Annaly Capital Management, Inc. (NLY) Q1 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the First Quarter 2016 Annaly Capital Management Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jessica LaScala. Jessica, please go ahead.

Good morning and welcome to the first quarter 2016 earnings call for Annaly Capital Management. Any forward-looking statements made during today's call are subject to risks and uncertainties 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 forward-looking statements 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 of this earnings call. We do not undertake and specifically disclaim any obligation to update or revise this information except as required by law. 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. Also note that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any shares, nor is it a substitute for the exchange offer materials that Annaly and its merger subsidiary have filed with the SEC. Annaly and its merger subsidiary have filed a tender offer statement on schedule TO. Annaly has filed a registration statement on Form S-4, and Hatteras has filed a solicitation/recommendation statement on schedule 14D-9 with the SEC with respect to the exchange offer. The exchange offer materials, including an offer to exchange, a related letter of transmittal and certain other exchange offer documents, and the solicitation/recommendation statement contains important information. Hatteras shareholders are urged to read these documents, as they may be amended from time to time, carefully because they contain important information that holders of Hatteras Securities should consider before making any decision regarding exchanging their securities. The offer to exchange, the related letter of transmittal and certain other exchange offer documents, as well as the solicitation/recommendation statement, are available to all holders of Hatteras common stock at no expense to them. The exchange offer materials and the solicitation/recommendation statement are available for free at the SEC's website at www.sec.gov. Additional copies may be obtained for free by contacting Annaly's Investor Relations Department at 1-888-8ANNALY. Please also note that this event is being recorded. Participants on this morning's call include; Kevin Keyes, Chief Executive Officer and President; David Finkelstein, CIO of Agency and Residential Credit; Glenn Votek, Chief Financial Officer; Michael Quinn and Jeffrey Thompson, Co-Heads of Annaly Commercial Real Estate Group; and Tim Coffey, Chief Risk Officer. I'll now turn the conference over to Kevin Keyes.

