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Annaly Capital Management Inc (NYSE:NLY)
Q4 2019 Earnings Call
Feb 13, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Fourth Quarter 2019 Annaly Capital Management Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Purvi Kamdar, Head of Investor Relations. Please go ahead.

Purvi Kamdar -- Head of Investor Relations

Thank you. Good morning and welcome to the fourth quarter 2019 earnings call for Annaly Capital Management, Inc.

Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the Risk Factors section and 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 thereof. 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 information for investors on the Company's website, www.annaly.com. Content referenced in today's call can be found in our fourth quarter 2019 investor presentation and fourth quarter 2019 financial supplement, both found under the Presentations section of our website.

Annaly intends to use our web page as a means of disclosing material non-public information for complying with the Company's disclosure obligations under Regulation FD and to post and update investor presentations and similar materials on a regular basis. Annaly encourages investors, analysts, the media and other interested parties to monitor the Company's website in addition to following Annaly's press releases, SEC filings, public conference calls, presentations, webcasts and other information it posts from time to time on its website.

Please note, this event is being recorded.

Participants on this morning's call include Glenn Votek, Interim Chief Executive Officer and President; David Finkelstein, Chief Investment Officer; Serena Wolfe, Chief Financial Officer and other members of management.

And with that, I'll turn the call over to Glenn.

Glenn A. Votek -- Interim Chief Executive Officer & President

Thank you, Purvi, and good morning, everyone.

I'm going to briefly cover our performance, our recent internalization announcement and our outlook for the year ahead. But before I get into that, I want to take the opportunity to introduce our new CFO, Serena Wolfe, who joined us in December and who you'll be hearing from later on the call.

We are thrilled to have Serena on our team. She's a respected industry veteran who joined us from EY where she had a distinguished career holding a variety of leadership positions. And she's already made a meaningful and immediate impact during her first few months here at Annaly thanks to her deep financial acumen and leadership experience. And we'll certainly benefit from her expertise in both real estate and financial matters going forward. So we're really excited to have her here.

Turning to our results.

We're extremely pleased with the strong finish that we delivered for our shareholders in the year. During the quarter, we achieved a number of milestones that I want to highlight, and we'll keep it brief as both David and Serena will provide greater detail.

Our economic return of 7.6% for the quarter and 14.1% for the year was the best performance that we've had since 2014. And as we anticipated, the third quarter had [Indecipherable] for us and we expect the positive momentum that we saw in the fourth quarter to continue into 2020. Credit activity accelerated during the quarter, increasing our capital allocation and credit investments to 26%.

And each of these quarterly achievements was a continuation of our efforts across all aspects of the business to focus on enhancing shareholder value. We did this by advancing our diversification strategy and improving operating efficiencies to enhance returns and continuing our corporate responsibility and governance leadership. There's a key shift that we've seen across the financial industry as investors increasingly acknowledge the benefits that governance, diversity and purpose-driven focus have on performance.

From an investment standpoint, in 2019 we had a 26% increase in new debt deals closed across both the commercial and middle market lending businesses. We originated $4.6 billion of total credit assets during the year, with residential credit representing nearly 60% of that growth as a result of doubling its yearly home loan purchases to $2.7 billion. Our disciplined investment activities led to middle market lending exceeding $2 billion in assets under management.

And we also co-authored our second thought leadership piece on GSE reform, which remains a significant opportunity for us over the long-term.

In 2019, we continued to optimize our capital in order to drive efficiencies for the bottom line. Notably, we opportunistically redeemed more expensive preferreds and access to capital markets through a series of accretive transactions. Additionally, we diversified our funding sources by accessing the securitization markets for both our resi credit and commercial real estate businesses. It has proven to be an effective complementary asset generation strategy as well as an efficient source of attractive non-recourse financing.

Finally, 2019 marked a year of considerable strides with respect to corporate responsibility and governance, which has been an area of significant focus for us. We increased the diversity of our workforce, with more than 70% of new hires and over half of all employees identifying as either female or racially diverse. And in recognition of our commitment to diversity, we were one of only two mortgage REITs selected as a member of the Bloomberg Gender Equality Index this year, which represents the third consecutive year that Annaly has been recognized. And we're very proud of that.

On the governance side, we made a series of changes that promote shareholder value. We reduced our management fee to 75 basis points in incremental capital, elected two new highly qualified independent directors, we separated the Chair and CEO roles and appointed our first ever independent Chair of the Board. All these actions serve to provide a strong governance framework that benefits the long-term interests of our shareholders, and our high standards are important to all our stakeholders, including our employees and our business partners.

