Annaly Capital Management - Earnings Call - Q1 2020

Transcript

Operator (participant)

Good day, and welcome to the Annaly First Quarter 2020 conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I'll now like to turn the conference over to Purvi Kamdar, Head of Investor Relations. Please go ahead.

Purvi Kamdar (Head of Investor Relations)

Good morning, and welcome to the First Quarter 2020 earnings call for Annaly Capital Management Inc. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, including with respect to COVID-19 impacts, which are outlined in the risk factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release.

As a reminder, Annaly routinely posts important information for investors on the company's website at www.annaly.com. Content referenced in today's call can be found in our first quarter 2020 investor presentation and first quarter 2020 financial supplement, both found under the presentation section of our website. Annaly intends to use our web page as a means of disclosing material, non-public information for complying with the company's disclosure obligations under Regulation FD, and to post and update investor presentations and similar materials on a regular basis. Annaly encourages investors, analysts, the media, and others to monitor the company's website in addition to following Annaly's press releases, SEC filings, public conference calls, presentations, webcasts, and other information it posts from time to time on its website. Please note this event is being recorded.

Participants on this morning's call include David Finkelstein, Chief Executive Officer and Chief Investment Officer, Serena Wolfe, Chief Financial Officer, Mike Fania, Head of Residential Credit, Tim Gallagher, Head of Commercial Real Estate, Tim Coffey, Chief Credit Officer, and Ilker Ertas, Head of Securitized Products, and with that, I'll turn the call over to David.

David Finkelstein (CEO and CIO)

Thank you, Purvi. Good morning, everyone. Since we last spoke on our market update call on March 16th, we've seen the COVID-19 pandemic spread rapidly. We would like to again extend our deepest sympathies to those directly impacted by the virus, and we hope everyone joining us for the call today continues to stay healthy. Keep ourselves, our families, and communities safe. Annaly continues to work remotely until it is appropriate for us to return to the office. We are grateful to have had well-established business continuity planning in place prior to this crisis to ensure the well-being of our staff without disruption to our operations. Now, on today's call, I'll briefly provide an update on the market and how we managed our portfolio during the extreme volatility in March. Then leaders of each credit business will go through their respective portfolios.

Serena will discuss the financials, and I'll follow up with our positioning and outlook going forward. Now, as the COVID-19 outbreak wreaked havoc on financial markets and the economy, we witnessed the Fed and Congress intervene in unprecedented ways. The Fed has enacted policy stimulus at a record pace, announcing larger and broader-based measures than during the 2008 financial crisis. They reduced the policy rate to the zero lower bound, provided ample liquidity and repo and U.S. dollar swap markets, conducted record asset purchases in Treasuries and MBS, and established lending facilities to support a broad array of markets. To contextualize the sheer magnitude of the Fed's actions, its balance sheet has grown by more than 50% in the past six weeks. These measures have helped support financial markets and should prove beneficial for the economic recovery once we find ourselves on the other side of the virus.

In addition to the Fed, Congress has now passed four rounds of fiscal stimulus measures worth more than 10% of U.S. GDP. We believe that the extraordinary steps that policymakers have taken to address the problems have been and will continue to be effective in normalizing markets and the economy. But this will require patience given the magnitude of the virus impact. Now, turning to markets in our portfolio specifically, I'll begin with the agency market. The liquidity vacuum we experienced in March was akin to the financial crisis, but it was the velocity of the risk-off move that was most notable. Normal trading relationships among asset classes almost instantly decoupled, volatility spiked, and spreads gapped substantially wider. Specified pools were particularly impacted as payups went from all-time highs as the market approached an impending refi wave to local lows as investors rushed to the sidelines to raise liquidity.

Adding to this turbulence, dealers struggled to intermediate as their balance sheets were constrained by elevated holdings heading into quarter-end. Our portfolio management efforts have consisted of strategic asset selection, unique hedging strategies, and a particular focus on liquidity. In fact, throughout January and February, in addition to a modest outright reduction in NC assets, we were shifting out of generic pools into lower-coupon TBAs such that one-third of our reduction in our pool portfolio came prior to the volatility we experienced in March. We reduced our leverage over the quarter from 7.2x-6.8x in order to preserve capital amidst the erratic price action. The decline in our portfolio by over $28 billion over the course of Q1 was largely driven by sales of generic non-story collateral, and the composition of our pool portfolio improved as a result of these decisions.

The percentage of what we define as "quality" specified pools now represents 85% of our portfolio, up from 69% in the prior quarter, with the remainder made up of seasoned collateral. This shift in portfolio makeup has proven prudent thus far, as specified pools have had a strong rebound in the second quarter, with the average payout on our portfolio improving by nearly a point since quarter-end. Now, looking forward in an environment with uncertainty around housing and prepays, we are confident that our portfolio is better positioned to perform throughout a range of different outcomes. Of additional note, vigorous Fed actions have dramatically improved the technical landscape for MBS.

Net supply to private investors was forecasted to be roughly $500 billion at the start of the year, but with the Fed pivoting from runoff mode to becoming the largest buyer in the market, the net supply outlook for 2020 has turned sharply negative. The impact of Fed purchases has tightened spreads and reduced volatility meaningfully, while settlements will continue to clean up the TBA float benefiting roll markets. In addition, repo financing remains ample for the product as it was even during the height of the volatility in March. Fed actions serve as a tailwind for the entire sector, both on the asset and financing side, and thus we are very constructive on agency going forward. Now, regarding our hedging activity, in light of the significant rally in rates, we took proactive steps throughout the quarter to manage the contraction in the duration of our portfolio.

First, we exited our Treasury futures positions prior to the widening in swap spreads that occurred at the end of the quarter. Second, we added receiver swap options at the beginning of the quarter, which proved effective in managing the sharp decrease in duration in our agency assets in March. We were able to exercise or exit many of these options at a notable gain and continue to deploy more option-based hedges given the cheapening in volatility that has occurred thus far this quarter. Adding these options is a beneficial way to manage the risk of longer-term rates moving higher further out the horizon, and finally, we extended the hedges further out the curve as front-end hedges offer little value now that the Fed has anchored short-term rates at the zero lower bound.

As a consequence, the decline in our swap portfolio is primarily attributable to the reduction in short-term swaps, in turn extending the average maturity and lowering the notional amount of our hedges. Our decision over the past few quarters to keep most of our swaps in LIBOR-based hedges benefited the portfolio as LIBOR widened meaningfully above overnight rates throughout the latter part of the quarter. However, we expect the spread to normalize as we have seen in similar widening episodes and feel comfortable heading into the second quarter with the majority of our swaps now in OIS. Shifting to the credit side, while no portfolio is immune to the impacts of the pandemic, we feel we are positioned to withstand current volatility given the composition of our portfolios and the relatively low leverage across our businesses.