Thank you, Jessica. Good morning and welcome to the Annaly first quarter 2016 earnings call. On last quarter's call amidst the realities of slowing growth and heightened market volatility which had only become more pronounced this year, I focused on describing the platform and strategies we put in place to outperforming these demanding markets. Today, I'd like to center the conversation on certain indicators and operating metrics to differentiate and best illustrate Annaly's strategy and leading market position. The first quarter of 2016 continued to be the type of challenging environment we've been preparing for and the type of market conditions that separate that haves from the have nots in every industry including ours. One of the most revealing indicators of performance for any yield-manufacturing strategy especially during heightened volatility is stability in earnings and book value. In this quarter, Annaly was once again one of the only mortgage REITs to earn its declared dividend with normalized core earnings while keeping book value basically flat to date. Over the past eight quarters, our normalized core earnings per share has ranged from $0.29 to $0.34 cents, representing only a 17% differential in earnings which is 63% less volatile than the peer average in the marketplace. As we've highlighted some of the onset of QE3 in the fourth quarter of 2012, liquidity is a paramount importance when operating in this marketplace. Annaly has been able to generate stable and competitive returns while maintaining the lowest leverage in the sector by far. This past quarter our economic leverage of 6.2 times remain nearly 30% lower than the agency industry average, and as importantly unlike most of our competitors we don't have to add assets to enhance our future returns, specifically our credit businesses which have achieved critical mass currently operate at leverage levels well below the industry averages, and with the new funding options we recently procured these facilities will serve to optimize our dedicated capital in each of these strategies unlocking incremental returns. In my remarks last quarter I also discussed our outlook for 2016. I stated that because of our diversified platform and low leverage profile, we were positioned to, take advantage of current market volatility, expected industry dislocations and the unforeseen opportunities we've been waiting for. I was signaling the benefits of and our desire for enhanced size and diversification in this volatile world. Because of our unique positioning in liquidity, we were able to move quickly and decisively in our acquisition of Hatteras announced a few weeks ago. This transaction now described in more detail in the S4 we filed today, marks the largest mortgage REIT M&A deal ever and further establishes Annaly as the industry leader, growing our proforma market capitalization over 20% in the entire industry and increasing our market cap ratio to 17 times the medium-sized company in the sector. The acquisition also serves additional strategic and financial differentiation. David will speak in more detail about the return profile of the portfolio among other strategies, but overall we expect that this transaction will accelerate Annaly's transformation to becoming the market leading hybrid REIT, expanding our ability to further invest in areas across the agency, residential credit and commercial credit markets, while enhancing our stability and scale, liquidity, asset and business diversification, all critical differentiators that define industry leadership. In a market that is clearly in search for yield, I also wanted to address the relative valuations of the mortgage REIT sector. To simplify, I'd suggest there are few interrelated market themes which have impacted valuations. All of which have become more visible to the market recently, thereby clarifying valuation parameters and the risk return equation of the industry especially for certain participants. The effects of numerous macroeconomic challenges and structural market factors which have contributed to slowing growth and declining corporate profits in a highly leveraged world are now finally being realized and manifested in obvious ways. Investors, especially growth and momentum equity investors are now finally appreciating the negative impacts and inherent risk of global debt, increasing by $73 trillion over 50% since the crisis, a rate which outpaces the growth of a global economy by more than three times over the same period. Sentiment has shifted, valuations are contracting in a number of other industries for various reasons, including sectors with declining growth, IE technology, lower prices, IE energy and mining and or higher leverage as in the retailer-consumer sectors. As I will describe further, value and yield investing in certain sectors of the equity market has clearly become more rewarding and more easily defensible in 2016. The impact of slowing global growth and increasing leverage has also affected monetary policy. Following the central banker's leverage buy out of the global economies raising the cost of their own financing doesn't make as much sense any longer in a world now distressed by a lack of free cash flow to repay such debt. As I've commented, the mortgage REIT industry has been under pressure as the proxy for liftoff in a higher rate. Now that there is a broader acceptance of the need for lower rates for longer, the paranoia that has surrounded the sector is beginning to dissipate for the larger more diversified participants. Finally, regarding mortgage REITs sector valuations. Although beginning to recover from the factors I've just mentioned they're still lagging because of the supply-demand imbalance in the industry. Our sector has an opportunity now to return to historical valuations by rationalizing operating models and cost structures executing additional strategic or financial combinations and attracting the incremental investor looking for income. Global M&A volume set an all-time high last year for a reason reaching $4.7 trillion as other industries realize the benefits of consolidation in the slow growth highly levered world. In addition as depicted in our investor presentation we filed as well, there is a clear and present opportunity to attract a growing investor flows, rotating into yield sectors today. Sectors which are more highly valued than the mortgage REIT industry. Currently, there is over $3 trillion invested in the MLP utilities, bank and asset management industries, approximately 200 companies which combined to have weighted average yield of 3.3% with similar leverage profiles and the other valued at significant premiums to book value. Given Annaly's stable earnings, liquidity, diversified platform, size, premium yield and long term track record, I'm confident this company could continue to reward our current shareholders while attracting incremental investors in this challenging marketplace who are conservatively valued yield options are increasingly difficult to find. Now I'll turn the call over to David Finkelstein.

Thank you, Kevin. As all are aware the first quarter proved once again to be a challenging environment for investors as virtually all financial markets exhibited significant volatility. Most risk assets ultimately recovered from the selloff which occurred early in the quarter as global central banks indicated their intention to keep the current high level of monetary policy accommodation for longer than previously anticipated. During the first quarter, the market volatility provided a window for us to capitalize on opportunities both traditional to Annaly as well as external opportunities. With respect to our existing businesses, we added nearly $900 million of gross assets between our commercial, middle market lending and residential credit business lines. Across these businesses we are currently seeing levered returns ranging between 9% and 13% which is consistent with agency returns yet has the added benefit of diversification. These returns are outsize relative to the absolute level of global yield alternatives and we believe helps explain the strong performance of our stock which exhibited a total return of 12.6% for the first quarter. The pending acquisition of Hatteras is an extension of the capital allocation themes we have highlighted on past earnings calls. We believe the anticipated cash on cash returns of 10% to 11% from the transaction are competitive relative to returns currently achievable across our other businesses and Hatteras portfolio provides further diversification and optionality to our core agency business. With this transaction, we envisioned credit assets potentially reaching a third of our overall capital by the end of this year, dependent upon how markets evolve over the coming quarters. Turning back to the first quarter and beginning with our agency portfolio, agency spreads were certainly not immune to the dislocations that plagued markets in the first quarter, a relatively low leverage, durable cash flow profile and positive duration enabled us to weather the rates rally without having to change our asset and hedge composition in any meaningful way. Regarding our outlook for the agency portfolio, although we anticipate pre-payments on our portfolio to increase by roughly three to four CPR in the near term as byproduct of the sharp rally and rates of the quarter. This uptick in speed is expected to be much less pronounced relative to the mortgage universe given our preference for high quality specified pools. Agency spreads looked modestly attractive compared to last quarter particularly considering the more [ph] posture of central banks. That being said we are not planning to increase to leverage over the near term but we do expect our leverage to increase somewhat as we onboard the relatively higher levered Hatteras portfolio. We spend much of the first quarter evaluating the potential state of the Hatteras portfolio with our own assets and we continue to feel positive about the combination of the two portfolios. With respect to residential credit, we had added roughly $300 million in assets during the quarter. We were certainly cautious of the extreme volatility in credit that characterized the first half of the quarter, but as we sit on our last earnings call we welcome the spread widening as we viewed it as primarily technical along with the decline in broader risk asset rather than reflective of the fundamentals of the U.S. housing market. Consequently the majority of new assets we acquired were purchased at meaningfully cheaper valuations compared to both the beginning of the quarter as well as at quarter end given the ultimate recovery in the sector. Residential credit spreads further improved in the second quarter supported by both strong fundamentals and broadly more positive risk on the back of stabilization in market and more accommodative central bank policy. We believe that both the fundamental and technical landscape in residential credit will remain favorable and we expect to continue to add modestly to our portfolio as opportunities materialize. However we also do expect that we will see further bulks of volatility in the intermediate term and consequently are mindful of liquidity considerations particularly given the fact that we expect to onboard roughly $500 million of Hatteras's residential credit portfolio in the third quarter. Now with that, I'll hand it over to Mike to discuss the commercial business.

