Rick Shane

Rick Shane questioned the credit performance of Enact's post-2022 book compared to expectations, specifically asking if any cohorts (DTI, LTV, geography) showed elevated risks, and what areas the company is being more cautious about going forward.

Answer

CFO Dean Mitchell stated that all recent book years (2022-2024) are performing in line with or better than pricing expectations, despite being originated in a purchase market with higher risk attributes and modest home price appreciation. He highlighted monitoring housing markets in the Sun Belt (Florida, Texas, California, Arizona) where home prices have moderated, contrasting with the Northeast. CEO Rohit Gupta emphasized the company's deep analytics and ability to make frequent, granular pricing adjustments based on risk views and geographic differences.

Rick Shane inquired about Two Harbors' tactical portfolio construction strategy during the merger period, specifically if the acquisition is influencing capital allocation and the static return outlook, and also requested an update on the current book value.

Answer

Bill Greenberg, CEO, clarified that Two Harbors is operating as an independent company, managing its portfolio in the ordinary course, with investment decisions aligning with historical practices. Nick Letica, CIO, provided an update, stating that the book value was up approximately 1.5%-2% as of Friday, January 30th.

Rick Shane asked about the tactical portfolio construction and capital allocation strategy during the merger period, and if it impacts the static return outlook. He also requested an update on the most recent book value.

Answer

CEO Bill Greenberg clarified that the company operates as an independent entity, managing its portfolio in the ordinary course based on market assessments of risk and reward. CIO Nick Letica provided an update, stating that the book value was up approximately 1.5%-2% as of January 30th.

Rich Shane sought clarification on the strategy behind Two Harbors' tactical net short position in the coupon 50 basis points below their highest concentration coupon, as observed on slide 17.

Answer

Nick Letica, Chief Investment Officer, explained that this coupon exposure is primarily driven by interest rate movements and the current coupon's position relative to their MSR and other portfolio risk exposures. He noted that as rates rally, the negative offset migrates down in coupon, and they manage this dynamically. He clarified that this specific 50 basis point exposure isn't a strong strategic commitment but rather a result of managing overall risk in the context of spreads and specified pools across nearby coupons.

Rich Shane observed a tactical net short position in the coupon 50 basis points below the highest concentration coupon for the third consecutive quarter, seeking clarification on the strategy driving this exposure.

Answer

Nick Letica (Chief Investment Officer) explained that the coupon exposure is influenced by rate movements and the current coupon's position relative to the portfolio's risk exposures and MSR. He noted that as rates rally, the negative exposure migrates down in coupon to offset current coupon risk in the MSR portfolio. He emphasized that the company views these risks on a 'bucketed basis' and does not 'fuss' over specific 50 basis point coupon swaps, managing overall risk rather than a strong strategic reason for that precise exposure.

Rick Shane followed up on credit expense, noting that low credit expense in 2025 allowed for aggressive marketing and rewards. He asked if the 2026 guidance, which implies more normalized credit expense, means any continued low credit expense would be reinvested or fall to the bottom line, given American Express's historical reinvestment approach.

Answer

Christophe Le Caillec, CFO, stated that credit expense is very low, near its limit. He explained that the business model generates efficiencies from operating expenses, not by constraining technology growth (which has an 11% CAGR). He emphasized that the company is committed to mid-teen EPS growth, and while there may be movements between lines, the focus is on sustained growth through strategic investments and efficiencies.

Rick Shane of JPMorgan Chase & Co. questioned whether continued low credit expenses, as seen in 2025, would lead to incremental investment opportunities or if those excess returns would flow to the bottom line, given American Express's historical tendency to reinvest.

Answer

CFO Christophe Le Caillec stated that credit expense is already very low, nearing its limit. He highlighted that the model generates efficiencies in operating expenses and marketing acquisition due to the increasing share of premium products. He affirmed the company's commitment to mid-teen EPS growth, noting that while there might be movements between expense lines, the overall EPS target remains firm.

Rick Shane inquired about the role of retention offers as the new, higher Platinum Card fees roll out, asking about the typical percentage of customers who request or take these offers and if that response rate is expected to be higher or lower this time.

Answer

Chairman and CEO Stephen Squeri explained that retention offers play a very small role in retaining the card base, with most retention driven by explaining the product's value. He believes the Platinum Card's enhanced value proposition makes it easy for customers to see its worth, and he anticipates retention offers may play an even smaller role than in the past due to the product's inherent strength and ease of benefit engagement.

