管理層發言
Thank you for standing by, and welcome, everyone, to the Annaly Capital Second Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press the star key followed by the number 1 on your telephone keypad. If you would like to withdraw your question, again, press star 1. At this time, I would like to turn the conference over to Sean Kensil, Director of Investor Relations. Please go ahead.
Good morning, and welcome to the second quarter 2026 earnings call for Annaly Capital Management. Please note that this call is being recorded. As a reminder, materials for today's call are available on our website at www.annaly.com. Today's call may include forward-looking statements, which are subject to certain risks and uncertainties that could cause actual results to differ materially, and may refer to certain non-GAAP measures. Please see the notices in our earnings release for important information regarding forward-looking statements and non-GAAP measures. Participants on this morning's call include David Finkelstein, Chief Executive Officer and Co-Chief Investment Officer; Serena Wolfe, Chief Financial Officer; Michael Fania, Co-Chief Investment Officer and Head of Residential Credit; Srinivasan, Head of Agency; and Ken Adler, Head of Mortgage Servicing Rights. And with that, I will turn the call over to David.
Thank you, Sean. Morning, everyone, and thanks for joining us. Today, I will open with a brief macro update before discussing our performance for the quarter, then I will provide further detail on each of our three investment strategies and finish with our outlook. Serena Wolfe will then discuss our financials in more detail before opening up the call to Q&A. Now, starting with the macro landscape: the U.S. economy continued to display resiliency during the second quarter as healthy consumer spending and tech-related investment activity drove economic growth. Also, the labor market appears to have gained some momentum in recent months, which is a welcome shift from the softer trend seen in the second half of 2025. That said, Fed officials have become increasingly concerned about persistent elevated inflation, notwithstanding last week's softer CPI print. Inflation pressures have been driven by a confluence of factors, including the energy price shock from the conflict in the Middle East, residual effects from tariffs, and the strong demand for computing equipment given the AI build-out. With policymakers more vocal about the potential to tighten policy, interest rates continue to rise, led by the front end of the yield curve. After pricing roughly 25 basis point cuts earlier this year, current market pricing suggests the Fed may hike at least once in 2026. Now, despite this pressure on the bond market, lower rate volatility provided a tailwind for our portfolio this past quarter, and we delivered a 5.5% economic return, once again demonstrating the strong performance of our diversified housing finance model. Additionally, we generated $0.79 of earnings available for distribution, marking the ninth consecutive quarter that our EAD has exceeded the dividend. The reinforced durability of our earnings power helped inform our recent increase in our quarterly common dividend to $0.75 per share. Also to note, we continue to operate with conservative economic leverage of 5.6x, and we raised roughly $450 million in equity through our ATM program during the quarter. Now turning to our investment strategies and beginning with the agency sector: spreads tightened in the second quarter as de-escalation in the Middle East led to a decline in both realized and implied rate volatility. Demand for agency MBS remained strong, driven by healthy fixed income inflows, increased purchases from overseas investors, and a robust CMO market, which is absorbing roughly 30% of gross issuance and broadly distributing the risk to a diversified set of investors. Given this attractive environment, we grew our agency portfolio by roughly $3 billion, ending the quarter at $95 billion in market value, which increased our capital allocation to agency to 57%. As far as portfolio activity, we rotated slightly up in coupon by reducing our exposure to 4s in favor of 5.5s and 6s, and we invested capital raised primarily in production coupon MBS and agency CMBS. Over the first half of the year, specified pools outperformed despite relatively benign rate volatility and a subdued prepayment outlook, which typically favors more generic collateral and TBA. Notably, pool outperformance was largely driven by strong GSE demand. We took advantage of these valuations and reduced our pay-up exposure by moving to lower pay-up pools and increasing our TBA holdings. Late in the second quarter, pool valuations became more attractive as GSE demand waned, and as a consequence we expect new investments to be more balanced across TBAs and specified pools. With respect to our hedge profile, we were conservative in managing our rate exposure and proactively added additional swap hedges to protect against rising rates. Our portfolio remains diversified across Treasury futures and swaps, with a preference for the latter given more attractive carry and comfort around balance sheet availability going forward. Now moving to residential credit: our portfolio ended the second quarter at $10.4 billion in market value, virtually unchanged quarter over quarter and representing 22% of the firm's capital. Residential credit spreads moved in tandem with broader fixed income markets, with AAAs ending the quarter approximately 10 basis points