Our cautious view on the economic cycle and credit pricing over the past number of quarters has somewhat mitigated our exposure to higher beta products. We are pleased with the conservative stance our residential and commercial teams have taken with respect to credit quality, as well as the strategic approach that our middle market lending business has taken as their focus has been on financing non-discretionary, non-cyclical companies where the vast majority of the portfolio is invested in essential businesses. Our origination and underwriting teams across all three credit teams have been focused on actively monitoring our existing loans and maintaining close contact with our borrowers and sponsors as the impact of the virus continues to play out, and now with that, I will hand it over to Mike to begin with the residential credit sector.

Mike Fania (Head of Residential Credit)

Thank you, David. The residential credit market, similar to the broader fixed income and equity markets, experienced significant disruption in late Q1 as the downstream impact to the economy due to the COVID-19 virus became increasingly apparent. Residential credit spreads started to widen in the second week of March, with significant asset price decline and liquidity temporarily evaporating from the market. Credit markets were extremely turbulent over the following two weeks, given a vicious cycle of deleveraging, margin calls, forced liquidations, and redemption concerns as technicals weighed on asset prices. Similar to the broader credit markets, the resi market began to stabilize with spreads moving tighter in early April as forced deleveraging subsided and market participants turned to evaluate assets upon fundamental. Prime Jumbo spreads trading in the low-mid to 100s to swap pre-virus touched 600-650 to swaps at the wides, before tightening into the low-mid 200s currently.

New origination CRT M2s trading at par dollar price pre-virus hit mid-high 50s at the lows and are currently trading in the low 70s dollar prices. The non-agency legacy market, generally a source of stability trading in the low-mid 100s to swap pre-virus, hit 10% yields before stabilizing in the 4.5%-5% yield area. The new origination non-agency whole loan market also experienced significant disruption as securitization was no longer accretive or viable, and market participants repriced assets given industry-wide forbearance policies and economic disruption. This, in turn, forced a number of non-agency aggregators and originators to close their operations, stop accepting new locks, and being forced to liquidate holdings on warehouse facilities. Moving to our portfolio, we priced two securitizations in January and February: OBX-2020-INV1 and OBX-2020-EXP1, with total deal sizes of $375 million and $468 million, respectively.

Those transactions priced at a weighted average cost of funds of 133 basis points and 105 basis points the swaps, with Annaly retaining approximately $110 million market value of securities across those two deals. Annaly has now securitized 10 residential whole loan transactions since 2018, representing our discipline and commitment in obtaining term non-mark-to-market financing. The economic risk of our residential credit portfolio ended the quarter at approximately $2.6 billion, down from $3.9 billion at the end of Q4 given the aforementioned whole loan securitizations, paydowns, and targeted security sales consistent with the deleveraging of the agency portfolio. Turning to the residential whole loan portfolio, we ended Q1 with approximately $1.3 billion of economic risk. The loan portfolio is conservatively positioned as it consists of 100% first lien, new origination collateral with strong credit characteristics, including a weighted average 762 original FICO, 67% original LTV, and a 37% DTI.

Layered risk within traditional credit metrics is also minimal within the portfolio, as less than 1% of our loans have an original FICO less than 700 and original LTV greater than 80%. At quarter-end, our residential securities portfolio sat at approximately $1.3 billion, with $530 million of those holdings representing positions in our OBX securitizations. Similar to our whole loan portfolio, we believe our securities portfolio is conservatively positioned, with 55% of our assets, excluding legacy RMBS, rated investment grade at quarter-end. Our aggregate CRT position sits slightly over $200 million market value, comprising only 8% of residential credit exposure.

In addition to the strength and conservatism of our portfolio, Annaly's presence as a programmatic securitization issuer, the ability to transact in either securities or whole loans, and the current lack of a legacy operating platform puts Annaly in a unique position among our peers as we evaluate the new landscape within residential credit. With that, I'll hand it over to Tim Gallagher, Head of Commercial Real Estate.

Tim Gallagher (Head of Commercial Real Estate)

Thanks, Mike. The commercial real estate property and credit markets continued the momentum of 2019 and got off to a solid start in 2020, but that progress abruptly stopped with the onset of the coronavirus-related crisis as the sector became one of the first to experience the impacts of curtailed travel and shelter-in-place orders. Hospitality and retail saw an immediate impact on operating performance. Initial data for multifamily, office, and industrial are better, but even these more stable asset classes are not immune to near-full economic shutdown. Commercial credit spreads started to widen in the second week of March in line with other credit markets, and certain CRE market participants such as money managers, REITs, and hedge funds were forced to raise cash due to fund outflows, margin calls, and redemptions.

By the third week of March, several mortgage REITs and other funds could not satisfy margin calls, prompting them to seek forbearance with lenders, while some vehicles were liquidated altogether, adding to pressure on spreads through these forced liquidations. Similar to the broader credit markets, the liquid commercial credit markets began to stabilize with spreads moving tighter in early April as forced deleveraging subsided. While AAA paper has significantly tightened from its March wides, credit continues to languish without a clear buyer base or financing option. In addition, servicers' ability to ramp up staffing, their liquidity to provide advances, and their assessment of special servicing and workout fees continue to be top of mind in industry discussions. According to research reports, more than 2,600 CRE borrowers totaling nearly $50 billion in loans have requested forbearance as of the end of March.

This backlog will be an ongoing headwind to existing credit bonds in the CMBS market. The new origination market remains largely frozen as market participants await further clarity on the macroeconomic impact of the disruptions and the resulting direct impact on the commercial property sector. The uncertainty has shut down debt fund lending as their existing financing execution remains unknown and the new issue CRE CLO market is closed. Warehouse counterparties are either on hold or have had to adjust pricing and haircut so materially that new direct lending is largely absent. Balance sheet lenders such as banks and insurance companies are focusing on their existing portfolios as forbearance requests have swamped institutions that have significant CRE exposure.

Turning to our portfolio, prior to the dislocation, we had originated three whole loans in the quarter for a total of $172 million to bring the overall CRE portfolio to approximately $3 billion in assets with $1 billion of economic risk. We continue to maintain more than $1.2 billion of unused capacity on our term warehouse facilities, and the majority of our loan portfolio is financed through a term non-recourse, non-mark-to-market CRE CLO we issued in February 2019. As of payment dates in April, across both our loan and securities portfolios, we received 47 out of 50 payments. Our CMBS portfolio is mostly comprised of industrial, multifamily, and office assets as we chose to invest primarily in the single asset, single borrower market where we could underwrite each asset.

