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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the Third Quarter 2018 Annaly Capital Management Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded.
I would now like to turn the conference over to Jessica La Scala with Investor Relations. Please go ahead.
Good morning, and welcome to the Third Quarter 2018 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 contents 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 post important information for investors on the company's website, www.annaly.com. Context reference in today's call can be found in our third quarter investor presentation and third quarter financial supplement, both found under the Presentations section of our website. Annaly intends to use our website as a means of disclosing material nonpublic information for complying with the company's disclosure obligation 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 can monitor the company's website in addition to following Annaly's press releases, SEC filings, public conference calls, presentations and webcast. Please also note that 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; Tim Coffey, Chief Credit Officer; Timothy Gallagher, Head of Annaly Commercial Real Estate; Michael Quinn, Head of Commercial Investments; and Michael Fania, Head of Residential Credit.
I'll now turn the conference over to Kevin Keyes.
Thanks, Jessica. Good morning, everyone, and welcome to the call. On last quarter's earnings call, I briefly summarized our five year strategic plan, Annaly 2020. I discussed how and why our company has grown and evolved over the past few years while most others in our sector have not. Today, rather than regurgitate market themes and events and how our strategies are uniquely positioned to capitalize on opportunities in this volatile environment, I want to simply focus on empirically framing the output of over strategies.
First, I'll start with a few measures of our growth. Since the initiation of our five year plan in 2016, Annaly has grown its market capital over 50% or $4.4 billion while distributing over $3.8 billion in dividends to our shareholders. Over this time period, our increase in market cap is 4x the average agency mortgage REIT's growth and our dividend payments are 25% more than the entire agency mortgage REIT sector combined.
We have executed on our diversification strategy, investing in nearly $14 billion of assets in our three credit businesses over the past three years, increasing the allocation of our total capital from 12% to 30% into lower-levered floating rate credit assets in order to reduce our sensitivity to interest rates. We have increased the number of our available investment options to 37, which is 3x more than Annaly had prior to diversification and over 4x more than the current mortgage REIT average.
The growth of our portfolio has been supported by the expansion of our financing sources and capacity as well. Since 2015, we have procured nearly $6.5 billion of dedicated financing for our businesses through five credit facilities, three securitizations and a five year FHLB line, while also expanding our direct repo relationships to 42% of our portfolio.
Second, I'd like to point the various measures of Annaly's stability and capital efficiency. Our diversification strategy positions us to continue to deliver high-quality, stable earnings, while producing a durable total return in various market environments. Since 2014, there have been 57 dividend cuts by 18 mortgage REITs, while we have paid the same stable dividend of $0.30 per share for 20 consecutive quarters. However, in measuring stability and durability of return, there's a lot more that can be analyzed than just dividend distributions.
Last quarter, I introduced additional risk-adjusted return and stability metrics that help frame the return differentials and capital efficiency among Annaly and other mortgage REITs. As part of our investor presentation this quarter, we have illustrated various operating and valuation criteria in more detail, which clearly distinguish Annaly's performance and model among the mortgage REIT industry, the S&P 500 and also five widely held yield sectors made up of 359 companies with $6.2 trillion of value and a weighted average yield of 3.6%.
In this quarter's presentation, we summarize an analysis of yield normalized for average leverage, which clearly demonstrates our ability to achieve superior returns without relying heavily on leverage. Since 2016, relative to the agency mortgage REIT sector, our return per unit of leverage is 39% higher, which is especially notable given we've employed approximately 25% less leverage.
As I mentioned, we've also secured additional financing capacity for our Residential Credit, Commercial Real Estate and Middle Market Lending businesses to preserve future liquidity and optimize our capital. Even with this additional capacity, these strategies continued to conservatively operate at very low leverage levels, only one turn combined overall, which is multiples below the industry averages, contributing to our sustained earnings stability.
We also look at the level of stability of our yield by comparing net interest margin over time. Annaly has maintained a net interest margin that is 11x more stable than the average mortgage REIT and 26% higher than the REIT industry itself since 2016.
With respect to the other risk-adjusted return methodologies, our sharpe ratio or performance relative to standard deviation of returns is 2x higher than the average yield company since our diversification strategy began in 2014. In addition, our trainer ratio, which looks at performance relative to beta is 3.5x higher than those same companies over the same time period.
