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Annaly Capital Management (NYSE:NLY)
Q4 2018 Earnings Conference Call
Feb. 14, 2019 9:00 a.m. ET


Prepared Remarks:


Good morning, and welcome to the Annaly Capital fourth-quarter 2018 earnings conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jillian Detmer, head of investor relations and marketing. Please go ahead.

Jillia Detmer -- Head of Investor Relations and Marketing

Thank you, Gary. Good morning, and welcome to the fourth-quarter 2018 earnings call for Annaly Capital Management Inc. 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 the earnings call. 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, www.annaly.com. Content referenced in today's call can be found in our fourth-quarter 2018 investor presentation and fourth-quarter 2018 financial supplement, both found under the Presentations section of our website. Annaly intends to use our web page as a means of disclosing material nonpublic 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 interested in Annaly 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 also note this event is being recorded. Participants on this morning's call include Kevin Keyes, chairman, chief executive officer and president; David Finkelstein, chief investment officer; Glenn Votek, chief financial officer; and other members of management. I'll now turn the conference over to Kevin Keyes.

Kevin Keyes -- Chairman, Chief Executive Officer and President

Thanks, Jillian. Good morning, everyone, and welcome to Annaly's fourth-quarter earnings call. This quarter, we decided to change it up a little bit in terms of the format of our call. We'll start with Glenn, who will provide an overview of our financials, stressing certain operating benchmarks, David will follow by offering update on portfolio activity, will also discuss in certain investment trends and comparable return parameters and some very curious assumptions in the sector, I will then finish our prepared remarks with broader comments on our strategies and the critical themes we'd like to highlight as we think about 2019 and beyond.

Let's now turn the call over to Glenn to start us off.

Glenn Votek -- Chief Financial Officer

Thanks, Kevin, and good morning. I'll provide brief financial highlights for the quarter and full-year 2018 and while our earning release discloses both GAAP and non-GAAP quarterly results, I'll be focusing this morning primarily on our core results and relating metrics, excluding PAA. 2018 was a year where Annaly, again, demonstrated the strength and stability of its business model. Our diversification strategy continued to advance, supported by an operating platform providing efficiencies of scale in a funding model, offering attractive and diverse financing sources to support our continued growth.

We generated core earnings per share, excluding PAA, of $0.29 for the quarter, $1.20 for the full year and a full-year GAAP loss of $0.06. Core earnings supported the cumulative 2018 dividend distributions made in the year of $1.20 per share. The portfolio generated 149 basis points of NIM, relatively flat versus Q3 and trends in both our core earnings and NIM illustrate the stability of our model. For example, over the past three years, the standard deviation of our quarterly core EPS and NIM is about $0.01 and four basis points, respectively.

Now over that same period, comparable peer earnings have been three times more volatile and NIM 50% more volatile. Core ROE for the quarter was just under 11.5% for the quarter and approximately 11% for the full year. Our core ROE per unit of leverage, which is 164 basis points in Q4 is another indicator of the stability of our performance with a standard deviation of just six basis points over the past three years, while peer results have been over two times more volatile. Now in addition to the stability of these metrics, they were also attractive on an absolute basis.

And the performance of our investment groups have been quite impressive over this period given the market environment that we've all been challenged by. In terms of diversification, we continue to opportunistically grow our portfolio, increasing credit assets year over year by 32% and growing credit asset revenues by approximately 40% over that same period. Our resi credit business achieved the milestone in the year, exceeding $3 billion in total assets with growth of 18%, while our Commercial Real Estate portfolio saw annual growth of 24% to $2.5 billion, and our Middle Market Lending portfolio nearly doubled in the year and is fast approaching the $2 billion asset mark. Now the build-out of our credit groups also punctuates the economics of scale of our operating platform.

Our credit business is generally more cost-intensive, we've been able to scale them without sacrificing operating efficiencies. Our efficiency metrics remain among the best across a broad cross section of both peers and other comparable companies. In our success integrating companies that we've acquired further highlights our operating leverage and scale, following both the 2018 MTGE acquisition, and the 2016 Hatteras transactions, we added no incremental staff or systems. We were able to integrate both companies within our existing operations, generating annualized savings of roughly $50 million.