We also announced yesterday our plan to acquire our external manager and transition to an internally managed REIT. This transaction further exemplifies our commitment to our shareholders and is a natural progression following the scaling of our four investment groups and given the fact that the manager is exclusively dedicated to Annaly as its sole client.

The internalization represents another step forward in our efforts to enhance Annaly's corporate governance practices and creates both strategic and operational flexibility. Specifically, the internalization aligns its incentives between management and shareholders, and improves corporate disclosure with increased transparency around compensation practices. Additionally, while we do not anticipate immediate cost savings, given our already favorable operating efficiency, we do expect to drive improvements in both scale and relative cost profile over the long term.

Turning now to our outlook. We are very encouraged by the prospects as we enter into 2020. Consensus views for economic conditions are constructive for our businesses and therefore our ability to continue to deliver value for our shareholders. The economic cycle has been extended, fundamentals appear solid as data continues to show more muted recession concerns and rates expected to largely remain within recent historical ranges.

The recent repricing in the market has reinforced our view that we should expect volatility during the year, which has historically been the case during election years. And while we remain prepared for exogenous risks, we're equally focused on the things that we can control: our role as a provider of private capital as GSE reform continues to take shape, driving economies of scale through greater operational flexibility, focusing on direct access to product to expand investment optionality and prudent risk management.

Finally, I want to provide an update on our CEO search. Transparency has been a theme that we've noted today. And so in that spirit, I want to also provide clarity on my future plans. As a member of the CEO search committee of the Board, I'm intimately involved in the evaluation of both internal and external CEO candidates, and I'm highly confident that we will have identified over the course of the next few months the right individual to lead the Company into the future.

As for me, I stepped into the role of Interim CEO at the request of the Board to guide the firm through this transition and to help find the right leader going forward. However, I have been looking to move on to the next stage of my life. So, as I discussed with both the Board and the management team, I plan to transition away from a full time operational role following the employment of a permanent CEO. And I intend to remain in an advisory capacity for an interim period to help provide continuity and to ensure a seamless transition. And after that, I'll continue to support Annaly's development going forward as a member of the Board.

So in the meantime, I remain deeply committed to leading the Company until the permanent CEO has been selected and transitioned. And once complete, I look forward to continue to support the firm in partnership with the new CEO, the rest of the management team, which I have the utmost respect for, and my fellow Board members.

And with that, I'll now turn it over to David.

David L. Finkelstein -- Chief Investment Officer

Thank you, Glenn.

The fourth quarter brought about a return of positive risk sentiment as the Fed executed its third rate cut of the year and resumed balance sheet growth. Both interest rate and funding markets normalized, leading to reduced volatility, a steeper yield curve, firm credit spreads and a retracement of much of the agency MBS widening that characterized the first three quarters of 2019.

As Glenn discussed, we generated a nearly 8% economic return in this environment, while our overall leverage declined by roughly 0.5 turn to 7.2 times. We shifted our allocation to credit modestly higher to 26% of total capital as a result of a combination of reduced agency exposure and growth in each of our three credit businesses over the period.

Before discussing our investment outlook, I want to briefly summarize portfolio activity across our four businesses.

Beginning with agency, MBS benefited from the improved market environment, leading to a reduction in prepayment concerns, and perhaps most notably, a significant improvement in the financing environment brought about by Federal Reserve intervention in funding markets. Our agency portfolio reduction was primarily attributable to short TBA positions, given negative carry and higher coupons.

Our hedge ratio remain roughly unchanged at 75% with a further modest rotation into OIS and SOFR-linked swaps, as swap spreads widened meaningfully on the quarter. We took advantage of greater stability in financing markets and extended the average term on our repo portfolio to over two months, and we further extended our average term into 2020.

Of additional note, we resecuritized $1.1 billion of premium priced agency DUS securities and distributed near par dollar price bonds, while retaining the IO portion of the assets, capitalizing on strong demand for DUS bonds by bank portfolios.

Shifting to residential credit. As Glenn mentioned, we had a very active quarter in the sector. Our portfolio grew to $3.9 billion as we acquired over $900 million of expanded prime and agency eligible investor whole loans over the period. Securitization execution remained strong and we issued $465 million of expanded private securities in October, and more recently, in January, we executed our 10th securitization under the OBX shelf backed by $375 million of investor loans. Each of these transactions generated an expected level of return in the low teens on the residual assets held with modest balance sheet leverage.