Third, the extremely low beta of our stock needs to be stressed in markets like this. Our diversification, liquidity and risk management practices have increased not only the stability of our returns but also decreased our correlation with the broader market. We have increased the liquidity of both our balance sheet and common stock.
Our $8 billion of unencumbered assets represents a 14% increase since 2016, and our three month average daily trading volume, which is greater than 70% of the mortgage REIT sector combined, grew by nearly 80% over the same time period. As a result, our equity beta has steadily declined by 17% since 2014 and is now roughly half the S&P 500, 34% lower than other yield sectors and 11% below the mortgage REIT sector.
Fourth, Annaly has demonstrated that it access a safe haven and defensive yield play in volatile markets. Since 2014, when the VIX is above 15, interestingly the market's average over that time frame, Annaly generated a positive return of 18% and outperformed the S&P 500 by 62% and other yield sectors by 44%. We have also outperformed the rest of our sector by nearly 25% during times of heightened volatility like we have been experiencing this quarter.
Lastly, our consolidation strategy has contributed to our outperformance and the sector's rebound from the lows during the volatility of the first quarter 2016. Today, although the number of mortgage REITs has declined from 40 to 32, the industry's value has increased by $16 billion or 34% since our purchase of Hatteras in 2016. The two acquisitions we've executed were each initiated in the two most volatile quarters of the past three years: the first quarter of 2016 and the first quarter of 2018.
We clearly demonstrated our unique capability to move opportunistically during times of heightened volatility with these acquisitions. With these deals, we've also exhibited the operating leverage and ability to plug and play into our platform, further diversifying our portfolios, adding earnings while saving Hatteras and the MTGE shareholders over $55 million of expenses.
Importantly, following these acquisitions, our strategy has been further endorsed by our shareholders. Since 2016, our institutional ownership has grown significantly to approximately 60% today, including more than a 40% increase in our institutional shareholders around the world. Bottom line, investors will continue to benefit from consolidation of the fragmented mortgage REIT industry. And based on recent past, consolidation will accelerate, if this current volatility persists.
The point of analyzing the operating and valuation metrics more comprehensively is simple. As I've said before, performance and value should not only be determined by looking at price-to-book value ratios and dividend yields at a certain point in time. Firm value is a combination of long-term, sustained, higher-quality, risk-adjusted return and should not just be measured by a 30-day dividend or a snapshot of book value.
Our company is not comparable to any other. We have proven to be a growing, diversified, stable, liquid, capital-efficient and scalable operating platform that can and deserves to be analyzed differently than most of the smaller monoline peers in the industry. And most simply, if one is preoccupied with the near term and just wants to focus on this current point in time, Annaly has demonstrated outperformance when market volatility returns like it has in this fourth quarter thus far.
Now I'll turn the call over to David Finkelstein to discuss our investment activity and outlook.
Thank you, Kevin. Interest rates continued their ascend upwards in the third quarter, agency spreads widened very modestly, and credit sectors remained reasonably stable. We slightly increased our already elevated hedge ratio and leverage increased primarily as a consequence of the closing of the MTGE acquisition as anticipated. As all are aware, we begin the fourth quarter with a meaningful increase in volatility. So in discussing the portfolio, I will address how we are managing our portfolio through a combination of disciplined asset selection, risk mitigation and financing across each of our core businesses as we prepare for an environment characterized by persistent higher rates and elevated volatility.
Beginning with the agency sector. Much of our activity was focused on onboarding the MTGE assets as well as investing the proceeds of our capital raised in September. The combination of these two events led to a roughly $11 billion increase in agency holdings, with a slight majority of the additions being in TBAs. We do anticipate converting a portion of our TBAs discussed by pools; however, pool pricing has held and weld despite the sell-off. So we remain patient until opportunities are presented. We have also migrated the portfolio up in coupon given that we believe that higher rates are likely to persist.
An additional benefit in portfolio turnover is that we were able to improve our asset yield by 15 basis points during the quarter, and this effort has continued into the fourth quarter with further improvement in asset yield, which should help offset higher financing costs.
