Good morning, and welcome to the Second Quarter 2015 Earnings Call of Annaly Capital Management Incorporated. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. 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 statement 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. Participants on this morning’s call include: Wellington Denahan, Chairman, Chief Executive Officer and incoming Executive Chairman; Kevin Keyes, President and incoming Chief Executive Officer; Glenn Votek, Chief Financial Officer; David Finkelstein, Head of Agency Portfolio; and Michael Quinn, and Jeffrey Thompson, co-Heads of Annaly Commercial Real Estate Group. I will now turn the conference over to Wellington Denahan. Ms. Denahan, please go ahead.

Good morning. Thank you, Anita. Welcome to the second quarter Annaly earnings call. Before I hand the call over to our incoming CEO, Kevin Keyes, and other senior members of the team, I would like to make a few brief remarks regarding the business and investment landscape, the Chimera management internalization and our buyback programs. We remain optimistic that the long overdue change in the monetary policy landscape is in the offering. We are encouraged by the strength in the labor markets, recent stability in inflation indicators and the generally stronger economic growth, that in our opinion, solidly supports an adjustment of the zero balance by the Federal Reserve later this year. Our conservative leverage stance will allow us to better navigate potential impact of increased market volatility, the effects of reduced liquidity and the untested markets functioning in a less accommodated monetary policy environment. Our increased capital allocation options, along with our lower leverage, will allow us to remain a nimble and opportunistic player. We will continue to be an active voice in the dialog on housing finance reforms, and are encouraged that the process of reform and redistribution of assets from government hands will provide investment opportunities for years to come. We will continue to engage with lawmakers to help ensure that the M-REIT sector remains a prominent private capital participant. With a strong and liquid balance sheet, we are excited about our position in the capital markets. This quarter’s results are strong reminder that the higher market rates can and did have positive impacts on our earnings. I am incredibly proud of our management teams and excited about the challenges and opportunities ahead. With respect to the Chimera announcement, it is important to note that when we were a much smaller company, it was sufficient for us…

Thanks Wellington. Before I begin with my prepared quarterly comments, I want to congratulate Wellington on her new position as Executive Chairman, and thank her for all that she has done for this company, its employees, and most importantly, for our shareholders. Not enough can be said on this call or in a press release about how Wellington and Mike Farrell has a vision and leadership to create this phenomenal company. I was lucky enough to advice and then work closely with each of them and have admired Wellington’s resolve during the challenging and rewarding times over the past few years. I am especially grateful that in her role as Executive Chairman, Wellington will continue to both create and challenge ideas as she has done so well for this company. I also want to thank the Board of Directors and all the employees here at Annaly for all the support and confidence they've given me in my new role. I know the opportunities that lie ahead for us are enormous and I am honored and energized to lead along with Wellington going forward. As we mentioned on our earnings calls over time and as exemplified in our most recent strategic decisions, we've been preparing for lift-off even well before the onset of QE3. While we have been in capital protection mode during this abnormal market cycle, we have been investing aggressively in all our investment teams and corporate infrastructure and broaden our expertise across the entire company, all in anticipation what is hopefully a return to normalcy in our market. This has been done methodically over the past few years and yet executed with urgency every day to make sure we are ready to capitalize on all of our opportunities. Our company has never been stronger and is prepared as…

Thank you, Kevin. As we have all witnessed, fixed income margins have exhibited significant volatility over the past quarter, as interest rates increased and spreads widened across a wide spectrum of fixed income assets. Given this backdrop, our book value declined slightly, which was consistent with our forecast given the rate the spread moves experienced over the quarter. It should be noted that our portfolio was cushioned by proactive portfolio decisions made in prior quarters, such as our low level of leverage, the asset adjustments we made at the beginning of this year and the quality of our hedges, which largely protected the portfolio from significant steepening of the yield curve that characterized in the quarter. Also notable is rise in longer term yields benefited our earnings as reduced amortization expense contributed to the $0.41 in core income that we generated for the quarter. Specifically with respect to the agency portfolio, we entered into the quarter with what we consider to be a relatively defensive posture. As we discussed last quarter, we reduced a portion of our longer duration specified pool holdings in favor of TBAs. While specialness in the TBA market was less material than in quarters past, the TBA sector outperformed specified pools as rates increased and declining demand for call protection led to deterioration in specified pool pay-ups even after adjusting for the longer duration profile of pools relative to TBAs. We also preemptively reduced spread and volatility exposure by making a modest rotation into the 15-year and 20-year sectors. And lastly, our hedges were more concentrated in the long-end of the yield curve, which experienced the largest increase in rates. Regarding our margin dues going forward, as Kevin mentioned, we have received greater clarity regarding Fed lift-off and we do expect the first rate hike to…