tighter. Our OBX correspondent channel produced another strong quarter of volume with $700 million of locks and $5.1 billion of fundings, including whole loan purchases, bulk purchases, and our partnerships. Annaly acquired $7.1 billion of loans in Q2, which is a new quarterly record for the business. Despite record volumes, the credit quality of our loan pipeline continues to improve, as evidenced by the locked pipeline's 765 FICO and 67% CLTV. Non-agency gross securitization issuance totaled over $150 billion year to date, up approximately 50% year over year, putting the private-label market on pace for its largest gross issuance year since 2007. Annaly remains the largest issuer of expanded credit mortgages and the second largest issuer overall as we closed 13 deals for $6.8 billion in principal balance in the second quarter, creating approximately $780 million of proprietary investments. Year to date, we have executed 25 transactions totaling $14.2 billion, and notably, we have securitized eight different forms of residential collateral, underscoring the depth and diversity of our platform. The OBX securitization program also had the distinction of closing the first billion-dollar new origination non-QM transaction, demonstrating Annaly's leadership position in the non-agency market. This inaugural billion-dollar deal was well received by investors, which allowed us to price a second equally sizable transaction approximately two weeks later. Our residential credit platform is well positioned for continued growth of the non-agency market, given the substantial investments we have made over the last several years, which we believe is a key differentiator and should continue to result in annually manufacturing high-yielding, proprietary investments that are difficult to duplicate and scale. Now shifting to MSR: our portfolio was roughly unchanged at $4.1 billion in market value, with our allocation of the sector representing 21% of the firm's capital. During the quarter, we modestly rotated the portfolio higher in loan balance as we committed to purchase approximately $200 million in market value of MSR across our various sourcing channels while also committing to sell two bulk pools with lower loan balances for $220 million in proceeds. These transactions capitalized on differing buyer economics across the MSR market, highlighting our value approach and portfolio flexibility. Moving into higher average loan balance MSR meaningfully enhances our return profile as our cost to service is a contractually fixed amount per loan, in contrast to in-house servicers with high fixed costs and a variable cost per incremental loan. Bolt supply in the second quarter decreased modestly from Q1, though we expect supply to remain healthy throughout the balance of the year given ongoing originator profitability constraints and industry consolidation. A minor note: our flow purchase channel is picking up with $31 million in market value purchases for the quarter, and it should become an increasingly important avenue to acquire current coupon MSR and allows us to offset portfolio paydowns. Our MSR portfolio fundamentals remain compelling. As prepayment speeds increased in line with seasonal trends to 5.2% CPR in Q2, which were still below our initial model projections, there is potential upside to returns. The credit quality of the portfolio remains exceptional, with serious delinquencies range bound at approximately 50 basis points. At a weighted average note rate of 3.3%, the lowest among the 20 largest MSR holders, our portfolio continues to generate durable cash flows with meaningful prepayment protection. MSR valuations remain well supported in the current interest rate environment, and our multiple increased marginally to 5.97, largely driven by the increase in rates offset by a flatter curve. Finally, to touch on our outlook: we continue to see compelling opportunities across our three strategies, underpinned by a healthy fixed income and housing finance investment environment. Agency spreads remain at attractive levels with mid-teens levered returns and very favorable technicals, and we will look to further deploy new capital in the sector balanced against relative value opportunities in our other businesses. Our residential credit platform continues to exhibit substantial growth supported by our loan sourcing and capital markets capabilities, longstanding originator relationships, and our skilled platform. Our MSR business is performing well ahead of our expectations, anchored by a deliberately constructed portfolio with a low note rate and high credit quality that would be difficult to replicate at scale in today's market. Importantly, Annaly offers investors a differentiated way to access value across the housing finance sector without assuming the operational intensity and volume dependency of a traditional origination model. We are not relying on loan volumes to sustain the economics of our portfolios, which allows us to remain selective, invest with scale, and allocate capital to the opportunities offering the most attractive risk-adjusted returns. That is a structural advantage that transcends market cycles and has contributed to our ability to generate double-digit economic returns while operating with less leverage than our peers. In an environment that continues to challenge origination-dependent businesses, the capital efficiency, scale, and flexibility of our platform meaningfully set us apart. And now with that, I will hand it over to Serena Wolfe to discuss the financials.