Agency MBS are in fundamentally sound shape, but with the Fed now in full runoff mode, we are cognizant of the technical landscape and has not inclined at least so far to proactively increase leverage in spite of the spread widening that has characterized the beginning of the fourth quarter. On the hedging front, we continue to hold a defensive posture in the third quarter as we modestly increased our hedge ratio and added to our swaption position.
With respect to financing, we further diversified our counterparties and added additional direct repo partners to our broker-dealer, bringing in our total direct counterparties within the broker-dealer to represent over 40% of the overall financing, as Kevin mentioned.
Shifting to credit and beginning with our residential portfolio. The MTGE acquisition increased our nonagency holdings by over $700 million. Given current nonagency pricing, we took the opportunity to identify the best relative value between the Annaly and MTGE portfolios and cycle out of the less-attractive assets redeploying capital from sales into our whole loan effort.
While we remain constructive on housing fundamentals, the meaningfully shorter spread duration of our whole loan portfolio relative to our securities holdings supports incremental allocation towards loans as a risk mitigation mechanism, given the nonagency spreads remain in the context of post-crisis tight levels. The credit metrics associated with our whole loan holdings remained strong as we maintained an average LTV of 67%, average credit score of over 750 and a DTI of 35% on the aggregate portfolio.
Financing residential credit remains healthy, as borrowing spreads and haircuts continue to contract, which has supported asset spreads. We have continued to supplement our FHLB financing through use of the strong securitization market. And in addition to the transaction completed in the third quarter, we priced our third securitization of the year last week, a $384 million transaction of which we retained $108 million in assets with double-digit levered returns. So while FHLB access has to date been a powerful platform to help us incubate and grow our whole loan strategy, we will continue to build a brand in the securitization channel as the higher advance rate and nonrecourse nature of issuing securities serves as an attractive alternative to FHLB financing.
Turning to our commercial portfolio. Growth this past quarter was fueled by the addition of the MTGE health care assets, which included 22 health care properties. In addition, we added over $200 million in direct origination loans, with levered returns in the double digits despite ever tighter spreads prevailing in the broader CRE market. We continue to focus on quality, which is reflected in the fact that assets added year-to-date have improved both the portfolio's average debt yield to 7.9% and LTV to 68%.
The financing environment created a tailwind for us in the commercial sector as we added additional warehouse lines in the business at lower financing rates, which enabled the portfolio to maintain double-digit returns in spite of runoff some of the higher-yielding assets in the portfolio. Also of note, the MTGE health care assets came with attractive financing that is accretive to our returns, and we are confident in our ability to successfully manage that business within the Annaly platform.
And lastly, our Middle Market Lending business exhibited the strongest percentage growth across our business lines this past quarter growing 22% quarter-over-quarter. This growth has been driven by partnering with a few high-profile private equity firms on their larger investments at the top of the capital structure as our investment team also continues to position the portfolio defensively against any broader susceptibility in the lending markets.
Most importantly, profitability within the portfolio continues a long-term trend of improving return profiles while leverage of the underlying companies is consistently well below the middle market sector as a whole. We do expect the recent growth trajectory of our MML portfolio to continue into the fourth quarter with the heightened focus on specific industries and sponsors.
Given the fundamental health of the portfolio and our increased nonrecourse financing flexibility, we stand ready to capitalize on external opportunities, should volatility bleed into the middle market space. As we continue to compete against AUM-driven strategies, the optionality of our shared capital model will become more evident during vintage investment years such as this one.
Now with that, I will hand it over to Glenn to discuss the financials.
Thanks, David. I'm going to cover a few items before getting into the financial highlights for the quarter. To begin, as part of our continuing effort to enhance our transparency and the ease of reading our financing disclosures, we revised the presentation of our financial statements and simplified our disclosures where appropriate. This includes the earnings materials that we filed yesterday as well as our third quarter 10-Q that we'll be filing sometime this week. And as just a convention, the information is and will be available on our website.
Secondly, we closed the MTGE transaction on September 7. It is now fully integrated business. The transaction provided $5.7 billion of assets, including agency and nonagency securities and approximately $300 million of health care real estate assets. With the integration now complete, the accretive nature of the transaction is validated, including the cost synergies. For example, MTGE has been paying annual management fees of roughly $15 million. Those fees will now be about 1/3 of the amount under the Annaly structure. And lastly, with the further diversification of our business that Kevin described, we've updated our definition of core earnings and related metrics more accurately reflect the associated changes to our portfolio and operations.