Moreover, underlying loans and single asset, single borrower transactions are the larger sponsors and are secured by higher quality stabilized real estate. Finally, our equity portfolio is comprised of need-based real estate, including grocery-anchored shopping centers, healthcare, and net-leased assets financed with long-term fixed-rate loans. Our portfolio is positioned with a focus on strong sponsorship, a premium on cash flow, and executable business plans and best-in-class operating partners. We have a dedicated in-house asset management and legal team, and the leadership of the CRE business have been through multiple CRE cycles dating back to the 1990s. Prior to the dislocation, the portfolio was performing according to our business plan, and we expect the vast majority of our assets to weather the storm and rebound when the economy reopens. And with that, I'll hand it off to Tim Coffey, head of credit.

Tim Coffey (Chief Credit Officer)

Thanks, Tim. As a reminder, the middle market effort was the first of the firm's three credit strategies to reside on Annaly's balance sheet, commensurate with the arrival of the group's current leadership team in 2010. At the time, the firm's founders, Mike Farrell and Wellington Denahan, sought professionals in the middle market space with a solid track record not just through the 2007-2009 period, but over multiple cycles. Today, Annaly Middle Market is a $2.3 billion business comprised of 51 borrowers that are 100% backed by top-tier private equity sponsors. Despite recent volatility and heightened uncertainty, we believe the Annaly Middle Market portfolio is uniquely positioned given our tightly wound approach to a narrow industry set, dedication to private equity firms with well-established track records aligned to our industry set, and deep first-order due diligence. I cannot emphasize enough, we do not compromise on due diligence.

The composition of the middle market portfolio is 70% first lien, 30% second lien. The number of borrowers in the portfolio and our percentage mix between first and second lien has not changed materially over the past two years. The group's asset expansion has been driven by growth from within our portfolio across multiple vintage investment years as opposed to the rapid addition of new borrowers. Much like how we handled past periods of intense convergence in the loan marketplace, and I can assure you the past three or four years were as intense as any period we have seen. We tackled this convergence by pruning.

We pruned the number of industries to which we are willing to lend from 16 to eight over the past four years, and correspondingly, we culled the number of private equity sponsors with whom we partnered to better align with the sectors we believe are countercyclical, non-discretionary, and defensive. Consequently, we reduced the number of our tier-one private equity relationships by almost two-thirds since 2010. This careful concentrated approach has resulted in the aforementioned borrower count remaining virtually static for two years. We readily admit our pruning was quite early. However, the middle market loan space is illiquid in the best of times. Consequently, pruning must come early in our view. In addition, the Middle Market Group has always been a pure-play direct lending business. Every dollar of our $2.3 billion book is a direct loan with no exposure to securities or securitizations.

We use very little third-party non-recourse leverage, as our past disclosures indicate. This did not change in the first quarter of 2020, and each of our three primary financing counterparties has been consistent with their approach since the relationships were initiated. On average, each of our term facilities maintained a maturity of at least 4.6 years out from today. We have not experienced a change in value adjustment on the portfolio for quarter-end, nor in the days subsequent to quarter-end. As it relates to the specifics of the portfolio, the weighted average unlevered return of the first lien book is approximately 7.6% fully floating. The weighted average unlevered return of the second lien book is approximately 11.2% fully floating, yielding an amalgamated unlevered return for the portfolio of approximately 8.8% fully floating.

In addition to the modest third-party leverage of 0.7x, I referenced previously, we are also differentiated in the underlying leverage profiles of our investments. The weighted average detachment point through our first lien exposure is approximately 4.6x EBITDA, and the weighted average detachment point across the book is approximately 5.1x EBITDA. While this weighted average detachment point is comparatively low, it reflects the substantial free cash flow generation inside our second lien exposures specifically, whereby our second lien leverage today reflects in many instances where first lien was originally executed at those deals' inception. Consequently, we are comforted against spread duration risk. This point is further amplified by a portfolio aggregated across past vintages with short effective durations: 21 months on the first lien and counterintuitively 20 months on the second lien.

The earlier mention of a static portfolio borrower count further illustrates this point as asset growth from existing borrowers is accompanied by required lender consent and support, mitigating against spread duration risk. Lastly, 85% of our portfolio is comprised of new cash equity transactions, to clarify, where new cash equity comes in to buy a business, with median equity contributions representing 44% of the capital structure underneath us. Moving to portfolio fundamentals, the fundamentals of the portfolio have in many respects been aided through the month of March due to the mission-critical nature of our underlying borrowers. 90% of Annaly's Middle Market group exposure resides within industries and borrowers categorized as essential under federal guidelines, enabling these borrowers to continue operations. Further, an additional 9% of our aggregate exposure, not deemed essential, has operated unimpeded and grown through the month of March.

We proactively have been in contact with all 51 borrowers in our portfolio and received one interest forbearance request on a $14 million first lien exposure. Interestingly, $153 million of the $222 million we have categorized under our quarter-end watch list witnessed considerable benefit in March, given the nature of these borrowers' operations, and we suspect that should continue in the coming months. As you will hear from Serena, the Middle Market Group's loans are classified as held to maturity, Level 3, and subject to recently imposed CECL reserves. Reserves taken in this quarter alone are multiples of what the Middle Market Group's cumulative actual losses have been over our nine and a half years at Annaly. We are certainly concerned with the prospects of deteriorating fundamentals and its potential impact on the middle market space generally.

Not surprisingly, a variety of influencers now stifle new issue activity with the exception of a few select industries that have been sources of opportunities for Annaly in the past. These select industries are currently well-represented in our middle market portfolio and likely to expand going forward. Trends within the CLO market portend difficulty on the larger end of the middle market, both new issue and secondary. The volume of amendments, forbearance requests, and workout activity in a condensed period generates a supply-to-personnel imbalance without precedent in a market that is now operating with a non-bank majority in charge. This signifies a prolonged reduction in new issue for the traditional middle market. We are very cautious about secondary market participation, although very narrow opportunity sets do exist.

Given Annaly Middle Market's biases, which mandate intensive due diligence, as I mentioned earlier, we expect our involvement will be weighted toward primaries, both new issue and tack-on acquisition activity alike. Wider pricing will certainly accompany these lower-levered transactions. In wrapping up, it can be said unequivocally the Middle Market Group will be as measured as we have been in our nine and a half years at Annaly. And for many of us individually, that caution has been a staple of our behavior in our prior 15 years, 20 years, 25 years before joining Annaly. I know that our experienced team will continue to execute a defined strategy shared by a group with an entrenched credit culture and no turnover since formation. With that, I will turn it over to Serena.