Thanks David. The fundamentals of the U.S. commercial real estate market continued to improve in the second quarter of 2015. Compared to last year, investment sales volume was up 23% to $118 billion and values were higher across all property types. On a sequential basis, second quarter 2015 volume was actually lower than the first quarter, the first time we've seen volume drop in over a year. However we don't see this as a signal that the market is slowing as there were number of large transactions that were announced in the second quarter that would likely close later this year. While there is increasing concern in the market about the future impact of tightening on real estate values, it is not yet shown up in pricing. Cap rates have either held steady or decreased slightly in the second quarter and remained at historical lows. CMBS issuance was almost $25 billion compared to about $19 billion in the second quarter of last year, an increase of almost 30%. Spreads have widened across the board this summer with AAAs now at about 100 basis points, 12 basis points wider than at the beginning of the year and 25 basis points wider than this time last year. In addition, BBBs are almost 100 basis points wider than this time last year. At Annaly, as of the end of the second quarter, our commercial real estate portfolio stood at approximately $1.8 billion. On an economic leverage basis, our commercial real estate portfolio was $1.3 billion and produced a leveraged yield of approximately 10%. Our book is slightly smaller compared to the end of first quarter, primarily as a result of over $286 million of pay-downs including the pay-off of the largest loan on our balance sheet. In addition, as we previously announced earlier in the second quarter, we added a significant amount of talent to the commercial team to help continue to grow the business. Specifically, we hired Jeff Thompson as a leader in our group and added five members of his investment team from GE Capital. While the market remains very competitive for new business, we are enthusiastic about our current pipeline and the increase in opportunities that we are seeing as a result of adding Jeff and his team. In addition, we continued to pick our spots on a risk return basis across our various investment products, which included first mortgages, mezzanine loans, preferred equity investments, JV equity and securities, with the goal of providing our shareholders with longer term, primarily floating rate cash flows as a strategic complement to our agency portfolio. We continue to aggressively manage our credit risk as we invest new capital prudently and profitably for our shareholders. And with that, I'd like to turn it over to Glenn to discuss our financial results.

Thanks, Mike, and good morning, everyone. I'll provide a brief overview of the key financial highlights before we then open the call up for your questions. So beginning with our GAAP results. We reported net income of $900 million or $0.93 a share. That compares against the first quarter loss of $476 million. The Q2 improvement was largely attributable to favorable mark-to-market adjustments in our interest rate swaps portfolio. Our core earnings which include, among other things, realized and unrealized gains and losses on derivatives, increased sequentially to $411 million or $0.41 a share. This compares to $0.25 in the prior quarter. And our annualized core ROE rose to 12.8% versus 7.7% in the prior quarter. Factors that contributed to the quarterly core results were increased net interest income, which was up about $122 million or $0.13 in the quarter, which is driven by both lower amortization expense and lower interest expense. Beginning with amortization. Under GAAP, we’re required to update our cash flow projections for differences between expected and actual prepayments and incorporate current and forward-looking market assumptions. We perform this analysis using third-party models. Prepayment fees during the quarter are less likely to influence our results, as often times actual fees may be the result of events or circumstances or market conditions from a prior quarter. So while average CPRs over our current quarter were faster, our projected CPRs declined as both interest rates as well as the yield curve steepened and interest rates rose. The effect of the slower long-term projected CPRs relative to Q1 projection was a favorable $0.07 a share. In terms of interest expense, the decline was due to the maturity of the convertible senior notes, as well as lower repo balances. Additionally, dollar roll income was a factor in the quarter. It was…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] At this time, we will pause momentarily to assemble the roster. The first question comes from Douglas Harter with Credit Suisse. Please go ahead.

Thanks. Can you talk about where you are in terms of building out the team for the non-agency investments in the light of the Chimera spin-off or split out?

Sure, Doug. This is David Finkelstein. We did make an announcement a couple of months ago about some strategic hires and we have added significant resources, not only to the run-off as trading the portfolio management, but also technology and other infrastructure. So where we’re operating in the space today, we’re pretty complete with that effort.