Thanks, David. The fundamentals of the U.S. commercial real estate market remain healthy, although some markets and property types are showing early signs of decelerating. In addition, in stark contrast to the situation at the time of our last conference call, the publicly traded capital markets have improved significantly over the last two months. Equity REIT share prices are up over 15% since early of February lows and now stand only about 5% below all-time highs reached in early 2015. In the last 60 days, CMBS spreads reversed the widening trend that started in the summer of 2015. AAAs have rallied approximately 40 basis points or 25% and BBBs have rallied approximately 200 basis points, also a 25% improvement. The moves in the CMBS market have largely followed the broader rally in credit markets. Turning to transaction volumes, first quarter 2016 acquisition activity was significantly below 2015. And mark the first quarter we have seen volume decline on a year-over-year basis since the last prices. $111 billion of property traded hands in the first quarter, a year-over-year decline of 20%. In addition, the most recent monthly results indicate and even weaker market with transaction volume down 39% in February and 25% in March. CMBS volume was also significantly lower with $19 billion of issuance in the first quarter, a 30% decline. As we observed on our last conference call, property pricing has leveled off but not yet been impacted negatively by the slowing transaction activity. As of March 31, 2016 our commercial real estate portfolio stood at $2.6 billion. Net of leverage in one senior loan held for sale, our net economic capital invested in commercial real estate was approximately $1.4 billion and is producing a leverage yield of 9.2%. We added $365 million of assets in the first quarter with an economic interest of $172 million, generating a leverage yield of 9.6%. We continue evaluate new business opportunities but have been very patient in committing to new deals. We believe that the elevated maturity wave approaching and the increased regulation on other market participants will provide and attractive flow of opportunities in future quarters. And we could increase our investment activity when our typical high quality borrowers feel bullish about committing fresh equity to new deals. Preservation of capital is our priority while we provide our shareholders with longer term primarily floating-rate cash flows as a strategic complement to our agency portfolio. And with that I'd like to turn it over to Glenn to discuss our financial results.