Thank you, David. Today, I will briefly review the financial highlights for the quarter ended June 30, 2026. As in prior quarters, our earnings release discloses GAAP and non-GAAP earnings metrics, and my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA. As David noted, the second quarter was characterized by a constructive fixed income investment environment, despite geopolitical uncertainty and rising yields. Against this backdrop, our diversified platform delivered strong performance. Elevated portfolio yields, tighter mortgage spreads, favorable hedge performance, and disciplined risk management supported both earnings and book value during the quarter. As of June 30, 2026, our book value per share increased by 1.7% from the prior quarter to $20.15. Including our $0.75 quarterly dividend, we generated a positive economic return of 5.5% for the quarter, bringing our economic return for the first half of the year to 6.9%. Earnings available for distribution per share increased by $0.03 to $0.79 per share and exceeded our newly increased quarterly dividend of $0.75 per share. The increase was primarily driven by higher average yields on our agency portfolio as our weighted average coupon on our assets increased 11 basis points to 5.11%, as well as higher securitization volumes within our residential credit business and favorable funding costs with average repo rate declining 6 basis points to 3.4% during the quarter. These benefits were partially offset by lower levels of swap income, reflecting lower average receive rates as SOFR declined during the quarter. Net interest margin increased 5 basis points to 1.76%, while net interest spread improved 8 basis points to 1.50%, with both measures benefiting from higher asset yields that more than offset modest increases in economic funding costs. Our balance sheet remained conservatively positioned, with economic leverage declining slightly to 5.6x from 5.7x in the prior quarter, a reflection of the increase in our book value for Q2. Our reported ending repo rate decreased 2 basis points to 3.85%, while weighted average repo days to maturity ended the quarter at 33 days, down three days from the prior quarter. Our residential credit platform continued to demonstrate strong momentum, generating significant securitization activity during the quarter, as David discussed earlier. Additionally, to support continued growth across our residential credit and MSR businesses, our total warehouse capacity increased to $8.3 billion, including $2.8 billion of committed capacity. We maintain ample available capacity in both businesses, with utilization rates of 61% for residential credit and 50% for MSR. We ended the second quarter with $8 billion in unencumbered assets, including $5.5 billion in cash and unencumbered agency MBS. In addition, we had approximately $1.6 billion in fair value of MSR pledged to committed warehouse facilities, which remains undrawn and provides an additional source of liquidity subject to market advance rates. In total, we had $9.6 billion of total assets available for financing at quarter end, up approximately $580 million from the prior quarter. This represented approximately 57% of our total capital base and provides us with significant liquidity and financial flexibility to support portfolio growth while maintaining a conservative risk profile. Finally, our OpEx to equity ratio increased 11 basis points to 1.4% this quarter, bringing our year-to-date ratio to 1.34%. The increase was driven in part by elevated expenses incurred during the quarter, which we expect to moderate in future periods. Overall, the quarter highlighted the benefits of our diversified housing finance platform and disciplined risk management approach. We generated book value growth, a positive economic return, strong earnings, and maintained our conservative yet flexible balance sheet positioning. That concludes our remarks. We will now take your questions.