And finally, critical to our ability to grow the credit portfolios is the availability and access to cost-efficient financing sources. During the past 12 months, we've added $900 million of new funding capacity across the commercial businesses, we also repriced existing facilities with savings ranging from 25 to 50 basis points, which represents pricing improvement of about 12% to 22%. And we further diversified the funding of our resi credit business by establishing ourselves as a problematic issuer, having executed $1.5 billion of aggregate securitization since the beginning of 2018, which includes a $394 million deal that closed just this past month. And with that, I'll turn it over to David.

David Finkelstein -- Chief Investment Officer

Thank you, Glenn. At this point in the earnings cycle, presumably, everyone is aware of the volatility that characterized markets over the fourth quarter and we were certainly not immune to this turbulence as the risk of sentiment led both agency and credit spreads meaningfully wider to end 2018. Leverage on our portfolio increased modestly quarter-over-quarter, but we maintained a relatively high hedge ratio of 94%. Capital allocated to our credit businesses declined to 28%, as we applied slightly more financing to credit given the more favorable terms, as Glenn discussed.

Turning to portfolio activity, and I will begin with the agency sector. We continue to rotate out of lower-yielding H securities, which improved our asset yield by 16 basis points and helped offset higher financing costs. We made a sizable and timely rotation in the higher coupon MBS later in the quarter coincident with the material underperformance of that sector. We also increased our Fannie Mae guaranteed multifamily position by roughly 50% with low double-digit returns and attractive convexity profile.

Although we continued adding to our multifamily portfolio in the 2019, recent spread retracement has brought that sector back to levels that we view as fair relative to core agency assets. On the liability side, we replaced our interest rate swap runoff with longer-dated contracts, which also explains the modestly higher pay rate on our swaps portfolio. We also extended the average days on our repo position by roughly 40% as the premium per term in the repo market dissipated in the fourth quarter, the trend that has continued into 2019 given reduced expectations for Fed hikes going forward. In Residential Credit, our home loan strategy maintained its pace last quarter.

And in addition to our securitization in October, we just recently completed a $394 million transaction in January, our fourth transaction over the past 12 months, leading to a roughly 12% levered ROE on the retained bonds. In securitized credit, as we discussed last quarter, we sought to reduce our post-MTGE holdings back to premerger levels, which we largely accomplished prior to the credit widening later in the quarter. GSE credit risk transfer securities exhibited the most notable widening in resi credit, the spreads on on the run mezzanine tranches widened by nearly 100 basis points. Over half of this deterioration has retraced, but nonetheless dislocation provided a good entry point to revisit the opportunity in that asset class after maintaining a more defensive posture earlier in the quarter.

Our commercial portfolio decreased very modestly, partially attributable to runoff exceeding new loans added. However, taking a step back, we did double the capital deployed in that business in 2018 relative to the year before. And I should note that we have achieved this growth, while reducing the cyclicality of the portfolio and moving up the capital structure. On the year, our first mortgage focus shifted from 23% to 32% of the portfolio.

We increased our average debt yield by 150 basis points and reduced the average LTV to 68. And of additional note, we sold a portion of our multifamily equity holdings, which generated proceeds equating to a 1.7 times purchase multiple for a sub four-year holding period. And in 2019, we may continue to substitute our equity for debt given strong valuations in the business cycle. Our Middle Market portfolio [Audio gap] in the quarter to just under $22 billion, and this growth was largely attributable to our selective focus on taking large positions in the strongest credit opportunities.

To illustrate, during the quarter, we were the leader range around $445 million secured facility to fund an acquisition procured through one of our top-private equity partnerships. Subsequent to quarter end, we syndicated 50% of the asset, leaving us with a little over 208% [Audio gap] The highly successful execution amid a very volatile December market, which points to the strength of our platform. And as we have stated in the past, we have both the liquidity as well as the strong relationships to underwrite larger unique transactions in the Middle Market sector, and we expect this to continue in 2019. Now before turning to our outlook, as Kevin discussed, I wanted to talk about expected returns in the context of the current market landscape.