Great. And then on the buyback. Is there anything you can share with your appetite and likeliness to use that to help us get a sense for the pacing of that?

Yes, hi Doug. The way that we look at it is it needs to be a prominent contributor to long-term more durable accretive profile relative to the other options that we have. Where we are in the interest rate cycle, hopefully we are in a transitional period that will potentially offer opportunities on a number of fronts. I always hope that it’s not in our stock, but if it is, we want to make sure that the stock has a significant amount of weakness relative to our forward projections on book value that we would have the opportunity to go ahead and close some of that valuation gap, and I would say we’d probably be fairly aggressive on that.

I think, Doug, what I would add, since our last call, Wellington throughout the analogy really purposefully I think to add some realistic commentary around a potential repurchase program. I think what’s changed since that halt is a few things. First, we’re obviously closer to September whether you think it’s lift-off or not, we are closer to that time period than we were then. For us more specifically, our stock technicals haven't gotten any better. So we’re well aware of that relative value equation. And then lastly, this independent with Chimera, we have proceeds from that company repurchasing our position there. So we freed up $125 million or so and everything is fungible, but you can argue that if you have a position in one other company, why not have a position in your own? So those three reasons are recent developments since our last commentary on the potential for a share repurchase authorization.

Great. Thank you for that color.

Thank you. The next question comes from Mike Widner with KBW. Please go ahead.

Hi. Good morning guys.

Hi Mike.

Thanks for the - you added some comments in the opening remarks about the premium amortization adjustment. I just want to make sure I understand the math there. Did you said $0.07 a share would be attributable to what lot of others would refer to as premium amortization catch-up. And I just wanted to make sure that I was interpreting that comment correctly?

Yes. That’s correct, Mike.

Okay. And so to be clear about that then that translates to roughly $66 million. Would it be fair to say that if we strip that out that your run-rate premium amortization, you’d expect all else equal nothing changes, market stays as it was in terms of rates, you’re somewhere around $160 million a quarter and I’m getting there just by adding the $66 million to the $94 million that you reported. Is that math right, or there is number ways I can do that and I just want to make sure I’m thinking about it right as we model it going forward?

One thing I’ll ask of you Mike is that you strip it out went to the downside too.

I mean, I know…

I want to be clear that we’ve been doing it this way now for over a year now.

Yes, about a year now. Yes, Mike, for example last quarter when we produced $0.25 a quarter, there was about $0.05 or $0.06 of detriment that came through. So if you look over the last two quarters, our amortization expense averaged about $190 million.

Yes. And so that’s - I mean that’s really at the end of the day what I’m getting at. Not that you read our research on competitors, but your point well is fair and we wrestle with this every quarter, it’s not fair to consider on the downside, not the upside or whatever. But what we’re really trying to get to and what investors care about obviously is what’s the ongoing earnings power. That’s what core should represent, and is $190 million - is that a decent number?

It really will depend on the level of interest rates.

Yes. And there is so many factors. It’s based on the way gap works in what will require to calculate. There are so many factors that come into play that are going to impact that number. If you looked over, say the prior four quarters or the prior two quarters let's say, it was about $190 million. You go back to four quarters before that, it averaged about $170 million. So it’s going to vary quite a bit and fluctuate. We would hope that you would be looking at over a longer term period of time to get a sense as to what the few quarters, because even the concept of catch-up presumes that your initial assumption day one is an accurate assumption which we probably can conclude is not the case. So you’re always trying to compare against an assumption that may or may not be right in the first place [ph].

This is part of the opportunity that being a mortgage investor presents, and it’s unfortunate that it is not as present as certain picture on a quarterly basis as everybody would like, but it is what it is.

Yes. So I appreciate that and I get all that, and that’s why I phrased the question as if your current assumptions that are baked into your numbers don’t change, right. If the interest rate environment remains static or whatever happens to be baked into the assumptions. It’s $190 million, the number is $160 million, the number - and I mean the reason I emphasize it is obviously that as you said yourself, last quarter it was $0.05 for the downside and this quarter it’s some number for the upside and we can't - there is no way from the outside that we can know what your baseline assumptions are, unless you actually tell us, and that’s why kind of relating with the point a little bit.

Yes, and actually to further amplify the point Mike. If we were to re-strike Q2 based on where rates are today, that impact will be about $0.03 is detriment. So instead of $0.41, it would be $0.38. It could be further perspective on how that changes from [indiscernible].