Thank you, operator.
分析師問答
Thank you. We will now begin the question-and-answer session. If you have dialed in and would like to ask a question, please press *1 on your telephone keypad. You will be placed in queue and an analyst will introduce themselves before asking a question.
Actually, first, the question is on the mark-to-market book value. Could we get an update?
Sure, Bose. Good morning. As of Friday, book value was off a little over 1%. So economic return was off roughly 0.5%.
Okay, great. Thanks. And then just wanted to ask about dividend coverage. Obviously, you raised the dividend, so clearly you are comfortable with it. Can you discuss the economic return of the portfolio relative to the required ROE that is needed to cover the dividend, which looks like it is a little under 15%?
Sure. In terms of the economic return and the returns available in the market, we obviously show that depiction in the investor supplement with agency around 14% and upwards of 15% for residential, and upwards of 13% for MSR funded through warehouse financing. The way we look at it is we have line of sight, I think, into the near term using the forwards. When the board sets the dividend, they are very methodical and want to make sure that it is earnable. We do not take these decisions lightly. We were certainly encouraged by the fact that we feel like it is earnable over the foreseeable future, and we are on track to modestly out-earn the dividend this quarter, all else equal. In terms of the portfolio, where we own our assets is in a very good position and it covers very well. Prepayments are relatively low and we have assets locked in for a very long time. So generally, we feel very good about dividend coverage on a go-forward basis. Thank you, Bose.
We will move next to Crispin Love at Piper Sandler.
Thank you. Good morning. David, can you build on that prior question and give us a little bit of a view of where you are looking to add incremental capital across your three strategies? Looking at slide 7 and the returns you referenced, the returns are pretty stable with last quarter. Last quarter you seemed to be leaning a little bit more into residential credit. Just curious on any shifts and where you are most interested in putting the incremental dollar across the three strategies, especially as agency technicals remain strong.
Sure, Crispin. Both agency technicals and MSR technicals are very strong—the strongest we've seen in quite some time. However, residential credit we believe exhibits the best risk-adjusted returns. So yes, we would like to incrementally add to residential credit, but we have to be responsible as it relates to the underlying credit. We priced four transactions already in July, and we are in the market with another deal as we speak. So we do expect to add in residential credit, but agency is certainly very investable, particularly when you consider the technicals and how broad the demand is. We feel it's a safe place to invest. Volatility has come down, notwithstanding recent geopolitical turbulence. So I would say the marginal dollar will probably go into agency with residential credit as we can add. MSR is still right there. As a matter of fact, we added a package just yesterday. We purchased an MSR package with the sub-3% note rate that we feel very good about with a strong OAS. When it comes to raising capital, Crispin, I want to take a second to talk about what we've accomplished over the past couple of years since we started raising capital again beginning in the third quarter of 2024. We raised $5.4 billion in capital in the last two years, including our preferred last summer. It has been very intentional. Obviously, price-to-book has to be accretive, assets have to be attractive, and we have to be able to feed the businesses, namely residential credit and MSR. Over the past two years, we added $2.6 billion in capital to both residential credit and MSR. That has helped grow those businesses. The capital raising has fostered the development of these businesses and has been very accretive. We generated nearly $280 million in accretion. It has added considerable scale, enabled us to develop more partnerships and really been a game changer for us. As a consequence, over the past two years, we have generated just over a 33% economic return since starting to raise capital again, and we have delivered a 53% total shareholder return in those eight quarters. We feel really good about what we have accomplished both from a capital allocation and capital raising standpoint.
Great, David. I appreciate that. Just one last question: on the FHFA and the GSEs, from your seat, how do you think they have been acting with respect to the mortgage market and spreads? They were very vocal earlier in the year. Would you expect additional actions in the balance of the year, or do you think their current buying approach is sufficient for the market?