While agency spreads have certainly widened, the yield curve remains compressed and additional leverage in this environment appears to serve as an overly concentrated substitute for the incremental return that a steep yield curve offered for much of this decade. And also we strive to be transparent about agency returns currently attainable. We have heard other market participants convey a levered return expectations in the mid- and even upper teens on certain assets when we have stated returns for those very same assets in the low double digits. Our expected returns do not assume the most negatively convexed assets funded on an overnight basis at the highest leverage levels since the crisis.

Rather, we present returns using assets with durable cash flow characteristics, appropriately hedged and financed using longer-term funding. Recent dividend and book value trends in our sectors suggest our more conservative assumptions might be a better depiction of actual returns and market risks. Now looking ahead, 2019 has brought about a more favorable investment environment, largely attributable to the Fed's recent shift to a more accommodative stance, and consequently, our book value appreciated roughly 3% in the month of January. Again, we do not intend proactively increased leverage, despite attractive returns in the agency sector, particularly given the lack of clarity on the size and composition of the Fed's balance sheet.

With respect to credit, the Fed's renewed posture is support of risk assets and levered spreads remained wider than levels experienced from much of the past year. Although we allocated our recent capital raise almost exclusively to agency for immediate accretion, we anticipate a rotation into credit as our pipelines continue to be healthy consistent with our capital allocation framework. And now with that, I will hand it back to Kevin.

Kevin Keyes -- Chairman, Chief Executive Officer and President

Thanks, David. As I said in my introductory remarks, we decided to enhance the format of this calls. While continuing to address specifics in my commentary, I also want to elevate the conversation as well. Not just every quarter, but every day, we have so much to talk about and strive to accomplish at this company.

Certain other market participants are confined to only posturing about leverage and spreads of one, maybe two isolated asset classes. Our increasing leverage meaning risk is the only potential way to more profit. That said, that's what they have to talk about. What we have here at Annaly is undeniably different, a much larger, more diversified and, by definition, more stable company that produces superior risk-adjusted returns.

We've built a yield manufacturing machine loaded with optionality that no other company in our sector has. So as we begin 2019, I thought it would be appropriate to highlight some of the critical themes relevant and unique to us and our shareholders. I keep a list of about 50 strategic priorities, market themes and trends in three categories in my notebook, that changes as the year evolves. But for the purpose of this call, I'll spare you.

I will -- You I'll all be relieved to hear that I'm now down to a top 10 list of themes for 2019. So here we go. First theme, the market backdrop has finally become more favorable for Annaly. After 9 rate hikes since December 2015, we believe the Fed is in the ninth inning of raising short-term rates.

There is an obvious combination of economic, physical, political and macro pressures that contribute to a shift toward more accommodative monetary policy that we've been able to project for a very long time. So with our cost of doing business peaking, our outlook is a lot less clouded than it has been for the past four years. Against this market backdrop, I'll turn to the high-level aspects of our growth strategy, which we have already successfully executed on for the past couple of years. We expect these trends to continue in 2019, and in some cases, accelerate and become even more prominent for Annaly in the near future.

So our second theme is continued consolidation in the mortgage REIT sector and other sectors in which we compete. Annaly will continue to emerge as a friendly activist. We have already been -- already seen improving the formula. The direct correlation between market volatility, resulting underperformance, liquidity issues and subsequent board realization and capitulation of acquisition targets in the sector, it's not a coincidence that in the -- too much of volatile market environments over the past three years, the first quarter of 2016 and 2018, we initiated successful acquisitions expanding our investment portfolios, while producing accretive earnings and growing our capital base for our shareholders.

As market conditions evolve, volatility returns, the inferior business models breakdown, Annaly will once again emerge as an attractive partner for certain companies not only in the mortgage REIT industry, but also in sectors of asset management that relates to our three credit businesses as well, such as the overly fragmented BDC industry. Theme No. 3. We will continue to grow and scale through partnerships and joint ventures.

We will further institutionalize our company as we have through -- through the 20 partnerships announced to date. We can enhance returns through strategic and/or capital partnerships, resulting in increased scale and proprietary origination without sacrificing balance sheet and liquidity, while incurring any additional associated operating costs. A derivation of theme No. 3 is our fourth theme.