Less meaningful change to core earnings is the exclusion of depreciation and amortization expense related to Commercial Real Estate investments. With the MTGE acquisition, our equity investments in Commercial Real Estate have increased over 50%. And this particular change to core aligns with the FFO or funds from operations concept that's widely reported by REITs that own similar assets. Prior periods have not been adjusted for the definition update as the impact would be immaterial.
Turning now to the financial results for the quarter beginning with our GAAP results. Third quarter GAAP net income was $385 million or $0.29 per share, which compares to $596 million or $0.49 per share in Q2. Primary factors contributing to the sequential change were losses on assets disclosed as a part of the portfolio management strategy that David discussed and MTGE related costs, which were partially offset by improvements in unrealized gains on swaps and gains on other derivatives.
Core earnings, excluding PAA, were $390 million or $0.30 a share compared to $383 million or $0.30 per share in Q2. The PAA for each of the past two quarters has been negligible as projected long-term CPRs has been largely unchanged.
Among the highlights for the quarter, interest income increased 5% or $40 million, as yields were up across the portfolio improving about 15 basis points. Higher funding costs were partially offset by our swaps portfolio and net receipt position, but nevertheless neutralized the asset yield improvement, resulting in economic net interest income being relatively flat sequentially.
Net interest margin, excluding PAA, declined modestly to 150 basis points. Core ROE, ex PAA, remained at historically high level to just under 10.9%, and our operating efficiency metrics were generally unchanged.
In terms of the balance sheet, portfolio assets increased almost $13 billion to 12%, driven by the MTGE transaction, additional agency investments and new investments across our credit platforms. Our allocation to credit increased to 30% at Q end - at quarter-end, which compares to 28% last quarter and 23% the prior year. And each of our credit group portfolios grew from the prior quarter. Commercial Real Estate portfolio grew 19% on $545 million of new investments, including the MTGE health care assets.
The Middle Market Lending portfolio surpassed $1.5 billion at quarter-end, increasing $273 million or 22%. And our resi credit business grew 13% with the growth coming from the whole loan purchases as well as the MTGE credit assets. Book value declined to $10.03 per share from $10.35 the prior quarter, and economic leverage increased modestly to 6.7x versus 6.4x in Q2.
David touched on some of the funding activities in the quarter, which were extensive. Our overall financing strategy has been a point of focus for us, and we've been quite pleased with the results of these efforts as we both deepened our funding sources while also improving overall terms and pricing.
So just to wrap up before we open up for questions, Q3 was quite eventful. We closed and fully integrated the MTGE acquisition, and we made further progress executing our diversification strategy supported by our demonstrated ability to attract broad financing sources to support our growth.
And with that, Phil, we're ready to take questions.
[Operator Instructions]. The first question comes from Doug Harter with Crédit Suisse.
Kevin, you talked about and you've been right about the kind of the earnings dividend stability. But I guess, at the same point, we've seen more book values to volatility. I guess, can you just talk about how you look to kind of balance those two, when you're kind of thinking about the risk profile you're looking to set for the company?
Yes. I mean, we're not insulated from the dramatic grind higher here in terms of yields. So the book value impact was really in line with, I think, what most people were estimating and how we calibrated our models months ago. I think the biggest thing - and again, actually, David can pile on as well. Look, we don't look at it. It's the typical math 30 days or quarter, each quarter. We're looking at it over time. And it wasn't in my prepared comments, but we always look back, we don't like to confuse motion with progress. We look back. And if we didn't have this diversification strategy, if we didn't have these three businesses now that is scaled into credit, lower leverage, floating rate assets, and lower levered meaning when I said 1x, that's 1/3 or 1/4 most of the other strategies in commercial resi and Middle Market Lending or half of that for MML. But we look at it over time and if we - with this diversification over time since 2014, we have protected book much better than we would have if we were just an agency REIT.