Serena Wolfe (CFO)

Thank you, Tim, and good morning, everyone. I'm sure you all agree with me after that overview that we have the best team in the business. I'm pleased to join you today for this earnings call and provide you with color on our financial results and the success of our remote close. I will provide brief financial highlights for the quarter ended March 31st, 2020, and while our earnings release discloses both GAAP and non-GAAP core results, I will be focusing this morning primarily on our core results and related metrics, all excluding PAA. As David mentioned earlier, given the great shutdown, the latter part of Q1 was challenging. However, we are proud of the results given the enormous headwinds that management and the company faced as we closed out the quarter. Our book value per share was $7.50 for the first quarter, a 22.4% decrease from 2019 year-end.

We generated core earnings per share, excluding PAA, of $0.21 for the quarter and a GAAP net loss of $2.57 as compared to $0.26 and $0.82 for the fourth quarter of 2019. The decrease in book value is attributable to the increase in unrealized losses on the swaps portfolio of approximately $3.2 billion due to lower forward rates compared to a gain of $778 million in the prior quarter, as well as higher unrealized losses on instruments measured at fair value through earnings of $730 million, down from losses of $6 million in the prior quarter, which is offset by unrealized gains in OCI of $997 million from our agency portfolio.

It is important to note that the vast majority of our assets and liabilities are at fair value, and our book value reduction illustrates the significant market disruption that occurred prior to quarter-end and the impact on fair value measures. Our book value decline was not a function of forced asset sales, but rather unrealized mark-to-market losses with potential for recoupment. Tim Gallagher and Tim Coffey provided an update to our ACREG and MML businesses earlier and the impact of COVID-19 on their portfolios. Given the market turmoil and uncertainty around the long-term economic picture, it was certainly an interesting quarter to adopt the CECL standards.

We recorded reserves associated with our credit businesses of $139.6 million during Q1, consisting of $39.6 million of opening balance CECL reserves and $100 million of additional reserves during the quarter, primarily resulting from the impacts of COVID-19 on our borrowers, of that being $62 million, or more general reserves related to forecasts for a deterioration in economic conditions of $38 million. In totality, these reserves comprise 3.7% of our ACREG and MML portfolios' loans as of March 31st, 2020. As we've discussed on previous earnings calls, we have implemented an extensive process to determine appropriate reserves for the ACREG and MML businesses, which includes developing policies, systems, and controls, including the use of two third-party models.

We have found that the key inputs into the CECL model that have material impacts on the reserve are the credit attributes of the loans, life of the loan driven by prepayments, and the economic scenarios, with the latter representing a considerable challenge given variability in data this quarter. We spent additional time with the businesses analyzing the results of the reserve calculations and ensuring it's consistent with our expectations given the quality of the portfolio and the performance of the borrowers. The full impact of the shutdown to the economy is yet to be seen, and we will continue to monitor specific asset performance and economic projections as we determine future CECL reserves.

We view it to be critical in the current environment to consider the adverse economic scenarios available in this process, and we remain comfortable with our existing credit portfolios given the thoughtful approach outlined by the ACREG and MML business leaders. It should also be noted that our residential credit businesses have elected fair value accounting, and thus the entirety of that portfolio is recorded at market value, including our whole loan holdings, consistent with the vast majority of our assets. Turning to earnings, the largest factors quarter-over-quarter to core earnings, excluding PAA, were higher premium amortization on agency investment securities on $41.9 billion of agency security sales, as well as lower average balances on our credit portfolio.

However, core did benefit from a reduction in financing costs, with lower average repo rates down to 1.77% from 2.10%, combined with lower average repo balances down to $96.8 billion from $102.8 billion. We expect continued reduction in financing costs with a repo rate of 1.23% at quarter-end. The portfolio generated 118 basis points of NIM down from Q4 of 141 basis points, driven primarily by a decrease in coupon from lower average interest-earning asset balances and the increase in premium amortization that I mentioned a moment ago. Annualized core return on average equity, including PAA, was 9.25% for the quarter in comparison to 10.56% for fourth quarter 2019.

There will be many factors at play over the next quarter with respect to expectations for unemployment, forbearance, and other issues being experienced by the mortgage market that will likely mute prepayments relative to what we would otherwise expect given the low-rate environment. The change in our efficiency metrics relative to Q4 2019, being 1.98% of equity for the first quarter, was primarily driven by our reduction in equity rather than any material increase in operating expenses. Also to note, our internalization transaction is on track, and we expect to close by the end of the second quarter.

Annaly was able to weather the storm from this dislocation and end the quarter with an excellent liquidity profile due to our high-quality asset composition across the businesses, our strong repo counterparty relationships and reputation, our broad diversity of financing arrangements, and the ability to tactically utilize our broker-dealer account for incremental liquidity. While numerous firms experienced difficulties meeting margin calls and other funding disruptions, the stability and resiliency of our funding sources was on display as our repo funding operations were uninterrupted. We continue to have good access to repo financing, and our direct lending businesses did not experience any meaningful funding pressures with term facilities. To protect the health and well-being of our employees, their families, and communities, remote work requirements began in phases in early March, culminating with a company-wide exercise on March 13, 2020, to test connectivity and functionality.

All employees were able to successfully perform their duties in this testing, and we have operated remotely since that time. As a result, we completed our quarter close remotely without any interruption or significant changes to our normal processes or controls resulting from remote work requirements. This is a testament to the quality of our personnel, processes, and IT systems. Finally, I would like to acknowledge David for stepping into the role seamlessly in uncharted waters. Despite the backdrop, he has demonstrated incredible poise and character throughout this time, and we're all thankful for his leadership. Challenging times can bring people together, and we as a management team have cemented strong relationships in a short time, and we look forward to brighter horizons and continuing to bring value to our stakeholders.

In conclusion with that, I'll turn over to David, who will provide commentary on our outlook and positioning.

David Finkelstein (CEO and CIO)

Thank you, Serena, and we hope the relatively deeper dive into the credit businesses this quarter proves informative in light of current market conditions. Now, as with any period of extreme market volatility, there are three conceptual stages of stabilization and recovery as it relates to how we manage our portfolio. Phase one involves preserving capital, ensuring up liquidity, which we have successfully completed this through the measures I have already discussed. In phase two, which is how I would characterize where we are currently, there are opportunities to deploy capital in the agency sector while we obtain more information on the long-term outlook on the economy. We are looking forward to transitioning from a defensive posture to a more offensive one, but dislocations and constrained liquidity do persist, and as a levered participant, we must remain focused on the stability of financing available for our investments.