Private capital needs new partners. We currently partner with more than 100 private equity sponsors and sovereign wealth funds across our businesses, all of which hold record levels of dry power -- powder, $1.8 trillion worth, which will yield meaningful high-quality financing opportunities for us. Within our private equity relationships, I'd like to say we are Switzerland as a valuable financing partner, especially as private equity is now competing for a lot more of the debt financing across the markets today. Annaly does not represent a conflict most PE firms need to contend with when they consider their lending partner.

In another words, competing PE Firm A doesn't like to hire competing PE Firm B in lending to its equity investments for obvious competitive reasons. So Annaly has emerged as a sizable, nimble, independent lender of choice to a growing number of private equity firms. Theme No. 5, growing recurring fee-related revenue.

Given the attractive performance across our businesses and the complementary alpha we generate, you may see us expand our third-party capital fundraising and distribution platforms giving us the ability to offer more bespoke, customized solutions to various investors, such as private funds and separately managed accounts to increase fee income to our shareholders. These first few themes of consolidation, partnerships and the continued development of new products illustrate how Annaly has evolved and is now built to capitalize on numerous strategic opportunities across our multiple businesses, leading us to Theme No. 6. Annaly is an operating company, not a trading business.

Monoline strategies charge fees similar to open-end, closed-end funds, variable annuities and ETFs, given their isolated value proposition and limited business plans. As a diversified operating company, Annaly has systematically evolved over the years, investing over $14 million in Commercial Real Estate, Residential Credit and Middle Market businesses, contributing to our broader performance versus these types of funds in the mortgage REIT sector since our diversification strategy began. Theme No. 7 is capital optimization.

Over the past 12 months, we procured $2.4 billion of incremental and dedicated nonrecourse financing across our three credit businesses as we remain focused on the official -- efficient deployment of our capital. Because our credit businesses have established strong track records under the Annaly umbrella, we've continued to attract financing capacity at more attractive terms amid the market playing by finite and constrained balance sheets. We are now positioned like we haven't been before to deliver attractive risk-adjusted returns, utilizing less equity capital and leverage with enhanced balance sheet capacity and flexibility. This is a basic, yet critical point.

As the rest of the sector goes back once again to its very bad habit of raising equity below book value to replenish losses, seven out of eight deals this year alone were dilutive to shareholders, Annaly has done the opposite, raising accretive capital, financing diverse investments with diverse funding sources and employing much lower absolute leverage levels to produce more attractive and less risky returns. Efficiently scaling our platforms has allowed us to capture market share and has also contributed to our outperformance leading to our eighth theme for 2019. The importance of both size and diversification, especially as an asset manager. Market data clearly substantiates these basic themes across all industry sectors.

Since 2014, companies with market capitalizations over $10 billion have generated earnings three times less volatile and performance over three times higher than companies with less than $1 billion in market cap. Annaly's capital base of $15 billion is a tremendous advantage in competing for larger and by definition less competitive transactions and in serving as a liquidity buffer during times of higher volatility or stress in the marketplace. Diversification also matters. Numerous others have tried it in many forms have failed and now chastise it.

Diversification is also undeniably supported by performance data. The five-year performance of the asset management and mortgage REIT sectors shows diversified investment managers have outperformed their less diversified peers by more than 4.5 times over. The final two themes are rarely stressed to even mention in the mortgage REIT industry, but both have been critical to the evolution and performance of Annaly and will continue to set us apart in the years ahead. Technology is our ninth theme of the year.

The success of our platform is the direct result of our broad investments made in our people, processes and systems. Today, we have over 170 employees, the largest number in the company's history, and we've made significant additions across our functional areas and the technology and infrastructure supporting them. Without giving away our playbook, I'd just like to say we will increasingly distinguish ourselves from any competition as it relates to financial and capital allocation modeling, risk testing and portfolio analytics. Our total number of IT professionals has grown by over 40% since 2014, adding in-house development and modeling expertise and expanding the number of proprietary applications we use by over four times.

We will be stressing these competitive advantages in 2019, and you will hear more from us on the importance of technology and how we use it as another one of our proprietary strategic weapons. Our tenth and final theme is corporate responsibility and ESG. Our commitment and focus within these areas is extremely important to me. Transparency and best practices as it relates to corporate responsibility and diversity have never been more important than today across the world in any industry.