Rick Shane asked if, given the attractive opportunities in low-coupon MSRs (viewed as attractive IOs), it would also make sense to buy lower-coupon MBS as a hedge and for discount accretion if prepayment speeds increase. He also inquired about the liquidity of lower-coupon MBS for deploying capital.

Answer

David Finkelstein, CEO and Co-Chief Investment Officer, explained that valuations on low-coupon MBS are quite tight, suggesting better ways to manage risk. He noted that while there's some policy risk in low-note rate MSR, the borrower reluctance to give up low-rate loans makes it a safe, durable asset. He confirmed liquidity in low coupons, though not as good as production, and mentioned adding DUS (agency CMBS) last quarter as a cheaper alternative for good convexity and longer duration.

Rick Shane asked if, given the attractive opportunities in low-coupon MSRs, it also makes sense to buy lower-coupon MBS, especially with increasing prepayment questions. He also inquired about the liquidity available in lower coupons for capital deployment.

Answer

David Finkelstein, CEO and Co-Chief Investment Officer, explained that valuations on low-coupon MBS are quite tight, suggesting better ways to manage that risk. He noted policy risk in low-note rate MSR but emphasized its safety and durability, with uncertainty hedged through duration. Finkelstein confirmed that there is liquidity in low coupons, though not as robust as in production coupons, and mentioned that adding DUS (agency CMBS) to the portfolio was a more attractive option for convexity and longer duration in the last quarter.

Rick Shane asked about Annaly's confidence in maintaining stable Net Interest Income (NII) adjusted for PAA over the next couple of quarters, given its recent stability and current market uncertainties.

Answer

David Finkelstein, CEO and Co-Chief Investment Officer, expressed confidence in stable NII and EAD consistent with the past quarter, citing low leverage and stable swap portfolio runoff. Serena Wolfe, CFO, added that increasing yields from capital deployment and expected Fed cuts on funding costs should support good NII levels.

Rick Shane inquired about the confidence in maintaining stable Net Interest Income (NII) adjusted for PAA over the next couple of quarters, given current market uncertainties.

Answer

David Finkelstein, CEO and Co-Chief Investment Officer, and Serena Wolfe, CFO, expressed confidence in the portfolio's stability and expected EAD consistent with the prior quarter, citing stable swap portfolio runoff and benefits from future Fed cuts on funding costs.

Rick Shane from JPMorgan Chase & Co. inquired about Navient's capital allocation strategy for 2026, particularly how share repurchases would be managed given the expected growth in the private book and the company's current significant discount to tangible book value.

Answer

President and CEO Dave Yowan stated that Navient is not signaling any change in its approach to share repurchases, which remain opportunistic and based on valuation, including the discount to tangible book value. He noted that the amount of share repurchases has declined over the years due to a reduced share count, and the strategy is scaled to the size of the share repurchase authorization.

Rick Shane inquired about Navient's capital allocation strategy for 2026, specifically how the company plans to balance growing the private book and managing debt maturities with its historical discipline of returning capital to shareholders, especially regarding opportunistic share repurchases given the current discount to tangible book.

Answer

President and CEO Dave Yowan stated they are not signaling any change in their approach to share repurchases. He reiterated that 'opportunistic' is based on share valuation and the discount to tangible book value, confirming the strategy remains consistent, scaled to the size of the share repurchase authorization received in Q4.

Rick Shane sought clarification on whether the lack of quarter-to-date equity issuance was a strategic choice to slow issuance or due to a blackout period, to understand the extent of AGNC's pullback.

Answer

Peter Federico, President, CEO, and CIO, clarified that future issuance would be opportunistic, not driven by a desire for greater scale. He confirmed that the absence of quarter-to-date issuance was due to a typical blackout period for companies from the end of the previous period until around their earnings call.

Rick Shane sought clarification on whether AGNC's lack of ATM issuance quarter-to-date was by choice or due to a blackout period.

Answer

Peter Federico clarified that AGNC, like most companies, is typically in a blackout period for ATM issuance from the end of the previous period until around their earnings call. He also reiterated that future issuance would be opportunistic and driven by economics, not a desire for greater scale.

Rick Shane from JPMorgan Chase & Co. questioned the flat midpoint EPS guidance for 2026 despite mid-single-digit loan growth and NII growth, noting the significant increase in RSAs to pre-pandemic levels and a higher efficiency ratio. He asked if the RSA increase was due to a pull-forward effect from new programs and if efficiency ratios would normalize in 2027, seeking clarity on the long-term outlook. He also asked if the timing differential of CECL reserving for loan growth was the primary driver.