Agency MBS currently provides the most surety. Even as the Fed shifts to a more measured QE pace aimed at lowering mortgage rates and economic stability, the agency sector will continue to benefit. We view the outlook for volatility to be lower, and with easier regulations to facilitate dealer intermediation in the Treasury market, market functioning should continue to stabilize. While a great deal of uncertainty remains, the environment for managing interest rate and convexity risk is much more favorable heading into the second quarter. Now, phase three, which we believe is near, involves strategically allocating capital to best position the company in a new environment. As we look ahead, we will benefit from having numerous ways to capitalize on the dislocations across markets, and those with ample capital will have many opportunities to choose from.

We sit in a healthier liquidity position today than we have over the past few quarters. There will be abundant prospects across our businesses, which again highlights the benefit of our model as we are able to most optimally balance the best risk-adjusted returns available. Episodes of extreme volatility, as witnessed in March, are pivotal moments for the growth of Annaly and our team. We have reaffirmed the principal ways in which we've always managed our business. Liquidity is paramount. Scale is critical, and relationships matter immensely, particularly on the financing side. Lastly, we have been of the view that historical leverage levels for our sector are elevated, and we expect them to decline in the coming quarters, which is not specific just to the agency market. Lastly, I wanted to thank our team.

I'd be honored of stepping into this role as the world, as we had all known it, turned upside down. Our team has truly worked tirelessly and collaboratively to successfully manage the unprecedented markets we have experienced. The Annaly culture has been a bright light amidst the turmoil, and I'm excited for what is ahead for our firm. And now with that, we can open up the call for questions, Operator.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. If you're using a speakerphone, please pick up your handset before pressing the keys. At this time, we'll pause momentarily to assemble the questions. Our first question today comes from Steve Delaney with JMP Securities. Please go ahead.

Steve Delaney (Managing Director and Senior Equity Analyst)

Good morning, everyone. Thanks for taking the question. Boy, it was great to hear from each of the individual credit heads, given the environment we're in right now. And I would say you all came across sounding very comfortable with what you own today. I guess the question that raises is your posture towards credit generally as a team. A lot of people seem to be running from the hills to the hills because they, I think, more because of financing weaknesses. But do you see this as more, over the next six to nine months, more an issue of managing what you have and minimizing losses, or do you actually see potential opportunities from the dislocations that have occurred? Thanks.

David Finkelstein (CEO and CIO)

Hi, Steve. This is David, and thanks for your comments.

Steve Delaney (Managing Director and Senior Equity Analyst)

Hello, David.

David Finkelstein (CEO and CIO)

Good to hear from you, Steve. And thank you for your comments on the credit businesses in terms of the more informative approach. We did want to make sure that everybody understands exactly how these businesses are operating and the portfolios are performing. And to your question, there obviously is a lot of uncertainty still remaining with respect to how the economy and credit evolves. As I said in my prepared comments, agency is the core of the portfolio. That does represent the best shelter in the storm here, and the sector is obviously quite attractive. Now, with respect to credit going forward, each of our three credit businesses very likely will have opportunities. There's three components of the repricing of credit that we've experienced and are experiencing. There's a technical cheapening, which we saw in March when there was overhang and resi credit and some commercial assets.

There's the fundamental component of price, which is still yet to be determined, and then there's a risk premium. Given the uncertainty, to what extent are you just getting compensated for bearing more variability in returns? We kind of think we're beyond the technical component. Now we're figuring out the fundamental price of credit and whether it's warranted, given current pricing, and what kind of risk premiums we should expect to achieve for making these investments, so there is still work to be done, and we have to have more information. The way I would characterize it is starting with the residential credit business. When we started the year, we felt that that would be a growth area given the fundamentals of the residential landscape. We still think it will be a growth area.

There's obviously been a dislocation, and loan origination is confined to Prime Jumbo, conforming loans, and the GSEs. There's been a little bit of a lack of sponsorship for the loans that we have historically acquired, but we think it'll come back. We think securitization will come back. That being said, assets are going to trade cheaper. Financing is going to be a little bit more expensive, but we think the returns are going to be commensurate with the risk. We do still think that's a growth area. Our middle market lending business, as Tim discussed, we believe will perform admirably through this and will be differentiated from other businesses in the middle market lending space. We do anticipate more opportunity, and we have the liquidity of the REIT to potentially add assets if it's warranted.

But again, we still need to figure it out. With respect to the commercial sector, I will say that the focus over the near term is going to be a little bit more on the asset management side. But it is, from an economic interest standpoint, it is the smallest business or has been the smallest business in our credit allocation. And we've been very conservative both with respect to allocating capital as well as the assets that we've acquired. So I think we're kind of waiting in the wings here. We will see shortly how pricing really shapes out. And if we think it's cheap relative to the fundamentals and the risk premium, we don't have a problem allocating capital. But in the meantime, agency is the shelter in the storm.

Steve Delaney (Managing Director and Senior Equity Analyst)

Understood. And super helpful. And just one question on that: is your favorable early 2020 outlook for residential, based on the strength of the housing market, etc.? Obviously, we don't have a securitization market today. We'll see if the Fed adds AAA RMBS to TALF. But do you believe that once we see a securitization market reawaken, that the problems we have had with warehouse lending will abate and that the banks will come back and be supportive of pre-securitization investment?

David Finkelstein (CEO and CIO)

Yeah. So I think seeing that execution will give more comfort that there is liquidity to banks. But I will also say that we're starting to see some aspect of warehouse lines actually open up. It's at a higher cost, but nonetheless, we're at a point now a month out of the real volatility where banks are starting to look at the sector. It's dependent upon the assets as well as the counterparty, but there are some silver linings with respect to warehouse lines. And the two will likely occur coincident, both securitization and warehouse lines opening up.

Steve Delaney (Managing Director and Senior Equity Analyst)

Thanks for the comments, and everyone stay safe. Thanks.

David Finkelstein (CEO and CIO)

Thanks, Steve.

Operator (participant)

Our next question comes from Kenneth Lee with RBC Capital Markets. Please go ahead.

Kenneth Lee (VP)

Hi, good morning. Thanks for taking my question. Wondering if you could just share with us any updated thoughts on your current dividend coverage? Thanks.