I'm very proud of the achievements we have made here at Annaly. These efforts have undoubtedly contributed to our outperformance over the past few years and the impact of our focus is unmistakable at our company. In conjunction with yesterday's earnings release, we published a comprehensive narrative around our extensive efforts in six distinct measurable categories, corporate governance, human capital, responsible investments, risk management, ethics and integrity and the environment. To conclude the theme of the top 10s for 2019, I wanted to summarize our recent top 10 ESG accomplishments, which include:

No. 1, the employment of Dr. Kathy Hannan to our board. This was also announced last evening. The third independent female Director to join Annaly since the beginning of 2018. No. 2, the decision to declassify our board.

No. 3, an amendment to our board refreshment policy addressing tenure and age. No. 4, the announcement of our second social impact joint venture with Capital Impact Partners. This fund, with a specific focus on affordable housing in Washington, D.C.

No. 5, recognition, once again, in the Bloomberg Gender-Equality Index for a second consecutive year. No. 6, the continued focus on advancing women in the work place, with women representing 40% of managing director promotions and 50% additions to our operating committee.

No. 7, over 50% of Annaly employees have now purchased stock in the open market, which includes every single senior employee subject to our employee stockownership guidelines as well as junior team members. No. 8, we've achieved the highest level of employee satisfaction in our history based on our third-party employee engagement survey in 2018.

No. 9, the hiring of a dedicated Head of Corporate Responsibility and Government Relations. And No. 10, the publication of our enhanced and industry-leading corporate responsibility initiatives on our website. These 10 themes are simply meant to help illustrate just a portion of the significant strategic efforts and trends we see in the future, which uniquely apply to Annaly.

As I said, we have a lot to accomplish in the years ahead. The themes I talk about today will continue. They'll continue to evolve as the opportunities for this company continue to grow. Focusing on the strategies around these themes has resulted in the best performance track record not only in the mortgage REIT industry, but also among the 350 companies that make up the $6 trillion of market cap in the yield sectors in the equity market today.

In the first three years of our five-year Annaly 2020 plan, our strategy has allowed us to grow our market cap by over two-third, while distributing over $4.2 billion of dividends and delivering a 55% total return. For 2019 and beyond, we plan on continuing our pace of diversified growth and outperformance and are well-prepared for most anything the market has to offer. Now I'll turn the call back over to Gary to moderate our Q&A session.

Questions and Answers:


[Operator instructions] The first question comes from Doug Harter with Credit Suisse. Please go ahead.

Doug Harter -- Credit Suisse -- Analyst

Thanks. I know you guys talked about the fact that the capital was kind of initially deployed in agency, but could you talk about kind of how you see the relative risk return kind of across the broad buckets you have and kind of how we should think about that 29% credit allocation, how that could trend over the coming months, quarters?

David Finkelstein -- Chief Investment Officer

Sure. Doug, this is David. Relative value across both credit and agency, each have their opportunities and challenges. I think with agency sectors cheapen to fair amount, but we do have concerns over supply.

So we think the cheapening is certainly warranted. We see levered returns in the agency sector, 8x leverage, roughly in the low to mid-11s, which is certainly reasonable given how flat the curve is right here. Commercial returns are a little bit lower than that, mid-10s, call it. Resi, the deal we just did had a -- as I said, had a levered returns the agency eligible securitization, levered return of close to 12%.

And then the transaction we did in the Middle Market space had a levered return with just over a quarter turn of leverage of over 11%. We're obviously, with respect to credit, with no relay cycle, and we certainly are aware of that and so we have made a vigilant effort to make sure the portfolio is high in quality, which we will continue to do in 2019. But we think both credit has its advantages, given the continued diversification that it offers, as well as what we're able to accomplish with partnerships and the unique transactions we're able to achieve. And we think it balances well with the agency portfolio, so we would anticipate, as I said in the prepared remarks, that we'll continue to allocate more into credit, but we'll be cautious out there because we can still achieve a better risk-adjusted return over time by increasing our allocation to credit.

Kevin Keyes -- Chairman, Chief Executive Officer and President

Doug, what -- Doug...

Doug Harter -- Credit Suisse -- Analyst

Talk about -- sorry, go ahead, Kevin.