Answer

CFO Brian Wenzel attributed the current EPS profile and efficiency ratio to significant growth investments, including heavy reserve rates for new programs and early-stage assets with lower yields, which impact various lines. He stated that RSAs would normalize and the goal is double-digit EPS growth beyond 2026, with current investments setting up for the medium to long term. He confirmed that the timing differential associated with CECL reserving for loan growth "dwarfs the true reality a little bit."

Rick Shane questioned why Synchrony's midpoint EPS for 2026 is flat despite mid-single-digit loan growth, NII growth, and expected buybacks, given the significant increase in RSA and higher efficiency ratio. He asked if RSA is a pull-forward for new programs and if efficiency ratios will normalize in 2027. He also sought clarification on whether the flat EPS and higher efficiency ratio are primarily due to the timing differential associated with CECL reserving of loan growth.

Answer

CFO Brian Wenzel explained that the flat EPS is due to significant investments in growth, particularly heavy reserve rates for new programs (Walmart, Lowe's) and assets in early stages of the J-curve, which impact various P&L lines. He expects normalization beyond 2026, aiming for double-digit EPS growth. CFO Brian Wenzel confirmed that CECL reserving, which requires booking losses upfront before earning off the asset, does "dwarf the true reality a little bit" and impacts the reported financial metrics.

Rick Shane questioned the consistent increase in severity rates, asking about the long-term outlook and whether normalized returns are being approached given the extended period of low losses.

Answer

Mark Casale, Chairman and CEO, clarified that the provision is at 100% and embedded HPA is around 75%, with severity fluctuations tied to vintage timing. He emphasized the low overall loss environment, stating that the current credit quality is the 'business' due to post-GFC guardrails like Dodd-Frank and GSE sophistication. He highlighted the exceptional credit quality and the company's confidence in its well-boxed risk profile.

Rick Shane asked about the timeline for releasing capital from Redwood Trust's legacy investment portfolio, how that capital would be allocated across the three core businesses, and the drivers behind the ROE expansion in the Sequoia Mortgage Banking segment.

Answer

CEO Chris Abate stated that freed-up capital would be quickly deployed into mortgage banking across all three platforms, citing record growth in Sequoia and Aspire. President Dash Robinson explained that Sequoia's ROE expansion was driven by capital efficiency (quick balance sheet turnover, frequent securitizations), improved operating efficiency (expenses to revenues), and synergies with the Aspire platform, along with growing market share in both Sequoia and Aspire.

Rick Shane with JPMorgan Chase & Co. asked about Blackstone Mortgage Trust's strategy to cover its dividend, given the implied dividend yield as a function of book value, and requested a ranking of levers such as higher yields, reducing non-performing assets, and reducing REO, along with their expected contributions. He also inquired about the funding loss rate outlook and the company's confidence in achieving hurdle rates in a sharply lower short-term rate environment, considering capital recycling opportunities.

Answer

Tim Johnson, Chairman and Incoming CEO, highlighted that distributable earnings prior to charge-offs of $0.48 per share covered the $0.47 dividend this quarter. He emphasized that the dividend is set with a long-term view, and significant earnings potential remains to be unlocked by converting REO and impaired loans into higher-returning investments. He confirmed that redeploying capital from REO and impaired loans serves as a strong offset to a lower rate environment. Austin Peña, EVP of Investments, added that the company's sensitivity to a rate move is limited to about 150 basis points.

Rick Shane asked about Blackstone Mortgage Trust's strategy to cover its dividend, given the implied dividend yield, and the levers available such as higher yields, reducing non-performing assets, and resolving REO. He also inquired about the company's confidence in achieving hurdle rates in a lower short-term rate environment.

Answer

Tim Johnson, Chair of the Expertise Board and Global Head of BREDS, highlighted that distributable earnings prior to charge-offs covered the dividend this quarter and emphasized unlocking earnings from the REO and impaired loan portfolios as the primary lever for long-term dividend sustainability. He confirmed confidence in achieving hurdle rates in a lower rate environment due to the strong offset from redeploying capital from REO and impaired loans. Austin Peña, EVP of Investments, added that the company only loses about 150 basis points from rate moves.

Rick Shane questioned if the decision to sell loans in the fourth quarter represented a strategic shift from the company's prior outline of growing the book faster and reducing or flattening the dollar volume of loans sold. He also sought confirmation that the updated guidance contemplates the reserve release from held-for-sale designation but does not embed any gain on sale, implying potential upside if the deal closes in Q4.