We can't say whether there will be more action, such as raising caps or anything otherwise, but they do have plenty of dry powder left. Through May, they had settled roughly $45 billion in pools under a $200 billion mandate. Broadly, their approach has been constructive for the agency market. In January, when spreads tightened on the announcement, we were concerned about being crowded out. But today it feels like they are acting more like a relative value market participant: when spreads are wider, they provide support and add; when spreads tighten, they slow down the pace or stop buying. That has helped stabilize mortgage spreads and made it an easier investment environment. We welcome their participation. When it is all said and done, if they get to the $200 billion, we expect them to be a generally responsible participant. We know the people there, many from prior lives, and we respect them. We view their participation as a positive force in the agency market.
We will move next to Ameeta Lobo Nelson at UBS.
Thank you, and good morning. First, looking at current coupon spreads compared to prior periods of Fed leadership transitions, do you feel today's mortgage market is pricing in a larger uncertainty premium than normal? How much of the current coupon spread do you think reflects uncertainty? And second, shifting to growth in the other segments: you have spoken about scale being a competitive advantage as you grow residential credit and MSRs. Where do you still see the greatest opportunities for operating leverage?
Thanks. When you look at mortgages today, the main drivers are realized and implied volatility, which are very low, and strong supply-demand technicals. After the Iran crisis, de-escalation led to both realized and implied vol coming down and the basis tightening. Supply has been more muted than expected at the beginning of the year; market expectations around supply have shifted. Fixed income flows have been strong, and a significant portion of gross issuance is being absorbed by CMOs, which distributes risk across a wide range of accounts. So market pricing is not really looking at Fed uncertainty; it's pricing volatility and implying relatively low uncertainty from the Fed.
On operating leverage, we are an operating-light company, and that has served us well. We are not obligated to invest heavily in any one sector because we don't have a lot of fixed operating costs. Relying on partnerships has been a distinct advantage, particularly in times like these. We are ready with capital to deploy and will consider adding operating leverage where appropriate, but being a capital participant has served us very well and we expect that to continue for the foreseeable future.
We will take our next question from Douglas Harter at BTIG.
Thanks, and good morning. On the residential credit side, can you talk a little bit about your ability to source the magnitude and diversity of loans? Across the industry, sourcing volume is a challenge. Where are you seeing the volume come from, what advantages do you have, and how does that translate into returns on the portfolio?
Sure. There are a number of key advantages. First, we've been in this market a long time: buying non-QM and DSCR loans for over 10 years and operating the correspondent channel for over five years. Given the capital we've raised, we've been able to deliver consistent pricing—a reputation that originators remember. Operationally, we are much deeper than many competitors: we face over 350 correspondents. Many competitors focus on the top 50 originators; we've gone further down the chain. We also expanded into non-delegated correspondent earlier this year, which has added significant, somewhat price-insensitive volume. Our service levels are strong: we have a staffed scenario desk and exception desk, and we've invested in technology and infrastructure to face 350 originators. Our execution on the back end is better, and we price larger deals, which spreads fixed costs and lowers variable costs like underwriting fees. We often price tighter than many issuers, so at the same level of margin we can offer originators a higher price. The market is competitive and there are new entrants, but our infrastructure, relationships, and pricing advantages have allowed us to source assets at a greater clip than many competitors. Note that our lock volume actually decreased quarter over quarter to $6.7 billion, down about 9% to 10%. Part of that is our discipline; we're focused on earning mid-teens ROEs and won't lead with price if it doesn't make sense. But overall, our infrastructure and relationships give us an advantage.
Appreciate that, Mike. One clarification: you mentioned that the economic assets in residential credit were relatively flat. How do I square that with the level of activity you described? What are the puts and takes?