Thank you, Mike and good morning everyone. I'll provide a brief overview of certain key financial highlights in the quarter before opening the call up for your questions. So beginning with our GAAP results, we reported a net loss of $868.1 million or $0.96 per share versus Q4 net income of $669.7 million or $0.69 per share. The quarterly change was largely attributable to unrealized mark to market changes on our interest rate slots, resulting from lower rates going to quarter and higher estimated premium amortization expense due to an increase in projected CPRs versus the prior quarter. On a normalized basis, our normalized core earnings were $291.8 million or $0.30 a share that compares to $0.31 a share in the prior quarter. Normalized core are at least under 10% at 9.9%, and that compares to 10.3% from the prior quarter. Primary factors contributing to the quarterly results where a higher repo expense of about $0.02 a share, lower dollar roll income of about a penny which is partially offset by increased interest income from the commercial portfolio and lower swap expense that combined represented about $0.02 a share. Our projected CPR at period end was 11.8% which is up about 300 basis points from last quarter's 8.8% as tenure treasury rate decreased about 50 basis points and forward swap rate declined by about 60 basis points. This led to a significant increase in estimated premium amortization expense recorded in the quarter. Q1 recorded premium amortization expense was $356 million versus $160 million for Q4, and that's before premium amortization adjustment of about $0.19 a share. The weighted average CPR for the quarter was down at 8.8% versus 9.7% in the prior quarter. In the combination of both higher funding cost as well higher amortization expense resulted in lower net margin as well as a mild decline in spread. Total operating expenses were flat versus Q4 at approximately $48 million. Turning to the balance sheet. Residential investment securities were relatively flat, although as David mentioned we had about $300 million of gross in the resident credit portfolio that reached $1.7 billion in the quarter, and within the commercial investment portfolio, corporate debt grew by about $150 million. And now the combined credit investment portfolio represents about 25% of capital. Our repo balances were down about $1.8 billion and were replaced largely by FHLB funding of a comparable amount, and book value declined slightly to $11.51 a share. Leverage as traditionally reported was 5.3 times. Working contrast our economic leverage which captures the effect of TBA contract was up slightly at 6.2 times. And a final thought on the Hatteras transaction. We put in place a comprehensive integration framework which include a dedicated integration management office that's responsible for execution and have been actively implementing a detailed integration project plan which spans each of the various functional areas that will need to be addressed, and we're off to a very good start on that. And so with that, we're ready to open it up for your questions.

We will now begin the Question-and-Answer Session. [Operator Instructions] The first question comes from Douglas Harter with Credit Suisse. Mr. Douglas, please go ahead.

Hi, this is Sam [ph] filling in for Doug. I know you guys provided good color on the overall leverage level going forward. But I was just wondering if after the HTS acquisition goes through whether maybe the leverage levels might change categorically for like maybe the agency portfolio and the credit portfolios?

Hi, Sam, this is David Finkelstein. As I said in my initial comments with under current market conditions we do expect to onboard the Hatteras portfolio and have our leverage slightly pick up somewhat consistent with the proforma analysis that we prepared. With respect to the individual business lines, we do have the intention to more optimize the use of our capital as our credit positions evolve, but I wouldn't expect any material change in our posture beyond then.

So just assuming kind of more the same, it's kind of a good run rate?

Yes.

Okay, all right.

What I would add, Sam, in my comments I talked about the credit businesses which are on our balance sheet relatively speaking they don't really stand out, but relative to the market they are sizeable, and now we've reached that scale for both commercial real estate, middle market lending and also residential credit. All three businesses were in a position now to optimize the capital with structure or alternative leverage which we haven't done to this point. So you're going to see a more efficient use of the capital and implicitly when I say that more efficient there is incremental returns that we can offer without having to go out and raise assets.

Got it, and my second and final question is, did I hear correctly that you guys are targeting equity allocation to credit investment to range about a third of your portfolio going forward?

Potentially, this is David again, potentially but it's all dependent on how markets evolve over the coming quarters, but yes.

Got it, all right. Thank you so much.

The next question comes from Jessica Ribner with FBR & Company. Ms. Ribner, please go ahead.

Good morning, guys. Thank you so much for taking my questions.

Good morning.

I guess just a couple of things. Can we assume that you are done with your buy back or are you still kind of opportunistically evaluating your stock and kind of market conditions?

Well, we're never done with any strategy I think of our four businesses. We have basically 20 options organically underneath the four businesses, agency, resi credit, commercial and middle market lending. And I would say the buy back and external options are really 21, number 22 and that's not in rank nor chronological or any sort of prioritization. That's just our whole menu. So the buyback you saw we've executed additional repurchases that settles this first quarter given the volatility but you also saw what we did in April with the acquisition of Hatteras.

Right.

To me that's really the spectrum of what we're capable of doing, and I think the most important take away is that we have all these alternatives and we compare and contrast the risk of returns of them every day. But in the world that is this volatile and I've been listening to earnings calls over the past couple of weeks and I think any platform that has options amidst this volatility is much better off. So the buyback is one of them but clearly the Hatteras transaction when we're able to add to earnings and book value and grow the capital base of the company and the diversification of the portfolio, frankly I'd much rather do that type of transaction for our shareholders than just a point in time repurchase.

That's fair. And then kind of the question piggybacking off of that, how do you view the M&A landscape going forward both for you and just the sector as a whole? Understanding that it's going to take some time for you to board Hatteras and really get comfortable with that.