The numbers vary depending on the assumptions on the forwards and leverage. But we're talking about a significant - we're talking about a significant number, 15%, 20%, 25%, depending on which period and time you look at. So this quarter there's been more volatility as we mentioned in all markets, and we weren't insulated by it. But over time, we definitely have been. The other thing I would say, and then I'll let David add on to it is, just our liquidity management and the diversification on not just the assets but our financing sources. So in this environment, the assets are floating rate, the financing is actually been procuring more attractive financing. So that's how we're able to maintain the returns in not just this quarter but going forward. So it's liquidity that take advantage of this volatility. Our model is much more capital-efficient. We're not as reliant on the capital markets as this company once was 4, 5 years ago. We are self-financed and with a lot of capacity. And we're obviously much less levered. So all that adds up to, I think, a model that's going to get impacted from rate moves just like every other industry practicality, especially in finance. But over time, we're just better protected. We got more options. And going forward, what we see is just a huge opportunity given where we sit, especially versus where others are.
And Doug, this is David. I would just add that, we're nearly five years into the beginning of this diversification strategy. And to Kevin's point, when you do look at our performance versus the agency REITs on a total economic return basis, it's materially better and consistent with actually hybrids. However, this year, 2018, Agency MBS have suffered consistently throughout the year. It's not just the third quarter and into the fourth quarter, but on an OAS basis, we're probably 18 to 20 basis points wider on the year, and that has obviously impacted us as the agency strategy is the mother ship of the business. But we feel like, to Kevin's point, it's a long-term focus, and we're happy with the business and we're happy with the work we've done.
I appreciate that answer. And then, just David, one sort of detail question. Did you say on the latest securitization you retained about $100 million of assets of, I guess, the residential securitization you did?
Yes, that's correct. And it was about 6.25% unlevered yield, but with a little over 3x of leverage. That gets to roughly a 13% levered return.
I guess just curious as to kind of - it seems like a relatively high retention percentage kind of what you saw on the market that was kind of leading to a kind of retaining about a third of the assets there.
Yes, I will say, we did hold the last cash flow asset, and we retained that to potentially sell at a later date. So that added a little bit. But generally speaking, our strategy is to sell about 75% to 80% of the assets through securitization.
The next question comes from Rick Shane with JPMorgan.
I had to say, I enjoy these calls. I have enjoyed these calls as much over the years as any company I follow. Kevin, I'd love to delve into Slide 9 with you a little bit. This slide is highlighted as a diversification slide. The other side of diversification would be complexity. I would like you to sort of help us understand, given the substantial increase in diversification, how you manage risk across the portfolio?
Sure. I appreciate your comments, Rick. I mean, we put a lot of work into the - not just preparing for these calls but putting information, more information out there to be not just transparent as what we're doing, but to provoke questions like this. So Page 9 is the summary of really our optionality. In terms of - the risk management, it's a - I'll give you the short answer. Risk management at this place dramatically changed five years ago. So we're well into the practices and the diligence and the checks and balances of this diversification well beyond, far beyond, far before 2018. So the reason this product set has increased is only because we have the people frankly put in place in order to handle, handle it in more. So the first thing is it has been a long methodical growth project to expand internal options. The second thing is, we've invested a lot in not just the investment teams but to your point on risk management, our risk management group has tripled in size.
Our legal team, systems, IT, all the infrastructure around these businesses, it's over 100 people that work on these four strategies. So it's not just methodical, it's been a big investment on behalf of the REIT. So it's been comprehensive. It's not just in the risk department, which is the point here, but it's also around the risk department. For instance, we've invested millions of dollars in our IT with our CTOs group expanding from 10 people to close to 40 now and making sure that we don't just have real-time information but we have the correct real-time information. So we have data flow and shared analysis around here in order for us to - that's only way we could scale this business. And then the last thing frankly which is probably the most important is this team and I've been together for the last 3 or 4 years, and we've made some selective hires in order to drive the growth of the business, especially in the origination platforms and the credit businesses. But there is a fabric here in this place that decisions are made on a shared capital model, relative risk-adjusted returns, really by the same group, again with some additions, but by the same people that understand, you don't get paid, not incentivized just to grow your business.
You are paid on return on invested capital. So I think in this environment where we're seeing assets balloon in certain other strategies just for the sake of growing AUM, what we've done here is we've redistributed from the agency strategy into these credit strategies. The only way it gets done is based on the best risk-adjusted return among the four businesses. So it's a culture. It's been investments. And I think, honestly, the one thing that makes me most satisfied about it is, it is a very healthy debate. I don't tolerate any egos. And I think at the end of the day people are incentivized to put money to work in the best deal over time. Hopefully, that's not too hokey, but that's really what I believe.