If you look at the actual portfolio, loans held on-balance-sheet that have yet to be securitized were effectively flat quarter over quarter at $4.7 billion. On an economic basis, the OBX portfolio was up $400 million through retained securities, while the third-party securities portfolio was down a little over $350 million. We sold $260 million of AAA CRE CLOs as they tightened and redeployed proceeds into agency. Our CRT portfolio was down close to $65 million. Credit spreads tightened, particularly for third-party securities, and we have the ability to monetize those positions. That's why you see a flat economic portfolio quarter over quarter.
Doug, to add: OBX and whole loans represent over 80% of the residential credit balance sheet, and that has been the objective. We have used third-party securities to generate yield over time, but manufactured securities in-house are higher-returning assets. The objective is to have the portfolio predominantly characterized by OBX-related assets. Thanks, Doug.
We will move to our next question from Harsh Hemnani at Green Street.
Given what we've seen with rates recently, prepayment risk in the market has decreased and average coupon has moved up across mortgage rate portfolios. How are you balancing that against your outlook for prepayments going forward? I know you added some agency CMBS—are there other actions you may take across the portfolio to manage prepayment risk?
Our strategy over the last two to three years has been, when we move up in coupon, to prefer quality specified pools. If you look at our investor presentation, we disclose the quality of our pools by coupon. We have a lot of call protection in most of our sixes and 6.5s. On 5.5s, we may tactically take on some generic pools or TBAs when pricing is attractive, and convert them into specified pools. We have deliberately constructed the portfolio this way to avoid exposure to a sharp rally in rates when in TBAs. We'll continue buying pools with call protection. In the first half of this year, specified pool valuations were tight due to GSE participation, and we had moved down in coupon into 4.5s in the first quarter to avoid adding a lot of TBA 5.5s. Over the second quarter, we moved up as specified pool valuations looked more attractive and we will continue to add specified pools.
From a big-picture standpoint, we are taking prepayment risk in the agency portfolio with higher note-rate collateral, but we are taking virtually no prepayment risk in the MSR portfolio. You want prepayment risk in more liquid securities because you can trade around them when there are surprises, while the MSR portfolio is very stable and doesn't require the same level of prepayment exposure management.
Got it. That is helpful. Thank you.
We will go next to Jason Stewart at Compass Point.
Thanks. A question on the MSR market: activity was pretty consistent and the market remained relatively liquid throughout the second quarter. Can you give more color on whether there are opportunistic pockets—have originators being more reliant on selling MSR for cash created any idiosyncratic opportunities or impacts from that trend?
Yes. Our operating-light model and use of partners has allowed us to participate in ways many others cannot. MSR holders who service their own loans and then need liquidity may sell MSR to buyers who also service their own loans, leaving stranded costs. Our model, using subservicers at scale, generally makes us a favored buyer because we don't have those platform constraints. We have a portfolio of subservicers, many of whom are also sellers to us. In the flow market, we are opportunistic; we picked up activity and are not forced to buy generic flow. We've grown our network of sellers to over 175 and use granular pricing. We're also the only large MSR holder with a large specified pool portfolio, and the analytics we use for specified pools feed into granular MSR pricing. That differentiation allows us to pick up better OAS and convexity.
Another way to put it: we do not want to compete with banks. Banks have demand for MSR in the current environment, particularly with capital rule proposals. Our channel—using subservicers and buying MSR servicing-retained—means we don't compete with banks in that channel, enabling us to extract better value than headline pricing might suggest.
That makes sense. Follow-up on residential credit: if origination pricing changes, is there a theoretical point where you would find secondary security opportunities more attractive and pivot back to securities rather than organically created assets?
Yes. We showed that in Q1 where there was significant activity: the CRE CLO portfolio reached $395 million as an allocation from agency MBS tightening early in January given GSE activity, and we redeployed as spreads moved. In Q1 we were active buying non-QM B-1s from third-party shelves and unrated A2s and other securities which delivered 13% to 14% ROEs at the time; now most third-party securities we see are closer to 11% to 12% ROEs. Q2 illustrated why having a manufacturing entity matters: triple-A spreads tightened 10 basis points quarter over quarter, but BBB spreads tightened more, flattening the credit curve. That allowed us to move out of third-party securities and continue investing in proprietary, higher-return assets we can set margins on. We have a flexible capital allocation model across and within the businesses and the personnel to capitalize on secondary opportunities when they become attractive.