Our efforts to establish programmatic issuance through the OBX shelf have been supported by sound underlying fundamentals such as low delinquency rates and below average prepayment speeds. And these characteristics have helped the program to gain broad investor interest.

Now turning to commercial real estate. Our asset exposure grew to $2.3 billion, which was driven by both whole loan originations as well as securities purchases, predominantly in the single asset, single borrower sector. Our weighted average cost of borrowing decreased by roughly 60 basis points to 3.4%, driven both by a reduction in LIBOR given Fed cuts as well as additional use of lower cost repo financing for securities added to the portfolio during the quarter. This reduced cost of capital has more than offset floating rate investment yields and consequently the levered return on our CRE portfolio increased to roughly 12.5% in the quarter.

Our middle market lending portfolio grew slightly on the quarter, with new originations for the year exceeding $1 billion. Our portfolio composition remains attractive with a focus on defensive noncyclical industries, a first lien weighting of 65% and portfolio leverage remains very low at 0.6 times. 2020 has started off well for our MML business with over $400 million in new commitments to begin the year, including a $300 million loan that we closed in early February, and are in the process of syndicating roughly half of the position which we anticipate completion profitably over the very near term.

Now shifting to our outlook. Global events so far in 2020 have had the negative impact of reintroducing volatility in the financial markets, while leading to meaningfully lower rates. We anticipate the coronavirus to ultimately have a transitory impact on the US economy, which continues to be characterized by low but stable growth in inflation. The partial revolution of the trade dispute that impacted much of 2019 is a positive factor that should lead to an uptick in business investment going forward. And meanwhile, the labor market remains strong, consumer fundamentals are healthy and residential investment has seen a marked improvement in recent months.

Although the Fed's most aggressive actions in support of repo markets, $60 billion in monthly bill purchases plus terming [Phonetic] overnight repo operations will be reduced in the second quarter, we expect policymakers to continue paying considerable attention to financing market stability going forward. As such, we anticipate ample illiquidity to be available in repo markets and the Federal Reserve to make regulatory changes that will help banks provide repo financing more efficiently.

This will help absorb supply in agency MBS, should continue to face a technical headwind to strong net issuance and Fed portfolio runoff. We nonetheless remain constructive on the agency sector as stable financing conditions, combined with relative value versus other sectors, should keep investors supporting agency MBS.

With respect to our views on credit, we remain cautious on the sector overall, but expect our residential business to drive incremental growth in 2020, given the sound demand for housing at current rate levels and strong fundamentals in the sector. Moreover, the administration's efforts on GSE reform may bring additional opportunities for private capital further out the horizon, as Glenn discussed. The commercial and middle market lending businesses may experience more moderate growth. Nonetheless, we will continue to underwrite high quality credit assets to ensure an appropriate balance across our credit businesses.

And finally, each of our credit businesses will continue to benefit from a lower cost of capital as securitization execution in the residential sector further improves and the increased breadth of our warehouse financing across our direct lending platform should benefit financing terms, leading to solid returns.

And with that, I will hand it over to Serena to discuss the financials.

Serena Wolfe -- Chief Financial Officer

Thank you, David, and good morning, everyone.

I'm pleased to join you today for this earnings call, my first as the CFO of Annaly, after joining the Company in December. A little over two months in, I can tell you, it has been a pleasure settling in and working with a team of such talented professionals and really, quite honestly, quite good fun.

I will provide brief financial highlights for the quarter and full year 2019. And while our earnings really are disclosed as both GAAP and non-GAAP core results, I will be focusing this morning primarily on our core results and related metrics, all excluding PAA.

As Glenn commented earlier, Q3 was a trough in performance for the year, with Q4 ending the year strong. We generated core earnings per share excluding PAA of $0.26 for the quarter, $1 for the full year and a full year GAAP loss of $1.60. The largest contributors to the improved earnings for the Q4 were increases in dollar roll income of $21.4 million to $36.9 million for the quarter and lower interest expense due to lower average repo rates and balance. And I'll cover more on interest expense in a moment.

The portfolio generated 141 basis points of NIM, up from Q3 of 110 basis points, driven mostly by lower average interest costs of 2.01% versus 2.28% in Q3. Our core earnings benefited from the Fed's liquidity injection, which eased funding concerns as we closed out the year. Our repo expense decreased 21%, $550 million versus $700 million, and repo weighted average days increased 44%, 65 days versus 45 days.