David Finkelstein (CEO and CIO)

Sure, so thanks for joining us today, Ken. We will have more formal guidance at a point in the future with respect to the dividend. What I will say is we recognize there certainly have been cuts in the sector, and we're aware of the guidance that analysts have come out with, so what I can tell you is that we do expect to maintain a competitive dividend yield relative to peers, which has been in the low double digits over the past number of years on book value, so we're comfortable with conveying our competitiveness of our dividend yield, and we really want to spend the time over the very near term and not just look at the second quarter, but look at multiple quarters out and determine what we think the appropriate dividend yield is. Obviously, our core was a little bit lower in Q1.

As Serena mentioned, there was some catch-up amortization associated with asset sales that dragged that down a bit. We do expect our core to be a touch higher in the second quarter, and we'll have more formal guidance with respect to the dividend later in the quarter.

Kenneth Lee (VP)

Okay. Very helpful. And just one follow-up, if I may. This one just on the middle markets lending business. Is there any potential benefit, or do you see any potential benefit from any of the various Federal Reserve lending programs for the portfolio companies within that business? Thanks.

David Finkelstein (CEO and CIO)

I'll turn it over to Tim to answer that.

Tim Coffey (Chief Credit Officer)

Yeah. I think as it relates to the variety of the programs that are out there, I think given where we play, we're less influenced by what goes on with a lot of those programs as they have been contemplated today. Certainly, the one area that has not been a part of a lot of these programs has been leveraged loans. You certainly have seen it on the AAA CLO side where they have announced some action. But I think, long story short, we are certainly not banking on it. I don't think we need to bank on it.

And I think as it relates to the AAA CLO portion of it, I think the benefit there is probably ultimately going to be outweighed by the fact that the CECL, I think, is going to have a more profound effect ultimately on how things get priced off of the cheapest aspect of the capital stack and the cheapest form of prime brokerage activity that feeds the entire ecosystem and leverage lending.

Kenneth Lee (VP)

Okay. Very helpful. Appreciate it. That's it for me, and hope everyone stays safe. Thank you.

David Finkelstein (CEO and CIO)

Thanks, Ken.

Operator (participant)

Our next question comes from Rick Shane with JPMorgan. Please go ahead.

Rick Shane (Managing Director and Senior Equity Research Analyst)

Hey, guys. Thanks for taking my questions, and I hope everybody's well. A couple of things, and I don't know if I missed it. Did you provide a quarter-to-date update on book value at this point?

David Finkelstein (CEO and CIO)

I haven't, Rick, but I will tell you as of yesterday, our book was up roughly 7%, right around $8. Our leverage has declined modestly, primarily as a consequence of higher equity value. We are right now at about 6.6x, maybe 6.5x. Our liquidity is $5 billion in terms of cash and Agency MBS.

Rick Shane (Managing Director and Senior Equity Research Analyst)

Great. Thank you for that update. And we really appreciate the deeper dives into the credit businesses. And wanted to follow up a little bit on the MML business. Look, your competition in that space to some extent has some very different constraints. They're subject to fair value accounting versus your CECL reserves. They typically have hard leverage limits related to their 40 Act status. I am curious if you are seeing any sort of arbitrage created by those differences. And also wanted to talk a little bit about the 3.7% CECL reserve in the context potentially of some of the spread widening that we've seen in the space that will impact fair value accounting companies.

David Finkelstein (CEO and CIO)

This is David. I'll start and then hand it over to Tim with respect to the CECL accounting on the middle market book. I think when Tim went through the metrics of the portfolio, upper eights yield with a detachment point at 5.1x EBITDA, we feel like that is a very comfortable level from a market standpoint, even with potential repricing. So from the standpoint of fair value on the MML book, I think we feel pretty good about it. I'll hand it off to Tim to.

Tim Gallagher (Head of Commercial Real Estate)

Yeah. Rick, I think just as it pertains to us, which is the first part of your question, I walked through where we were with our watchlist categorization names, which is approximately $220 million. $150 million of that number, the borrowers actually experienced some substantial growth in the month of March. So clearly an outlier for the names that one would consider to be the most sensitive to everything that's been going on. But March was a very productive month for a large portion of those watchlist names. So I think what we try to marry up are the fundamental aspects of the portfolio coupled with what you're ultimately describing, the spread duration issue that certainly goes into any FVO calculation.

I will tell you, I think the middle market space, generally speaking, has been largely, most diplomatically, not particularly concerned with spread duration risk because it's something that hadn't reared its head for basically seven or eight years until Q4 of 2018 when it first hit, and then obviously with this most recent bout beginning in Q1 of 2016, Rick, we became very, very focused on that. And I think David spelled out the numbers and the attachment points, but I think the real telling one is as it relates to our effective durations. We carry a second lien book that's got a shorter effective duration than our first lien book, which is a clear anomaly, but it's also a function of the types of credits that we play in, and so we've been very, very conscious of spread duration risk.

Unfortunately, I think 99% of the space is not particularly concerned with it, and you only really find out until you have periods like today. So certainly, I think how people are going to have to assess that is going to be a big part of the FEO calculations and prospectively potentially the hits. I would also tell you that where you play is very, very important in terms of how you manage effective duration risk. And so when you take a look at our book, I think one of the things that does stand out is the fact that we have shifted our focus over the last two or three years to more leverage range opportunities that are sub-50, sub-60 of EBITDA.

And they tend to be platform investments where sponsors are rolling up a specific space, and they have to come back to us to obviously ultimately complete any prospective acquisition opportunities. And that allows us the binary optionality to either stay in the deal or ultimately exit stage left, commensurate with any prospective acquisition opportunity. And so that particular segment has really been the most powerful thing that we've strategically done to mitigate spread duration risk.

Rick Shane (Managing Director and Senior Equity Research Analyst)

Tim, that's very helpful, and it really does come through. I apologize to my colleagues listening, but I am going to ask one last question. Can you just talk about LIBOR floors on that portfolio, and is the benchmark rate for those investments three-month LIBOR?

David Finkelstein (CEO and CIO)

Borrowers have an option, Rick, basically one, three, six, etc. Since the crisis, the 12-month option has been less relevant in a lot of the underlying credit agreements. We do have LIBOR floors on our portfolio, with approximately 80% of our book has a LIBOR floor. How we are financed, our counterparties with us on the third-party leverage side do not have LIBOR floors with us. So there is a bit of an arb there. I think as it relates to the one three-month option, what I can tell you is recently the trend has been to the overwhelming majority being at the one-month end.

Rick Shane (Managing Director and Senior Equity Research Analyst)

Makes sense. Thank you guys very much.

David Finkelstein (CEO and CIO)

You bet. Thanks, Rick.