We will go next to Hong Ling Zhang at JPMorgan.
How do you think about your ability to tap the equity markets at your current stock price?
Three criteria matter: assets need to be attractive, we need to be able to feed the businesses, and the price-to-book needs to be accretive. We think the stock warrants a premium given what we've created and our franchise value; replication would be difficult. We've completed 11 straight quarters of positive economic return and believe our valuation is modest relative to our value creation. When raising capital, we want to be gentle with the market. We raised nearly $450 million last quarter and were careful around timing and market conditions. The raise was a small percentage of outstanding shares—about 2.5%—and we behaved in a measured way to avoid disrupting the stock. As long as we can buy assets and generate positive returns, and we remain respectful of the stock, we'll continue to raise capital selectively.
Got it. Thank you. Give Rick our best, please.
We will move to our next question from Trevor Cranston at Citizens JMP.
Thanks. One more on residential credit: you mentioned pricing a couple of large non-QM transactions. As you look ahead to the second half of the year, is there any particular collateral type you're focused on as the best opportunity to deploy capital? More generally, do you see dispersion in risk-adjusted returns across the different collateral types you're focused on?
Thanks. As David mentioned, 70% of the $14.2 billion we've executed year-to-date is non-QM and DSCR, and that will continue to be the core collateral Annaly is well-suited to purchase. We believe it offers the highest ROE, though it also requires the most capital commitment. Owner-occupied agency loans, investor loans, HELOCs, and close-in seconds are less scalable currently. Our competitive advantage is the infrastructure and the ability to face 350 originators, which lowers our cost basis. We aim to bring larger deals; we did a billion-dollar non-QM deal and another billion-dollar deal within two weeks. Non-QM issuance has already been strong this year—$65 billion and likely north of $100 billion by year-end—accounting for a large portion of the residential credit market. We treat investors as long-term partners and work to deliver strong execution and investor experience; that has allowed us to do larger deals and build a broad investor base. Non-QM and DSCR will remain core, and we can flex into other areas of residential credit as opportunities arise.
Next, we will go to Kenneth Lee at Capital Markets.
Good morning, and thanks for taking my question. One: regarding the recent dividend increase, can you discuss the resiliency of earnings power, especially given continued geopolitical uncertainty and a flattening yield curve? And two, you mentioned rotating into higher loan balances within MSRs—can you talk more about the motivations behind that?
We take dividend decisions very seriously and the board is thoughtful. We stress the environment to ensure the dividend is earnable. Over time, we expect to cover the dividend; there will be quarters where we out-earn it and maybe a quarter slightly below, but with current information we expect to earn the dividend, which informed the decision to increase it. There's geopolitical uncertainty and volatility, but overall we feel good about our ability to earn it.
Got it. And on the MSR rotation into higher loan balances: any further color on the economics there?
Yes. Our model is essentially variable-cost: we pay a contractually fixed amount per loan to subservice. That fixed-per-loan cost has less impact on higher loan-balance loans versus lower loan-balance ones. Participants who service their own loans model at their marginal cost and can be more aggressive on low loan-balance collateral, but they may be left with stranded platform costs if they sell. By selling lower loan-balance pools and buying higher loan-balance MSR, we pick up economics and yield. Our marginal-cost pricing with subservicers means our cost to service is materially lower than industry averages for similar portfolios. We can be opportunistic buyers where others are forced buyers, and that creates value for us.
Thank you, Ken.
That concludes our Q&A session. I will now turn the conference back over to David for closing remarks.
Much appreciated, and thank you, everybody, for joining us. Enjoy the rest of your summer. We'll talk to you soon.
This concludes today's conference call. Thank you for your participation. You may now disconnect.