Now, David covered the continued growth of our credit businesses in his comments, but what I wanted to touch on briefly is the efficiencies we've gained in our operations, in particular with our resi credit securitization business. We have clearly established ourselves as a programmatic issuer for the funding of our resi credit business, with Annaly being a top five non-bank issuer of new origination loans in 2019, having executed $2.6 billion of aggregate securitizations, an increase of 70% [Phonetic] on prior year activity.

Our resi credit team has driven efficiencies through increased volume as we can securitize loans on average in six months from purchase. This speed to market will prove beneficial to our financing costs, which is particularly meaningful with the expected reduction in FHLB low-cost financing in the future. We've achieved this growth while presenting the quality of our credit investments and our outlook on the fundamentals underlying those assets. Our discipline is illustrated by our new origination purchases in our residential whole loan portfolio, which excluding our pool rate [Phonetic] portfolio, has 60 plus day delinquencies of 24.4 basis points. This portfolio has outperformed our initial underwriting.

Additionally, we've recorded approximately $20 million of total cumulative provisions between our direct lending businesses since inception. The quality of our portfolio is also evident in our CECL reserve for our MML and ACREG businesses that will be included in our next quarter filings and which we expect to be immaterial.

As we continue to grow [Technical Issues] businesses, we have maintained a disciplined approach to financing, ensuring robust and diverse sources of available finance funding. During the past year, we have continued to expand our financing sources, put in place an additional credit facility and increasing our funding capacity for our commercial businesses by $700 million. In addition, we executed our first CRE CLO deal with a max capacity of $857 million.

We continue to execute on our efforts to optimize our capital base. We opportunistically raised $443 million of preferred equity and redeemed all outstanding shares of Series H and Series C preferred stock, reducing the cost of preferred capital by 15 basis points. Our share buyback plan previously approved by our Board of Directors allowed us to act swiftly in the market in the third and fourth quarters, repurchasing shares representing total proceeds of $291 million for the year.

Our efficiency metrics remain consistent year-over-year and are among the best across the board cross section of peers and other comparable companies. In fact, our operating expense to equity ratio is over 1.7 times more efficient than internally managed mortgage REITs, and following completion of the internalization discussed earlier, we expect to achieve a long-term range of 1.6% to 1.75%.

Importantly, we achieved these metrics while sustaining our investment in our people, processes and technology. In 2019, we increased our headcount by 16 people and continued to invest in our best-in-class technology platform. During the year, we continued our digital transformation, utilizing data analytics and automation to further enhance our use of data and improve our operational and financial controls.

As a result, we are well positioned to reap the benefits of the internalization of our manager in future years as our investment in technology and people have provided the foundation to enable us to drive efficiencies and evolve in the future, while providing better business insights to senior management and the Board of Directors.

And so with that, I'll turn it over to the operator and we'll open for questions.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Rick Shane of JPMorgan. Please go ahead.

Rick Shane -- JPMorgan -- Analyst

Hi, guys. Thanks for taking my questions this morning. Just curious, as we sort of move into or move through the first quarter and into 2020, given the opportunities in the agency business, are you seeing sort of the improvement in margin that you anticipated? And do you continue to see good opportunity to deploy capital in that business?

David L. Finkelstein -- Chief Investment Officer

Hi, Rick. This is David. So, heading into December, we did experience a lot of spread contraction in agency MBS, so they did end the year tighter. Heading into 2020, we obviously experienced a sharp rally. We think that going into the spring, there's going to be a fair amount of supply and prepayments are relatively heavy. So that does explain some of the reduction in the portfolio we experienced late last year. And we've also reduced the portfolio a little bit more thus far this quarter in anticipation of the ability to redeploy capital into the spring when supply does come. So right now, spreads look perfectly reasonable, but we are anticipating a better opportunity perhaps into the second quarter to actually bring leverage back up in that environment.

Rick Shane -- JPMorgan -- Analyst

Got it. Great. And then second question. On the commercial real estate portfolio, you guys are a little bit more concentrated in retail than many of the commercial focused mortgage REITs that we follow. Is that sort of a contrarian view? is that something that over time you'd like to take down?

Glenn A. Votek -- Interim Chief Executive Officer & President

I'll start and then I'll hand it over to Mike. I'd say the vast majority of our retail exposure is necessity based. And so, it's not so much a contrarian view as what we think to be more stability in the retail sector than what is broadly represented by retail.