Operator (participant)

And our next question comes from Eric Hagen with KBW. Please go ahead.

Eric Hagen (Director)

Hey. Hey, thanks. Good morning, guys. And hope you're well. And hey, David, I enjoyed the interview on the website.

David Finkelstein (CEO and CIO)

Oh, thanks.

Eric Hagen (Director)

Hey. Following up on the adjustments in the hedge book, all in, are you guys running a positive duration gap right now? And what's the message you think for investors with respect to the spread and duration exposure they can expect to receive right now and annually going forward?

Mike Fania (Head of Residential Credit)

Yeah. Sure. It's a good question. So to the first question, the duration we are running right now is a half a year as of this morning, 0.54 years. And the message I think we would convey is that it's not the quantity of hedges, it's the quality. With the Fed clearly in play for the foreseeable future in terms of policy accommodation, we don't expect short rates to increase for the foreseeable future. And so having hedges at the front end of the curve is not advisable in our view. When we look at the possible risks of the portfolio, the agency portfolio, it's very asymmetric insofar as there's very little call risk. The duration of the index is well below two years, as is our portfolio, and it's really about extension risk.

And so how we wanted to create, or reposition, the hedge portfolio late last quarter is to make sure that we had protection out the curve to the extent that the market became somewhat complacent, and we did see a bit of a sell-off in the longer end, just given the fact that there is going to be a lot of Treasury issuance. And oftentimes, we think the Fed is providing a put option on the market. They're not always doing that. And so we wanted to make sure that our hedges were out the curve because, like in the summer of 2013, which we all remember, in those types of episodes where the market gets tripped up, you can't see a meaningful sell-off and a steepening of the curve. So that's where we felt the most risk was.

I think the average life is a little over nine years on the hedge book, and our assets are much shorter. And that brings our duration down to about a half a year. And if anything, we would shorten the duration a little bit more potentially. And we're also a little bit more inclined to use options here, just given that volatility has come all the way back to the levels in January. And we think that's a worthwhile investment. When the tails get cheap, you want to buy them. And so we have added a number of payer swaptions out of the money payer swaptions to the portfolio as well in the second quarter.

Eric Hagen (Director)

Thanks for that, Mike. I thought that was great. And just one on prepays. Some people think we're effectively just kicking the can down the road, so to speak, because of the operational liquidity challenges that have obviously made mortgage spreads and rates very wide right now. Does your prepay assumption assume some normalization in mortgage spreads and mortgage rates? And just help us contextualize the prepay assumption. I think it'd be really useful. Thanks.

Mike Fania (Head of Residential Credit)

Yeah. Are you talking about the longer-term prepay assumption that we publish?

Eric Hagen (Director)

Yeah.

Mike Fania (Head of Residential Credit)

Yeah. So that's the average of, I believe it's five dealers and their average prepays, long-term prepays on our portfolio. We look at that relative to our model, for example. And the reason why we use it is it's arm's length insofar as we're not influencing that. We think that all models have real issues right now, given we have not been at these rate levels before. Number one, you can't really model the uncertainty with respect to this virus and the ability for loans to close, etc. The primary secondary spread should contract over time as more capacity is added. We do anticipate that to be the case. And so it's a little uncertain with respect to what the model impact will be or whether or not models are completely accurate. But we think 17-odd CPR is a reasonably good long-term estimate given the rate environment.

And if anything, over the long term, perhaps a little bit conservative given the quality of the collateral we own, which is now the vast majority of it. I think 99% now is either medium or high-quality specified pools or seasoned bonds. So we're comfortable with it.

Eric Hagen (Director)

Got it. So since it's a long-term estimate, it does take into account some normalization of spreads over time.

David Finkelstein (CEO and CIO)

Yes. Exactly.

Eric Hagen (Director)

Got it. Got it. Thank you. And then just one on housekeeping. How much are you guys funding overnight right now through Arcola?

Mike Fania (Head of Residential Credit)

Yeah. I'd say right now it's 25% of our overall repo book, right around there, maybe a touch inside of there of our overall financing. With respect to Arcola, it was a very valuable tool during the month of March. That's where a considerable amount of the liquidity was with respect to the Fed providing liquidity in repo markets. A lot of it ended up in FICC. And so we appreciate having that. We have more capacity if we wanted to increase our Arcola balances. But we also heavily appreciate the bank counterparty relationships. And we have to balance that trade-off between overnight financing at 10 basis points and going out a little further, whether it's one month, three months, and paying just a little bit of term premium on that.

Eric Hagen (Director)

Got it. Thank you so much and stay well. Thanks.

David Finkelstein (CEO and CIO)

Thanks, Eric.

Operator (participant)

And our next question comes from Doug Harter with Credit Suisse. Please go ahead.

Doug Harter (Director)

Thanks. David, if you could talk about kind of your outlook for leverage kind of as we move into the phase two or phase three that you described in your prepared remarks.

David Finkelstein (CEO and CIO)

Sure. Are you speaking with respect to us or broadly?

Doug Harter (Director)

Yeah. For you.

David Finkelstein (CEO and CIO)

Okay. So obviously, our leverage is a touch lower on the quarter and even lower now. And we do think that it is an environment where leverage will be lower. There is more spread in the agency market, and the economics are more favorable than they have been given the fact that we're at the zero lower bound. The Fed is obviously in play in buying assets. And we're certainly comfortable with the agency market. But you can take two approaches. You can say, "Okay, let's add leverage because we think spreads are going to tighten," which we do on the agency market. That just tends to be the case when you have this type of environment, as we saw in the earlier QEs. Or you could take the approach that we can earn a competitive yield with a little bit lower risk.

I think we're more on the side of lower leverage and a slightly lower risk portfolio. And a lot of that is informed by what we just experienced in March. Liquidity was obviously highly constrained for agency investors. It wasn't just the REIT sector. I mean, if you look at the amount of assets the Fed purchased, which is in excess of $500 billion, the fund redemptions, deleveraging, and other sales of agency MBS obviously provided a lot of supply into the market. And we learned a lesson from that experience. And I think it does inform how you look at leverage on a go-forward basis. And generally speaking, we think it's a little bit lower.

Doug Harter (Director)

Then just sticking to leverage, how are you thinking about the borrowings currently against FHLB and kind of what the outlook there is as we kind of approach sort of the end of your ability to access that?