Answer

CEO Jon Witter affirmed that there has been no strategic change, reiterating commitment to modest balance sheet growth, using loan sales to moderate, and aggressive capital return. He explained that the emergence of Plus Reform and the growth of private credit have created a new 'third funding leg' opportunity, offering more stable long-term earnings and attractive capital characteristics. Jon Witter confirmed that the guidance includes the reserve release from held-for-sale designation, but not any gain on sale, indicating potential upside if the deal closes in Q4.

Rick Shane questioned if the decision to sell loans in the fourth quarter represented a strategic shift from the company's prior outlined strategy of faster book growth and stable loan sale volumes. He also sought clarification on whether the updated guidance included the reserve release from 'held for sale' designation but excluded any potential gain on sale.

Answer

CEO Jon Witter clarified that the core strategy remains unchanged, but the emergence of Plus Reform and the growth of private credit have created a new 'third funding leg' opportunity for more stable, capital-efficient earnings. He confirmed that the guidance incorporates the reserve release from 'held for sale' designation, but not any gain on sale, which would be upside if the deal closes in Q4.

Rick Shane sought clarification on the expected redeployment of $1 billion in second-half repayments, questioning if a one-quarter lag should be anticipated for originations and why the Q4 pipeline wasn't larger given the Q3 lag. He also pressed for a realistic timeline to double the current ROE to adequately cover the dividend, emphasizing the importance of resolving challenged properties.

Answer

Patrick Mattson, President and COO, stated the goal is to match repayments with originations, minimizing timing drag, and that ample capital exists for deployment. He noted that Q4 originations would be front-ended and pipelines remain active, expecting continued build into year-end and Q1. Matthew Salem, CEO, categorized REO resolution into near-term (12-18 months), medium-term (24-36 months), and longer-term buckets, estimating about half of the earnings impact could be recovered in the near term from assets like Portland, West Hollywood, Raleigh, and Philadelphia.

Rick Shane noted that the current ROE is about half of what's needed to support the dividend and asked realistically how long it would take to double the ROE by resolving challenged properties and loans.

Answer

CEO Matthew Salem categorized the REO portfolio into three timelines: near-term (12-18 months), medium-term (24-36 months), and longer-term. He estimated about half of the embedded earnings power could be recovered in the near term from assets like Portland, West Hollywood, Raleigh, and Philadelphia, with Mountain View in the medium term and Seattle life science potentially longer.

Rick Shane from JPMorgan Chase & Co. asked for insight into KREF's large maturity walls in 2026 and 2027, seeking a potential breakdown of expected payoffs, extensions, and problematic loans. He also requested clarification on whether pipeline 'refinancings' represent new credits or existing KREF loans, and how the company internally distinguishes a 'refinance' from an 'extension'.

Answer

CEO Matthew Salem explained that it's difficult to provide a precise breakdown of future maturities, but noted many are being resolved ahead of schedule. He believes most credit issues have already surfaced and are not primarily tied to maturity dates anymore. Salem clarified that the vast majority of refinancings in the pipeline are for new credits, not existing KREF loans. An extension modifies a current loan, whereas a full refinance of an existing asset is rare and would be treated as an entirely new loan with new terms.

Rick Shane of JPMorgan Chase & Co. asked about KREF's strategy for managing its significant 2026 and 2027 loan maturity walls and sought clarification on the distinction between a loan refinance and an extension. In a follow-up, he requested a detailed timeline for repatriating capital from the company's REO portfolio.

Answer

CEO Matt Salem addressed the maturity walls, explaining that many loans are being refinanced ahead of schedule as sponsors seek to extend duration in a favorable market, and he does not see maturities as a major catalyst for new defaults. He clarified that most refinancings in KREF's pipeline are for new credits, not existing loans. Regarding the REO portfolio, Salem provided an asset-by-asset breakdown, indicating West Hollywood and Portland would see capital returns starting within the next year, while assets like Mountain View and Seattle require more patience to maximize value.

Rick Shane of JPMorgan Chase & Co. requested details on the $10.5 million in REO-related losses, the accounting and balance of payment-in-kind (PIK) interest, the strategy for holding versus selling REO based on property absorption, and the expected capital expenditure for the REO portfolio.

Answer

CFO Paul Elenio clarified that a ~$9.5 million REO loss was a strategic decision to quickly flip a deteriorating asset, while a smaller loss was on another property. He stated the PIK receivable balance was $95 million at quarter-end, which is added to the loan's carrying value and assessed quarterly via CECL. CEO Ivan Kaufman explained their REO strategy focuses on workforce housing, not oversupplied Class A assets. Both executives estimated future CapEx on the REO portfolio would be in the $25-$50 million range over time.