It's a good question. I mean, I think the way we look at it, and we've been looking at it for years. As we grow the company internally and we diversify and we brought in a lot of diversified talent as well. So the first goal was to grow organically in the last couple of years when the market's been fairly challenging and protect our capital. To fast forward today now that we have the talent, the infrastructure, the system, the platforms to onboard additional companies like Hatteras, I think we're in a position to be more offensive, or go on the offense when we choose to. I would say our industry as I mentioned in my comments is nothing like any other today. I think every other industry sector, and I'm not exaggerating, is really challenged by what's going on in the economy, what's going on in pockets of different parts of the financing world and banking regulation and everything else that people are lamenting. But I think M&A and consolidation and rationalization makes a lot of sense when certain platforms are not, when I talked about haves and have nots, certain platforms are just not going to be able to do what they've been doing in the past. So we are forward-looking here, we're forward-thinking. I think we are set up to do a lot of different things which has been our goal. We spend a lot of money to do this and having charge the shareholders to do it. So I think the landscape is open. I think our sector, again nothing like other sectors, could use some rationalization. But I'll end with an analogy, the equity REIT world which I used to advise in years ago, in its formative stages, in fact there's plenty different windows you can look at in any industry but its formative stages in the early 2000s. The market cap of that sector grew from, doubled in a couple of years, $200 billion to $400 billion from 2003 to 2005. In those three years there is also $115 billion of M&A of strategic and financial combinations. So 30% of the total market cap was actually taken out while it doubled. So I think, and that was a healthy way for the best companies to not just survive but to thrive. So I'm really focused on being the best company, not just necessarily in the mortgage REIT sector but in all the sectors that we are now playing in, and if we can capitalize on external growth opportunities to maintain our advantage in the future we're going to do that.

Okay, great. Thank you very much.

Thank you, Jessica.

The next question comes from Bose George with KBW. Mr. George, please go ahead.

Thanks, good morning, guys. It's actually Eric [ph] on for Bose. First question is how do you think the issuance of a single security from the -- could impact your business and I guess in a similar vein do you think the issuance of a conforming securitization by Chase last month can be a meaningful part of the market?

This is David. So to your first question with respect to the single security issue. This has been in the works for almost the last four years between the initial plans and they're making quite a bit of progress and so we're looking forward to the evolution of that. I think from the standpoint of market liquidity, it will help liquidity after there is an initial call it about of uncertainty, but ultimately having a single security where both Fannie and Freddie can issue into will broaden the asset base in individual per coupon basis. So you'll have deeper markets for individual coupons, and it will lead to probably a cleaner volume of trading, less differentiation and overall more liquidity. With respect to the Chase deal, the Safe Harbor deal I think is what you're referring to. We did not participate in that deal. It is obviously a good deal for Chase as well as for the buyers of that security with respect to the evolution of these types of deals that provide capital relief and other benefits both to the issue or the market. We think that's going to continue. For housing finance to kind of get through some of these regulatory issues, financial markets have to evolve to accommodate some of the frictions, and that's an example of that and we're seeing a lot more of those and we think it's a healthy thing for the market.

That makes perfect sense, and I guess my second question is on valuation, and I think this speaks directly to your opening comments, Kevin. The mental model that we use around valuation for not only mortgage REITs but most fund with a liquid portfolio of assets is that valuation may deviate from that asset value temporarily but should revert back usually over the course of a business cycle. And one of things we saw in the Hatteras deal and what it demonstrated was that even a liquid portfolio of -- doesn't necessarily need to be valued apart. So my question is whether you think we and others who actively follow this phase in general should adjust or even ignore that mental model, or you can use a new metric to assess incentive value if the expectation for low interest rates is expected to persist?