David Finkelstein (CEO and CIO)

Sure. Sure. So as you suggest, our line does end currently in February of next year. We did reduce our borrowings from the FHLB last quarter given the fact that we were financing a fair amount of agency MBS in addition to our whole loans on the line. And it actually became more economical to use our bank counterparties to finance the agency MBS. So we reduced the line by about two-thirds. We still maintain our whole loans on our FHLB line. But we are preparing for the eventual end of that line should that be the case. And as I was talking about earlier with Steve, we're looking at warehouse lines, bank warehouse lines. It's more expensive, obviously. But again, the economics of whole loans right now are more favorable.

And so, when you look at the balance, we do think that converting over to bank warehouse lines, assuming a securitization market redevelops, and we anticipate it to do so, we think the economics will not be quite as good as FHLB, but they'll be competitive in the fact that we've already built a brand in the securitization space thanks to the FHLB line and that helping us incubate our whole loan business. I think we're in good shape going forward, not relying on FHLB if it's not there.

Doug Harter (Director)

Great. Thank you.

David Finkelstein (CEO and CIO)

You bet, Doug.

Operator (participant)

Our next question comes from Matthew Howlett with Nomura. Please go ahead.

Matthew Howlett (Analyst)

Thanks, everyone. Good morning. First, on the margin, you gave a really good color on what happened there in the quarter and where repo is at the end of the quarter. One of your peers, I think, guided to over 150 basis points net interest spread second quarter. Is there sort of a cadence or any type of forward guidance you can give us on what to expect on that margin, that net interest spread next several quarters?

David Finkelstein (CEO and CIO)

Yeah, and obviously, it's fluid. Both is going to be inside of 100 basis points, certainly. We can and have repositioned our swaps to reduce the net interest spread. All I can tell you right now, because it's obviously fluid, Matt, is from a NIM standpoint, I would view Q1 as a trough relative to Q4 and Q2, and now, that being said, it is on a lower overall asset base. So you do have to take that into consideration.

Matthew Howlett (Analyst)

Right. Absolutely. So, I mean, is the biggest variable clearly is it just speeds? I mean, is that, given what we've sort of got clarity on where repo is and where the swap rates are, the biggest variable we think about modeling this next several quarters?

David Finkelstein (CEO and CIO)

Yeah. And repo, I think, is relatively stable and predictable. And what we do on the asset side and speeds obviously can influence that, and what we do on the swap side. And there's a lot of small variables that I think can make up the overall NIM. But I'm comfortable telling you that Q1 is a trough on that front.

Tim Gallagher (Head of Commercial Real Estate)

Okay. Great. And then, David, congrats on the role. The company is internalizing here at the end of second quarter. I wanted to obviously ask you about buybacks going forward. Can you maybe just spend a second to address your vision of Annaly? Maybe give us an update on the internalization, what changes and cost savings are going to happen, and just overall, anything you'd like to say in terms of where you think you're going to take this company in the next several years. And congrats again.

David Finkelstein (CEO and CIO)

Okay. Let's talk a little bit about that and thanks for the question, Matt. In terms of the vision in Annaly, what I'll say is I've obviously been with the firm for nearly seven years, and I've overseen the businesses for the past number of years. There is a level of continuity, as I've obviously had an influence on how these businesses have been directed. Now, what I'll say is, first and foremost, Annaly is an agency-oriented REIT and I'm not just saying that because it has been a port in a storm over the volatility. That's the DNA of the company. It was founded by two bond traders and nurtured by those individuals and that happens to be the DNA that does exist today, both on the asset and liability side. Agency-oriented.

But that being said, we do have three very solid credit businesses, and they all performed admirably through this volatility. On a go-forward basis, in terms of how we see the world, as I was discussing earlier, looking at these three credit businesses, we came into the year thinking that the resi sector probably had the most promise given the fundamentals and what we've been able to do in that business. We still do think that. Tim, in the middle market lending business, will differentiate that business, I think, through this volatility relative to his peers, as I said. And so that is something we're certainly happy about. And the commercial business has a capital markets focus. It's been conservative, both with respect to capital allocation and what we think the sectors that they've invested in.

But the commercial business, I think the sector as a whole is probably characterized over the very near term as more precarious given the uncertainty with respect to the commercial real estate. So my view is that we're an agency firm. We have all of these options. We have incredibly talented people, and we have brands in each of those businesses. Some level of continuity. We will make incremental changes as we get more information in terms of how this episode plays out. I wouldn't characterize anything we anticipate as transformational, but you can expect that when we go through an environment like this with disruption, that we have the capital and the liquidity to take advantage of opportunities. And we're absolutely looking to execute on that. But it's a little early to really predict how that plays out.

Now, in terms of bigger picture, Annaly will be very relevant in real estate finance, both in markets as well as in policy circles. We've built a strong brand in D.C.. We're looked upon as a thought leader down there, and we anticipate continuing that because there's a lot of policy work that we think needs to happen over the next number of years to make sure that real estate markets are well functioning and liquidity goes to borrowers, etc., so we will be relevant on that front. In terms of managing the company, we will look a little bit more organically, I think, relative to the recent past. This means more focus on portfolio management, looking within to create opportunities and generate growth, and ultimately, my view and our view is that we will attract capital through performance. That's what's going to be the key ingredient here.

We won't need to buy growth. We anticipate performing and capital coming our way. And so that's the general philosophy of how we're going to run this company: a little bit more portfolio-focused, organic growth. It's not to say we wouldn't be acquisitive, but we think we have all the ingredients within the company to be able to do what we want to do. And now, over the near term, we obviously have the tailwinds in the agency market. And so we are a little bit centric toward that business, but we'll see how everything plays out. And continuing on, your other questions again, Matt?

Matthew Howlett (Analyst)

I appreciate the buybacks. I know they'd be premature, but just wanted to throw it in there.

David Finkelstein (CEO and CIO)

Yeah. So with respect to buying back stock, obviously, in March and even into April, liquidity was paramount. How we look at buying back stock is it's a capital allocation equation. On one hand, you have the very near-term immediate accretion when your stock price is at a discount, and you trade that off with liquidity and what we might think to be better longer-term investment opportunities to use that capital. So what I'll tell you is we have the authorization. It is a capital allocation consideration, and we'll evaluate it relative to both liquidity and other options that we have.

Matthew Howlett (Analyst)

Thanks a lot, David. I really appreciate it.

David Finkelstein (CEO and CIO)

You bet. Thanks, Matt.

Operator (participant)

Ladies and gentlemen, this will conclude our question-and-answer session. I'd like to turn the conference back over to David Finkelstein for any closing remarks.

David Finkelstein (CEO and CIO)

Thank you, everybody. We hope everybody stays healthy and safe throughout this episode, and we look forward to talking to everybody shortly. Thanks.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.