a "huge focus" for both new loans and modifications.

Harsh Hemnani inquired if the check size and yield on the quarter's hotel origination differed materially from the average and asked about the timeline for selling one of the Park Hotels assets and renegotiating the other.

Answer

Chief Investment Officer Tim Doherty explained the hotel deal was an acquisition of an existing ground lease and was underwritten to meet their target ROA. CEO Jay Sugarman added that it had strong credit metrics and a low LTV, resulting in a slightly tighter yield but still meeting targets. Regarding the Park assets, Jay Sugarman stated it was premature to discuss timelines as they don't control the assets yet but are preparing for the transition.

Harsh Hemnani of Green Street inquired about the split of recently closed deals between those with and without an accompanying leasehold loan to understand the certainty provided by the loan. He also asked if the strong LOI pipeline signals a broader recovery in the ground lease market.

Answer

Chief Investment Officer Timothy Doherty explained that while deals with a leasehold loan offer more certainty, the vast majority of all LOIs historically close regardless. He also stated that the reduced volatility in interest rates has helped sponsors make decisions, leading to a stronger pipeline, which is a good sign that transaction flow will increase.

Harsh Hemnani asked about Safehold's cost of equity, the logic of selling Caret units to fund buybacks if Caret is undervalued, and why the company would prioritize buybacks over growth if it can achieve attractive spreads. He also questioned the long-term UCA potential of affordable housing assets compared to traditional trophy properties.

Answer

Chairman and CEO Jay Sugarman explained their cost of capital is benchmarked against long-duration bonds, aiming for a 100+ bps spread. He justified selling Caret units by arguing that realizing some value is better than the zero value the market currently ascribes to it. He positioned the buyback as a tool to address share price dislocation, not a pivot from their primary goal of scaling. Chief Investment Officer Timothy Doherty and Mr. Sugarman defended the UCA potential of affordable housing, citing their high-quality, core locations and strong underlying real estate fundamentals.

Harsh Hemnani from Green Street Advisors, LLC inquired about the expected near-to-medium-term growth of the loan portfolio and whether incremental growth would be primarily driven by leverage.

Answer

President, CEO & Director Stuart Rothstein indicated that portfolio growth is expected to continue as capital is recycled from focus assets and redeployed with three to four turns of leverage. He clarified that funding for this growth will come from both the redeployment of equity (as some focus assets are unlevered or under-levered) and the use of typical leverage on that equity.

Harsh Hemnani from Green Street asked how ARI intends to fund incremental deployments beyond expected repayments, given the strong year-to-date origination volume. He also questioned if the slowdown in the securitized market is driving more business to ARI.

Answer

Executive Stuart Rothstein stated that future deployments will be funded by loan repayments and capital recovered from resolved focus assets, explicitly ruling out equity issuance at current prices. He noted leverage would see a modest, natural increase as this capital is redeployed. Chief Investment Officer Scott Weiner confirmed that disruptions in the U.S. securitized market are increasing inbound inquiries for ARI's balance sheet lending, providing more opportunities for larger deals.

Harsh Hemnani from Green Street asked about loan spreads on stabilized versus transitional assets, how the company weighs risk appetite in the current market, and whether ARI would consider using the CRE CLO market for financing.

Answer

CIO Scott Weiner explained that while loan spreads have tightened, financing spreads have also compressed, allowing ARI to maintain mid-teen returns. He noted that spreads for new loans are generally in the high 2s to low 4s. Weiner emphasized a focus on downside protection and moderate leverage, stating they don't need to chase risk to hit return targets. He also confirmed ARI does not anticipate using the CRE CLO market, preferring the flexibility, borrower privacy, and favorable terms offered by its existing financing partners.

Harsh Hemnani of Green Street asked about the outlook for loan repayments in Q4 and whether the decrease in the general CECL reserve indicates that most credit issues are now known.

Answer

Executive Stuart Rothstein stated that based on current dialogues with borrowers, repayment activity expected in Q4 and early Q1 remains on track. He affirmed that the company feels it has identified its specific credit issues and feels good about the portfolio, aside from the assets on its focus list. The CECL change is partly a mathematical result of repayments outpacing originations.