Michael Fania -- Head of Residential Credit Group

Yeah, Rick. This is Mike. Yeah, I think the majority is in grocery anchored shopping centers. I think we've had that exposure for four to five years or so now. And we expect to continue to own and reap the benefits of owning those assets in the long term.

Rick Shane -- JPMorgan -- Analyst

Great. that's it for me, guys, this morning. Thank you very much.

David L. Finkelstein -- Chief Investment Officer

You bet. Thanks.

Operator

The next question comes from Eric Hagen of KBW. Please go ahead.

Eric Hagen -- KBW -- Analyst

Hey guys, thanks. Good morning. In the press release last night, you guys noted that internalizing should provide greater operating flexibility. I just want to let you guys expand on what exactly that means. Does it mean that reaching your ROE hurdle rate could be easier to accomplish with a lower expense ratio? Or does it mean that you're fundamentally more positive on operating type businesses as a result of the change in cost structure? Thanks.

Glenn A. Votek -- Interim Chief Executive Officer & President

Yeah, I would say -- and thanks for the question. I would say it's a combination of both of those things. Like Serena has pointed out in her opening remarks, we've made significant investments in technology. I think we'll continue to do that. That'll allow us to continue to drive operational efficiencies and improvements. But I think while we're very comfortable with the approach that we've taken to-date strategically in terms of how we want to source assets that will continue. However, it does allow us an expanded opportunity to look at other strategic opportunities. And, David, if you want to elaborate on that?

David L. Finkelstein -- Chief Investment Officer

Yeah, just to add to Glenn's point. So we do feel like with our businesses, we're perfectly capable of organic growth, but just simply having the flexibility should there be an opportunity out the horizon to either expand our capabilities, to acquire assets or enter into potentially an additional asset class, this just gives us more flexibility to pursue that.

Eric Hagen -- KBW -- Analyst

Great. Thanks for that detail. It seems like you guys are may be a little under-levered in the credit segment. So I'm just curious how you think about the trade-off of possibly running a little bit more structural leverage in the credit segment and reducing your recourse leverage in the agency segment versus continuing to have the same financing exposure that you currently have.

Glenn A. Votek -- Interim Chief Executive Officer & President

Yeah. That's a very good question. So we do have some structural leverage, certainly, in the credit businesses. But generally, we look at it holistically across the four businesses. And historically, we were able to use the agency portfolio as somewhat of a funding vehicle for the credit businesses, and have been very low levered as a consequence of that.

But the way we evaluate it currently from a liquidity standpoint is to the extent there's excess liquidity, what's our highest cost financing. And we may reduce -- if there's additional liquidity, we may reduce our borrowings on the higher cost financing like for example, MSRs. We don't lever our MSR portfolio. That does typically tend to be relatively higher cost financing. And so we fund it with capital, effectively. And so we're constantly evaluating how efficient we are with our capital, but considerate of liquidity, and we'll just optimize the overall portfolio based on that.

Eric Hagen -- KBW -- Analyst

Yeah. Certainly makes sense. Just one more. Any update on book value through the first six weeks of the year?

Glenn A. Votek -- Interim Chief Executive Officer & President

Sure. It's obviously been a volatile year, and books have been up and down. And as of last night, we were almost exactly flat on the year.

Eric Hagen -- KBW -- Analyst

Super. Thanks so much for the comments, guys.

David L. Finkelstein -- Chief Investment Officer

You bet.

Operator

The next question comes from Kenneth Lee of RBC Capital Markets. Please go ahead.

Kenneth Lee -- RBC Capital Markets -- Analyst

Hi. Thanks for taking my question. Just one in terms of potential for equity capital allocation going forward. You mentioned having a little bit more allocated toward credit. And given your relative views between credit and agencies, how should we think about equity capital allocation going forward?

Glenn A. Votek -- Interim Chief Executive Officer & President

Sure, Ken. So, broadly speaking, I'll say our credit allocation increased as I mentioned in my comments because we reduced agency and we also added to our credit portfolios, namely in the residential space. Now, going forward, we think all of our credit businesses can grow, but there is -- I would say it is somewhat more episodic. Like for example, we are persistently acquiring residential whole loans, but when we do a securitization, the amount of capital actually that is used to hold those residuals bonds is really a very small fraction of the overall loan.