Kevin Keyes -- Chairman, Chief Executive Officer and President

Sorry, what I would just add, it was in our written remarks, and I think we are a bit less direct than I would then I'll be now. I would just say a couple of things. After the fourth quarter and especially after December of last year, how we talk about returns, you know, the market now has calmed down. We need to be direct with the market and shareholders, both current and prospective.

These returns that we're talking about have been consistently aligned with what -- our guidance has been aligned with what we've delivered. I think the volatility and the rest of the sector unfortunately reflects guidance that hasn't matched the actual returns. Company is talking now about 14%, 15% or even higher than that gross or even net ROEs, it's just not achievable. And I think when the sector does that and don't -- and they don't produce and then we have volatility like we did in the fourth quarter and companies lose 8% to 10% to 12% to 15% of book value and miss earnings and drop earnings by 13% or 15% after that.

It's just -- it's a question of credibility. So your question is prudent. I think we've been consistent in the messages as I -- when we say we're going to have returns on an asset class or an investment, that's what we've delivered, and I think there should be some -- there is a ownership of that. And also, the other points in my commentary just to put an endpoint on it, is that the returns we're delivering in any asset class, agency or the three credit businesses are a lot less levered.

In our credit businesses, we are 50% to 75% less levered and yet we're delivering similar or better risk-adjusted returns. So I don't mean to get on my soapbox, but I'm pretty proud of what we said is what we've delivered. The problem with the rest of the sector is not alighting their guidance with what is actually achievable in the marketplace.

Doug Harter -- Credit Suisse -- Analyst

I appreciate that commentary, Kevin. And then on the credit asset, how scalable are some of the relationships you have? Can those kind of be expanded to kind of deliver more credit product to you? Or they kind of -- is it the pace that they're kind of delivering now kind of topped out? Kind of how do you think about that opportunity from a size perspective?

David Finkelstein -- Chief Investment Officer

Doug, well, we certainly think they have grown. If you look over time with respect to Residential Credit, for example, last quarter was our highest volume in terms of loan acquisition and this year has started out providing a fair amount of flow into that business. So we do expect to be able to certainly maintain the pace and grow it. The transaction in December in Middle Market Lending is another example of that, the largest transaction we've done, and we continue to cultivate relationships that are very long relationships and by conveying to the market and showing that we can certainly manage very large transactions, distribute risk as necessary, it feeds on itself, so business begets business, I think.

And the same is true in the commercial business where, as I said, w doubled the capital allocated to that business, and again, we're very conscious of risk. It's not as if we're the best bid in the market at all, we're highly discernible, but nonetheless, we penetrated relationships and sources of flow to where everything that we're doing in credit has demonstrated reasonably strong growth and we can maintain it.

Kevin Keyes -- Chairman, Chief Executive Officer and President

Doug, what I'd just add just over-the-top big picture. I have mentioned 20 joint ventures and we deal with another part of our origination business over 100 sponsors. It's early innings with these joint ventures, it's -- so in terms of scaling them, as David mentioned, we've been growing, but it's really just beginning. And I think probably as importantly or more importantly, the 100 sponsors or so we deal with the Middle Market Lending and Commercial Real Estate, we really tier these relationships.

And I think in the past five years, we've come up with probably three or four tiers of quality or size of these sponsors. So it's a really good complement of joint ventures that we get proprietary flow for resi credit and then equity sponsors that I said, we represent Switzerland to lending to their equity. But at the end of the day, when credit is not easy, these deals are -- a lot of these deals are highly risky that we stay away from. And I think the benefit of these relationships are just starting to kick in.

But we're definitely -- we're honing in on the higher quality, larger sponsors when it comes to credit in Commercial Real Estate, Middle Market Lending and the joint ventures will continue. And I think the way we can scale it there is the larger partners will do more in alternative products, so we'll be scaling within some of the joint venture partners.

Doug Harter -- Credit Suisse -- Analyst

Great. Thank you.


The next question comes from Rick Shane with JP Morgan. Please go ahead.

Rick Shane -- J.P. Morgan -- Analyst

Good morning, guys. Thanks for taking my questions. Just wanted to ask, there was a $3.5 million loan loss provision. Which asset class was that related to? And can you talk a little bit about the credit?