No, it's totally fair. So - and I'm going to ask a little bit of an odd-well question. You come from a banking background, and I suspect that you talked when you're a banker a great deal about market efficiency. You basically just gave a presentation that might call that into question a little bit. Has being CEO changed your view on efficiency of how securities are valued?
My former life as an adviser, you kind of just rent, you don't own. So I own this place with my partners and with every employee. So I think - I guess, I try not to take it too personally. But my background just like others background here, we are prepared and really armed to continue to not just create value, but create value with taking the least amount of risk and maintaining a very efficient enterprise. So I missed your first comment on efficiencies. But I think what we've done here is, grown business less reliant on the capital markets, as I said, and how we get valued over time. Again, I think, I talked about our growth and our scalability. Look, I know the markets take time to evolve. I mean, we've been talking about consolidation in the banking industry for 10 years. So we're patient here, but we're patient, but we're pretty driven every day to make sure that the needle is moving in the right direction. I think my background just like other backgrounds that we've hired here give us broader perspective beyond just the mortgage REIT sector. And I think that is probably the most important thing in terms of keeping things on an even keel.
The next question comes from Bose George with KBW.
I wanted to just go back to spreads and volatility. Just given what's happened since quarter-end, could you just give us an update on book value? And then just the related question is, given the volatility, where do you see sort of the best incremental opportunities now?
Sure. Bose, This is David. Obviously, the fourth quarter has started with a fair amount of turbulence. Rates are up, agency spreads are anywhere from 7 to 9 basis points wider, and even credit is now beginning to widen. So book is down in the context of 4% thus far in the quarter. In terms of volatility, in our view, particularly on the Agency MBS, there's been a lot of questions about adding leverage given the cheapening in the agency sector. And we look at it in terms of what are the drivers of the spread widening. And sometimes the drivers present a green light to add leverage, whether it's a technical dislocation that we believe to be transitory for something along the lines of that. And sometimes there is a red light. In this instance, at least for the immediate term, elevated volatility as well as some balance sheet pressures, we're seeing in the world market. And the Fed, obviously, letting the portfolio fully runoff. That doesn't tell us right now we want to add agency leverage. That being said, they're perfectly reasonable priced right here. It doesn't take an OAS model, if you see Fannie 4s just below par, so 4% yield, with a 10-year note at 3.17% and still reasonable slope to the yield curve. They look to be in very fine shape. But we're hold the steady right here. And I think the way we also look at it is - when we have these episodes is what's the outcome if you're right and you had leverage, then obviously you win, but it's a big bet. But you also win if you don't have leverage, and that's an outcome you're perfectly okay with. So that's how we're positioning ourselves.
That's great. That's helpful, Dave. And then actually just on the CRT side, with the spread widening there, any thoughts about that market?
Sure. CRT right now, the most recent deal price that we've yesterday in the mezzanine tranche at LIBOR plus 240, and that gives you a levered yield with 4x of leverage at LIBOR plus 790. So you're into double digits. But we do think that there could be a little bit more widening, and so we're comfortable with our positioning. And to the extent we did see further widening, we probably think it looks very attractive.
Bose, what I would just add in that two other credit businesses, Middle Market Lending and Commercial Real Estate, I'll speak for both Tims. But I would say couple of things - three things. We're cautious on spreads, David's commentary. The second thing is, we're not reaching for yield and sacrificing credit. And the way we're doing that is really tied to in times like this as things start shaking out, there's a lot of - still lot of deal momentum and origination momentum, but we're capable of doing, it's just doing larger deals, which by definition are less competitive. And we're really taking more concentrated approach. So we're confident and we're only confident in something we underwrite. We can do something bigger, attract a better return to maintain the credit exposures. And I think you'll see us this year we're going to do north of $4 billion gross in credit, which is last year we did about $3 billion. And we're very cognizant of where we are in the cycle, but we're competing for different types of deals than most others, given our size and given the optionality I talked about before. So that's where we're navigating, and I expect that's where we're going to be for the next, really for the foreseeable future given the volatility.
Okay, great. And just one political question. The Mel Watt's term is expiring in January. Just any thoughts on what that could do to the mortgage market, and specifically whether you think anything could change with FHLB access?