So, the growth in credit can only be so great just given the slow nature with which we can deploy the capital. But generally, in these three credit businesses, we want to grow our residential credit the most because we think that's fundamentally the most attractive, and then middle market and commercial to the extent we're doing high quality loans, which we are, we will grow. But we don't expect our credit businesses to be an increasing portion of capital in the absence of reduction in agency. I would expect them to be relatively flat on the quarter and we'll see how the evolves into the spring and help pricing books. But we think we're going to stay relatively close to the lower end of the range and be somewhat content with that for the time being, just given pricing and some of the fundamentals in parts of credit sectors.

Kenneth Lee -- RBC Capital Markets -- Analyst

Okay. Very helpful. And just one follow-up, if I may, just on the topic of internalization. In terms of the reduction in your long-term opex as a percentage of equity, you mentioned 1.6% to 1.75% range. Just want to get a little bit more color on the key drivers for that reduction in range.

Serena Wolfe -- Chief Financial Officer

Thanks for the question, Ken. It's Serena. So, as Glenn previously mentioned, there's several variables at play. And as a management team, we continuously seek to identify new opportunities for cost savings and improving efficiencies just as general course.

But as a kind of a data point, as part of our external [Technical Issues] transaction in 2013, we had disclosed at that time that the Company estimated saving about $211 million over five years. And so our actual cost savings have far exceeded that target, which is evidenced by the opex ratios that I previously discussed and is illustrated in the investor presentation.

So, we just thought as a management team, we are focused on continuous improvement, and we thought it important to set ourselves a target. And so that's what the 1.6% to 1.75% really represents. It's just a target that we're looking to achieve of projected annual savings that we think we can reasonably achieve given, where as Glenn mentioned and I also mentioned, we already have a very efficient operating platform.

Glenn A. Votek -- Interim Chief Executive Officer & President

Yeah. The one other thing I would mention is that, Serena had indicated earlier the commitment that we have to technology and the investment in technology that will obviously drive economies of scale over time and greater efficiencies. And the other thing is as we internalize to the extent that we would raise incremental capital, obviously we would not incur the additional fees that we would have otherwise incurred had we continued to be external.

Kenneth Lee -- RBC Capital Markets -- Analyst

Understood. Very helpful. Thank you very much.

Serena Wolfe -- Chief Financial Officer

Thank you.

Operator

The next question comes from Matthew Howlett of Nomura. Please go ahead.

Matthew Howlett -- Nomura -- Analyst

Guys, thanks for taking my question. And firstly, I want to applaud you for the internalization. I think it really sends a strong signal to the market. The question is on -- David, I appreciate the comments on the outlook on agencies. But when you look at the writedown of specified pools and TBAs and then in certain segments of the specialized pool market, but how do you think about positioning with payups where they are versus potential to have [Indecipherable] mini refi ways if mortgage rates do hit all-time lows or at some point, reach an all-time low level?

David L. Finkelstein -- Chief Investment Officer

Sure, Matt. That's a very good question. We are obviously concerned about the elevated level of payups. But that's a function of the market. As we've talked about in the past, the TBA deliverable has deteriorated, which means that specified pools are really benchmarked off of a deliverable that's not really consistent with the past. And so, specified pools are clearly much higher quality now, and that's reflected in the pricing.

But how we're looking at investing going forward in light of refis and in light of payups, we are going down the coupon stack even as specified pools. For example, in the 3% coupon, which is a $1 or $2 price bond with very modest payup, for example, $200,000 loan balance, which is roughly a little bit over 1 point, maybe 1.25 point, so you get a low $1 or $3 priced bond. You actually get about 95 basis points off the yield curve with your hedge and that does generate roughly an 11% return, and your payup exposure is relatively modest.

So, we do expect refis to obviously pick up not until Q2. Speeds will be about 20% lower in Q1 than they were in Q4. But nonetheless, we're prepared for the eventual rise given this rally in the market and we are investing in lower coupons. And I think you see quarter-over-quarter, when you look at our coupon distribution for Q4 was Q3, we clearly demonstrably reduced our [Indecipherable] coupon and that's helped us be in better shape into this rally in Q1 here.

Matthew Howlett -- Nomura -- Analyst

Right. And certainly, speeds are lower than the market in 4Q and you took down the long-term sort of prepay a little bit as well. And then the dollar roll income, that was -- that's been volatile. That was up nicely. Is there any sort of guidance you can give us some line item going forward?