Glenn Votek -- Chief Financial Officer

Sure, Rick. So that's related to a very modest position that we had in our ACREG business. It was a loan where we had a mez position, and we provisioned appropriately for that. It's in the process of workout at this point in time.

Rick Shane -- J.P. Morgan -- Analyst

Got it. OK. Second question in, again, given the diversification you're accounting is going to become or how you look the world could become a little bit more complicated? As we move to a [Inaudible] environment next year, when you think about your Middle Market Lending business, will you move to lifetime loss reserves? Or will you be able to account for those on a fair value basis like the BDCs?

Glenn Votek -- Chief Financial Officer

I think we have the flexibility to go either course. It's something that we're still in the process of implementing, and we're evaluating the alternatives there. But we will have some flexibility with respect to how we approach that.

Rick Shane -- J.P. Morgan -- Analyst

Got it. And is that -- will that be the same in the commercial real estate -- in the commercial mortgage business as well?

Glenn Votek -- Chief Financial Officer


Rick Shane -- J.P. Morgan -- Analyst

OK, great. Thank you, guys.


The next question comes from Ken Bruce with Bank of America Merrill Lynch. Please go ahead.

Ken Bruce -- Bank of America Merrill Lynch -- Analyst

Hi. Thanks. Good morning. Thank you for all this information and perspective.

I guess, as I pull back and look at the business, you've clearly been making strive to diversifying the business and growing it. And we've seen that across a number of other businesses. I guess, it's not entirely clear that the market is differentiating its valuation of your business in a corresponding way, and I'm always interested in understanding how patient you are in terms of pursuing this particular strategy if it, in fact, is not necessarily generating a distinction valuation for your shareholders?

Kevin Keyes -- Chairman, Chief Executive Officer and President

Thanks, Ken. It's the never-ending search of quest for the Holy Grail, right? Look, I think valuations across the market have been distorted. We've talked about that in terms of valuing risk assets versus lower risk assets. So that's impacted us over the past five years just in the overall valuation arbitrage or lack thereof.

But distinct to us, and we talked about it, I think, last call. I'm really proud of what we've done, I'm proud of what we've built, the commentary I have today about our top 10 themes, I think we have 50, or I get 100 in my mind. We're not necessarily smartest guys in the room, we don't have to be and that's why we built what we've built. And I think in terms of book value stability, core earnings stability, lower beta than anybody, higher NIM, risk-adjusted returns, performance, I'm convinced that we've seen a very good following and an increase in our institutional shareholders across the globe that over time will be further rewarded.

But at the same time, we've been rewarded our shareholders as we've said with this strategy. So we're always driven to outperform and, of course, we -- everyone always wants a higher valuation. But we're at defensive stock, we have a cyclical strategy and within that we have countercyclical strategies that cushion us like no other and that allows us to really navigate just about anything. And look when more volatile times hit, that's when our valuation premium shows up.

And that's when we've been able to be more opportunistic, as I mentioned in the first quarter of '16 or the first quarter of '18. So we're never comfortable. I sense a degree of hubris in the sector when companies talk about increasing leverage today because it's -- because they're comfortable with that after they just lost 10% of book and missed earnings by 13% or 15%. We're never comfortable.

Our shareholders pay us to be paranoid, and the strategy we put in place, I think, is one that can outperform. We can plug and play. And I could go on and on and on. I think our valuation over time will be rewarded and has been awarded in the form of growth capital like nobody else.

Ken Bruce -- Bank of America Merrill Lynch -- Analyst

Thank you. And I guess, you've done a great job at diversifying the business and growing it and institutionalizing it as you've kind of pointed out. You went through a lot of statistics in terms of what you've done on the government side as well. And I'm going to come back on a theme that we've talked about before, but the one missing piece in terms of truly institutionalizing your business is, in fact, interlacing the manager.

I guess, I would like to kind of get your most current thoughts on that and that has always been and, I think, it still -- that internal structure tends to warrant a much better valuation in the market and if, in fact, you would pursue that if that made sense. Thank you.