I think valuation when you just speak in terms of metrics, the whole academic part of it which I think your question is really leaning towards that, I think what I would say is really we view our businesses very simplistically and whether it's five years ago or looking five years forward, especially in credit, and what we're focused on is really cash on cash returns in any of our four businesses. So what multiple the market will give us for our earnings or for those cash returns, to a point it has always been cyclical and we are kind of bouncing along the bottom in terms of book value multiples and net asset value appreciation by the market. So what I would say in saying all that, we worry about just cash on cash producing returns that are as risk-free as we possibly can. We are very aware of our shareholders and the type of shareholders that we have and why they own us, especially in this world that's bouncing around, not just everyday but for the past really since last summer. So we want to make sure that we're protecting capital while producing these returns. I would say, I don't think I'm going out of the length to say that valuations are typically tied to market performance and supply. And our sector, just like other sectors, frankly issued too much supply in too short of a timeframe, and I would argue at the wrong time. So the sector needs to gain back credibility, frankly I think if we rationalize some of these models, and I'm not just talking about buying and selling them I think there's a lot of things a company can do to clean up and become more efficient. I think that has to happen in our industry. I think that happens along with some continued proven performance going forward should the valuations revert to the main. Like you said that usually happens, but certain critical things as I mentioned in my comments that I think have to happen before we get full credit for our platforms from the institutional and retail shareholders. And I think we're trying to do that, and I think whether we get that recognition tomorrow or next week we are focused on obviously any CEO said this, but I think any good CEO knows that the next five years are more important than the next five days and that's what we're focused on.

Great, that's really helpful, Kevin. Thanks.

Thank you.

The next question comes from Rick Shane with JP Morgan. Mr. Shane, please go ahead.

Thank you. Thanks, guys, for taking my questions this morning. Look there's been a fair amount of discussion both from management and from my peers on the phone about valuation and the rationality of what's going on in terms of how the market's looking at your equity. I'm really curious, I think the thing that surprised us the most during the first quarter was the volatility around agency MBS. I would have thought that in a slight to quality market we would have seen more price stability, tighter spreads throughout the quarter, and we didn't necessarily see that. I'm curious your take on what's going on in the agency market. Is there something structural that's changing or we're just seeing or we're just in the period where correlations for assets that might not necessarily be correlated approached on.

Rick, this is David. Agency MBS remain one of the most liquid assets in the world. Whether it should participate in a slight of quality has a lot to do with the level or rates. What we saw in Q1 was a very sharp rally where mortgage rates got inside a three and three quarters, and we had what we consider to be somewhat of a convexity event and so far as pre-payments are expected to rise. And that hurt mortgage performance, and that was a significant factor that we think influenced the performance of the agency MBS sector. Now, yes, agency MBS are certainly amongst the highest credit quality assets next to treasuries that exist in the market. But when you have other factors that impact performance like pre-payments and like the convexity profile that can keep it from participating along with treasuries certainly in the slight to quality.

Got it. So you really attribute it less the structural changes in terms of taper or changes in the repo market more really to traditional convexity in your markets?

I would say so, I mean the repo market's been pricing in more cost associated with financing for quite some time and I think the market doesn't expect the Fed to seize purchases for a considerable period of time. So generally I would say it was a convexity concern and actually that's somewhat evidenced by the fact that specified pools within the agency realm actually did quite well, indicating their better convexity profile and higher price appreciation with the rally.

Got it. Okay, great, that's very helpful. Thank you, guys.

The next questions comes from Brock Vandervliet with Nomura Securities. Mr. Brock, please go ahead.

Thanks for taking the question. Good morning. Just a housekeeping note on the FHLB line. I was under the impression that although you could keep that line for a very long period of time you couldn't make new draws after the FHFA decision. Clearly that's incorrect. Can you describe your ability to make further draws on that?

Brock, this is David. You are correct. The decision came down in January. We had increased that line prior to that decision coming down.

Got it. Okay, and as a follow up I guess for the commercial real estate team. You noted in the opening remarks some signs of slowing. It certainly looks that way with the volume decline, spread widening, CNBS conduits wounded or shut down. What do you think the slowdown to look like and how do you dimension that in terms of cap rate change or some other metrics that you may look at?

This is Mike. I think, the commercial market is cyclical right? So it's going to follow economic conditions, it always has and I believe it always will. From a cap rate perspective, we don't see a lot of change right now, and assuming the tenure at sub 2% stays where it is I think it's a very, cap rates are very, very widespread to that level. So I really don't anticipate any significant changes from a cap rate perspective, and I think what we're watching closely is just fundamental performance. So supply-demand conditions in particular markets where we invest in. So I don't see growth going negative at this point. I think we mentioned decelerating which is a slowing of growth but markets are still growing. So as of this point, I don't think we anticipate any significant changes, but look we're watching these markets very, very closely and we analyze every deal on its own very specifically with respect to local market conditions. So that I think is what I would say about that one.

Okay, great. Thank you.

[Operator Instructions] This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Kevin Keyes for any closing remarks.

Thanks everyone for your interest in Annaly and we look forward to talking to everyone soon. Thank you.