David L. Finkelstein -- Chief Investment Officer

Sure. So, it was up as a consequence of two factors. Number one, obviously, we had three rate cuts last year, and roughly 50 basis points of those rate cuts were new to Q4. And so the implied financing rate was more attractive on dollar rolls, which we benefited from. And in addition, as I mentioned, we did have some short TBA positions, which there were in higher coupons, negative roll rates which being short, those rolls, means that you actually generate income when you go to cover those rolls. And that adds to our dollar roll income.

The breakdown was roughly a third from short positions and the other two-thirds from our long positions, which were predominantly in lower coupons. In terms of Q1, I was looking -- we don't forecast to be quite as high as Q4, but we do expect it to be in the proximity of what we generated in Q4, so maybe low 30s currently, so about $0.025 or thereabouts is what we forecast, and that could change as the quarter progresses.

Matthew Howlett -- Nomura -- Analyst

Great. Really appreciate it. Thanks, David and Glenn.

David L. Finkelstein -- Chief Investment Officer

You bet.

Operator

The next question comes from Doug Harter of Credit Suisse. Please go ahead.

Doug Harter -- Credit Suisse -- Analyst

Thanks. Just one more on the internalization. Just how kind of the new structure might and not kind of having incremental expenses might change your view on capital raising and kind of attractive -- wherever returns need to be in order to kind of raise capital?

David L. Finkelstein -- Chief Investment Officer

Sure. So this is David, Doug. So look, the way we look at raising capital -- obviously, it has to be beneficial or not cost prohibitive to book. Otherwise, it's not a consideration, generally. And we did see a lot of capital raises last year which were actually dilutive to book. That's not something we do. But equally as important is the investment returns that are available in the market.

And so as I was saying, with agency returns in 11%, maybe a little bit higher, they're perfectly reasonable, but it's not telling us to go out and raise capital and deploy that in the agency sector at this point. Now, to the extent that our price to book is at a premium and that changes as we proceed here on to the year and the agency basis haven't achieved and then those two factors line up, and we certainly would. But generally speaking, it's the combination of the two factors and they both have to be favorable.

Doug Harter -- Credit Suisse -- Analyst

Great. Appreciate that. Thank you.

David L. Finkelstein -- Chief Investment Officer

You bet.

Operator

The next question comes from Mark DeVries of Barclays. Please go ahead.

Mark DeVries -- Barclays -- Analyst

Yeah. Thanks. Another question for you on the opex ratio. I just want to clarify a point that -- I guess the 1.6%, 1.7% of equity that you guided to, is that kind of what you're expecting for 2020?

Serena Wolfe -- Chief Financial Officer

Hi, it's Serena again. So, no, as we previously mentioned, the driving force behind the internalization is not cost savings. And so we're not expecting immediate cost savings in 2020. We view 2020 as a transitional year. As we move through 2020, our G&A framework will evolve through the process of our internalization. And so, we do not anticipate achieving those opex target in 2020. It's more 2021 and further target.

Mark DeVries -- Barclays -- Analyst

Okay. That's helpful. And then just want to get some color on how we should think of the dynamic of that ratio changing as you grow the balance sheet. I mean, I think you made a couple comments. One is that, obviously with a new equity, that doesn't actually add incremental fees as it would under the external structure. But also, this now provides you new flexibility to pursue new lines of business, which presumably would add to the expense structure. How should we think about that ratio kind of growing with your balance sheet?

David L. Finkelstein -- Chief Investment Officer

Sure, Mark. This is David. So, certainly as we raise equity as an interim manager, it's going to lead to more efficiency as we grow unlike with the external manager. Now, how we think about potential external opportunities that might require some costs associated with it that would now be borne -- in terms of personnel that would now be borne by the REIT, we're going to look at it on a net present value basis. If a potential strategic endeavor has X cost associated with it, but it's got X plus some number on a risk adjusted basis of revenues and income associated with it, then it's more likely that we would be able to pursue it. And as an external manager, it's a different equation because we only have so many resources with the external manager. But if it's a profitable endeavor on an all-in cost basis for the REIT and risk adjusted, then it's much easier for us to pursue.

Mark DeVries -- Barclays -- Analyst

Okay. And then just one last clarification on 2020. Just because of that opex as a percentage of equity has kind of jumped around the last three [Phonetic] years, and I think it was elevated the past year because of the MTGE issue. Is 2% something closer to what we should expect for 2020?

Serena Wolfe -- Chief Financial Officer

I think it's closer to 1.8%, 1.8% or something like that. I think you should look to it -- we are anticipating 2020 will be somewhat consistent to 2019.