Kevin Keyes -- Chairman, Chief Executive Officer and President

I'll answer it, again. I mean, first of all, I'll just say three things. First, our structure as it is today, we're operating four complementary businesses that we put in our presentation material. If you carve them out to separately publicly traded companies, it'll all be market leaders in their own right.

So in operating those four businesses relative to the peers, we are operating in an operating expense level to equity and assets. To equity, it's 50% more efficient; on assets, it's about two-thirds more efficient versus the overall market. So in this structure, we're still operating 50% or two-thirds more efficiently. OK? Secondly, as it relates to other internally managed companies, those companies -- there has been some fake news out there, right? When you restructure and you charge the shareholders, there is cost to be borne for that and it's the shareholders' cost since the management's benefit.

So if you sell management company A couple of years ago for $500 million, $600 million, amortize that cost, I don't know three, five, 10 years, that just doesn't go away. So the ratios of today don't really reflect, don't at all reflect the cost the shareholders had to pay for pulling whatever gains you think are forward. So we could straight line all these costs and we're still a lot less expensive than even the internally managed comps that run one or two businesses tops. And the last thing is, look at, I think -- Ken, you know, I think, better than anybody the intellectual capital and the management here that's really been in place since 2013.

We have a lot going on to increase value not for the manager, the value we increase goes right to the shareholder and one of my commentaries about one of our top 10 themes about new product development, if we're going to go embark up on other strategies, which we're totally capable of, the fee streams of those strategies don't go to the manager, they go to the shareholder and that's all part of the R&D that we are doing here and part of the future of this company that these strategies are not just scalable for the public shareholder, they're scalable for potentially private shareholders. And at the end of the day, some of the parts means a lot more. So we don't feel inhibited by a structure at all. I think as it relates to valuation, you heard my prior comments, I just think there is a lot of upside to this company, some of which we can't even talk about, I won't even talk about because there is a lot of imitators out there.

But we feel entirely good about what we're delivering to our shareholders and the relative value that we're delivering.

Ken Bruce -- Bank of America Merrill Lynch -- Analyst

Thank you. That's helpful. Appreciate it.


The next question comes from Bose George with KBW. Please go ahead.

Bose George -- KBW -- Analyst

Hey, guys. Good morning. If I missed this, but can you give us your book value since quarter end?

David Finkelstein -- Chief Investment Officer

Hi, Bose, this is David. As I said in the prepared remarks, through the end of January, up roughly 3%.

Bose George -- KBW -- Analyst

OK. Great. Thanks. And then, actually, can you just talk about your outlook for agency spreads? You noted some concerns about supply.

Can you just elaborate on that?

David Finkelstein -- Chief Investment Officer

Sure, Bose. The biggest elephant in the room is the Fed. Obviously, there are net seller and we still have uncertainty about how long that will persist. Our view is that it will likely persist beyond the end of the quantitative tightening.

So that is something that gives us caution, spreads do reflect supply in the market certainly, and incremental capital is coming into the agency sector, but it very likely could require considerably more incremental capital. We think it's there, but potentially a wider spread. So we think the market is priced appropriately, but there is risks on the horizon in the agency sector from supply.

Bose George -- KBW -- Analyst

And to the extent, the Fed stops tapering at some point, do you think they do it by continuing to let mortgages runoff and buying treasuries? Or how do you think that plays out?

David Finkelstein -- Chief Investment Officer

Yes. Continuing to let mortgages runoff and buying the front end of the treasury curve.

Bose George -- KBW -- Analyst

Yes. OK. Great. Thanks.


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

Kevin Keyes -- Chairman, Chief Executive Officer and President

Thanks, everyone, for joining the call today and for your support of Annaly. We look forward to speaking to you all, again, next quarter. Thank you.


[Operator signoff]

Duration: 49 minutes

Call Participants:

Jillia Detmer -- Head of Investor Relations and Marketing

Kevin Keyes -- Chairman, Chief Executive Officer and President

Glenn Votek -- Chief Financial Officer

David Finkelstein -- Chief Investment Officer

Doug Harter -- Credit Suisse -- Analyst

Rick Shane -- J.P. Morgan -- Analyst

Ken Bruce -- Bank of America Merrill Lynch -- Analyst

Bose George -- KBW -- Analyst

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