Sure. First of all, with respect to a new director at FHFA, there has been a discussion about potential administrative reform measures that could be undertaken by FHFA, which would mean likely a smaller footprint of the GSEs. And the way we look at that is, we think that will create opportunities in the whole loan spaces as those borrowers seek financing. So we are somewhat optimistic about what could occur in terms of opening up our whole loan opportunities. And with respect to FHLB assets, we have a little over two years left with our line. We are not overly reliant on it, as I said in my prepared comments, insofar as we are making very good inroads into securitization channel. We are perfectly happy to have FHLB access. If we have it for longer than February 2021, that's great. But if we don't, we're perfectly prepared for that eventuality.
The next question comes from Ken Bruce with Bank of America.
I've been following this company for a long time, and there's certainly been a lot of changes that have occurred over that time. I can hear the frustration in your prepared remarks as it relates to the way that the market is valuing the company because that really has not evolved a lot over that time despite the changes in the company. So I can kind of share that with you all. My question maybe gets to the heart of some of the pushback that we get about Annaly. And it really relates to essentially the management structure. We have seen significant premium on businesses that are internally managed. And I wonder what the appetite is for Annaly to reinternalize.
Ken, well, first, the structure - I just - I'll start with our operating efficiencies. So we externalized and fixed our fee back in 2013 in advance of this diversification. So we're operating four large businesses under 1 umbrella for a fee that is 30%, 40%, 50% lower than some of the - most of these other monoline companies, okay? So we didn't charge a shareholder to diversify. And our operating efficiencies, operating expenses to assets is 23 basis points for last five years versus 66 basis points for the sector. On equity, it's 163 versus 317. I want to introduce - we've already introduced OpEx to core. We're at 17% OpEx to core, which is $0.30 - 30% less than OpEx to core for others at 25%. So we run a very tight ship here. We're not - and our shareholders are benefiting from the diversification in terms of our results. The second thing is, a number of these companies that have internalized had activists show up at the door because of they weren't efficient and because of their fee structure.
And in order to do that, they charge their shareholders an inordinate amount of money to internalize, pulling the savings forward at onetime, which - let's amortize that cost over time in terms of those "internalizations." And where that does money go to when that happens? So I would put that out there. And then the last thing in terms of the structure tied to valuation, I think - and it's not frustration, Ken. It's more like resolve for us. Our valuation unfortunately is tied to a sector that blows up every other quarter. So our job - my job is to look at - compare ourselves, operate the business, aim for the best risk-adjusted returns, not tied to the mortgage REIT yield or the mortgage REIT profile. I want to look at the best managed yield manufacturers out there, which is why we look at the companies in the S&P 500 and why we look at the 400-or-so companies I profiled in my prepared remarks. So loo, we're a sleep-at-night stock in this market that I don't think a lot of people are getting much sleep. Over time, look, I think we have been rewarded. We have been in growth mode. We positioned ourselves to be less reliant on the capital markets, like I said. And I think over time, our shareholders will be rewarded by owning us and no one else. So that's what this management team is going, that's what I'm doing personally. And I think - but I want you to know, it's really not frustration, it's more or like it's competitive drive and result on behalf of this team that over time we'll be fine.
Well, maybe it's my frustration, but you guys have been executing quite well, and I think there's been a lot of value effectively created but not necessarily demonstrated in the way that the market is valuing the stock, and so we're always trying to think about ways that things that may be - can add to that or somehow further differentiate you from the peer group, which I think you talk about it at great length. So I won't get into that. But the valuation does not necessarily reflect these differences. So we're always looking for ways to enhance that.
Yes, Ken, I think that's what we did in the supplement. We're trying to spoon-feed the market, put different ways to profile our return relative to others beyond just point in time, book values and yields. But we appreciate your comments. And look, I'm open to all the help we can get in terms of framing it out for people. We have attracted a lot of new shareholders, as I mentioned, and I think there are some fundamental - there's more fundamental work being done today and certainly there has been in a while given what's happened in the market with a lot of the valuations and different structures to play off of liquidity.
This concludes our question-and-answer session. I would like to turn the conference back over to Kevin Keyes for any closing remarks.
Thanks, everyone, for joining the third quarter call, and we look forward to speaking to you on next quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.