Mark DeVries -- Barclays -- Analyst

Okay. Got it. Thank you.

Operator

[Operator Instructions] The next question comes from Brock Vandervliet of UBS. Please go ahead.

Brock Vandervliet -- UBS -- Analyst

Thanks. Good morning. Hoping to beat this to death on internalization. I was wondering if you could kind of deconstruct a little bit the expense base of the business. What I'm getting at is, some of the pure play agency only platforms, obviously a very different model, have a much lower opex ratio even than your long-term target. As you look at your mix of business, what would you say is the excess for the additional lines of business, if you can speak to that?

Glenn A. Votek -- Interim Chief Executive Officer & President

Yeah. So I'll start with that. Brock, I think it's a fair point. We are an agency only business that would be able to drive the cost structure much lower. We are in four diverse businesses. A number of them are more people intensive, more cost intensive, whether it be largely our credit businesses. So, as a result, in the past we have disclosed what each of those businesses would look like relative to peers and then on a weighted basis what it would look like, which is why we feel that our efficiency levels are far superior to peers. And Serena had touched on that in her opening remarks. But it's really when you look at each of the composite businesses, which again, we have disclosed in the past, you can get a sense as to what type of expense loads we have for those individual investment groups relative to peers.

David L. Finkelstein -- Chief Investment Officer

Yeah. One thing I'll add, Brock, is that, if you did look at each of our four businesses on a stand-alone basis, they are more efficient than their respective counterparts within those sectors, and a lot of that is attributable to the synergy with the overall Company and businesses. And so -- yeah, there is a cost, an operating cost associated with diversification and it's clearly not a pure play agency. Exposure to credit businesses do come with cost, but over the long run, we certainly think that it bears out that it's a worthwhile endeavor to smooth both our earnings stream as well as our book value.

Brock Vandervliet -- UBS -- Analyst

Okay. Got it. That's helpful. And separately, as you look at Annaly's platform in the residential origination marketplace versus other peers and in terms of the product mix, how is it different than some of the other players that are out there where we already see kind of the market stratifying to this almost prime, scratch and dent, fix and flip? Like what's in your pipeline?

David L. Finkelstein -- Chief Investment Officer

Sure. So, as we've talked about in the past, the expanded prime sector, the near miss sector is the part of the market that we've developed the footprint in. We are very early entrants into this space. We're not doing the deep credit types of loans. These are sub-70 FICO -- or sub-70 LTV, 750 or above FICO. And they're very good credit loans where you might have some mitigating circumstance, whether it's the borrower is a self-employed borrower or something like that. And so that's really the area we're focused on.

I think over the last number of years, the relationships we've developed through our originator partners has become very, very ingrained in terms of how they're doing business and they rely on us extensively in terms of our ability to purchase loans. And so, we were somewhat of a first mover in the space, and that's helped us out. And if you look at the flow that we've generated in the loans repurchases, it accelerated quarter-over-quarter. And so we feel like we're in a good place with that business and that's where we're going to continue to focus our efforts on.

Brock Vandervliet -- UBS -- Analyst

Great. Thanks for the color.

David L. Finkelstein -- Chief Investment Officer

You bet, Brock.

Operator

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

Glenn A. Votek -- Interim Chief Executive Officer & President

Great. Thanks, operator. This past quarter demonstrated the resilience of our strategy and we're proud of all that we've accomplished in 2019. We're very optimistic in our outlook and prospects as we build on the momentum from last year. We're also excited about the internalization and the positioning of our diverse businesses and are highly confident that supported by the more than 180 talented, dedicated professionals on our team, that we'll continue delivering significant value for our shareholders.

Thank you, all, for joining the call and for your continued interest in Annaly. And we look forward to speaking to you next quarter.

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Purvi Kamdar -- Head of Investor Relations

Glenn A. Votek -- Interim Chief Executive Officer & President

David L. Finkelstein -- Chief Investment Officer

Serena Wolfe -- Chief Financial Officer

Michael Fania -- Head of Residential Credit Group

Rick Shane -- JPMorgan -- Analyst

Eric Hagen -- KBW -- Analyst

Kenneth Lee -- RBC Capital Markets -- Analyst

Matthew Howlett -- Nomura -- Analyst

Doug Harter -- Credit Suisse -- Analyst

Mark DeVries -- Barclays -- Analyst

Brock Vandervliet -- UBS -- Analyst

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