Yes, do we expect $0.41 to be our core runway? No.

Yes, I get - in case the question is not obvious, what I’m asking is, last quarter the premium amortization was $284 million. This quarter it’s $94 million. That’s a huge difference, $0.20 of earnings difference. And I’m just trying to figure out if the run rate there - is the $190 million which you said is the two quarter average, or if it’s a $160 million which is I could get to math that way or I could get to math that says $220 million, and I’m not asking you to promise me what it’s going to be next quarter. I’m just trying to say, given your current assumptions that are baked into that June 30 number, what would - assuming no change in rates, what would a normal quarter given the CTRs that we saw last quarter, what would that number be? In other words very precisely, what is the amount that you backed out of a run rate premium amortization to get to $94 million? And maybe you’re not going to give me any better answer on that, I don’t know.

Historical range, yes. I think Michael I will say, I think I talked about it on the last call. I don’t have all the numbers in front of me, but the last 12 quarters since the onset of QE3 when I said that’s into our marketed border assets. I think 10 of those 12 quarters are core. We managed the business. We don’t take extra risk without knowing we’re going to have the incremental returns. I think our core ranged from $0.25 to $0.35, 10 out of those 12 quarters, and those are in very, very volatile interest rate cycles and trends. So I think we’re managing for stability and I think the components of the equation, that’s always a function of not just interest rates but where our leverage is and what we’re doing with them. Other parts of our floating rate portfolio. So we manage and I’m not going to go out [ph] but we manage for stability in 10 of our last 12 quarters. We’ve been in a pretty - we’re in a much tighter range than anyone else in the sector.

Yes. In fact in the last six quarters we’ve averaged $0.30 a share in core.

So I’m just going to take it simple, $0.30 is all else being equal is what you’re suggesting, because it seems I’m not going to get a better answer than that. And I appreciate as always and I’ll let somebody else to ask questions.

Thank you, Mike. We understand it.

We know you can model [indiscernible].

Thank you. The next question comes from Jason Weaver with CRT Capital. Please go ahead.

Hi, this is Pedro Saboia on for Jason Weaver. Thanks for taking the call. Our call is if there was any amortization true-up adjustment in the quarter?

Yes, I think we just covered that. If you look at what our long-term assumptions were in Q1 versus Q2, the impact would be $0.07.

All right. Okay. Got it. Sorry, I missed that. All right, thanks then.

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

Hi guys. Thanks for taking my questions this morning.

Hi Rick.

Look, it’s interesting. We’re all investors and one of the important things as an investor is always revaluating your own hypothesis, and I think you guys have done that in terms of the share repurchase. And frankly I think you see the evolution of Annaly over time moving from basically a sole product to a pretty diverse and an increasingly diverse platform. So I think it’s an indication of the entity, both in the short-term and the long-term. And I do want to say I wish both of you guys well in your new roles.

Thank you.

Then I had a couple of questions. One of the things that we’re looking at here and I like the strategy overview slide, and it’s really interesting to compare it quarter-over-quarter. What you’re showing here is that you see the opportunity in the Agency MBS improving slightly versus where you were even a quarter ago, and actually the opportunity in commercial first in the near-term a little bit down from what you saw previously. Would you shift the portfolio growth in the near-term to adjust for that? And the other element of that is that last quarter you provided a pretty good update on where you stood in terms of your TBA position. And frankly, we probably didn’t pay enough attention to that. It’s not in the strategy overview this quarter. I’m curious where the TBA position is for that?

Sure, Richard. This is David. First of all, with respect to our potential to shift the allocate - or the preference from commercial to agency. The reason why agency returns look or appear to be somewhat higher to distributable is the fact that the curve steepened out, longer term rates increased, and as a result, the yields on Agency MBS are higher relative to current or near-term funding cost. The one thing that’s different that we like about commercial relative to agency is that a lot of that sector is floating rate, and since we do anticipate that the Fed loans will be raising rates this year and subsequently more heights thereafter, that floating rate feature is very appealing to us. So I don’t think we’re going to drawback on our effort to reduce the emphasis on the commercial portfolio. One other development with respect to our entrance into the residential sector. That is very appealing to us relative to both of these sectors for a couple of reasons. It’s primarily rooted in diversification, but purely from a risk return standpoint, the sector is very appealing. When you consider the housing fundamentals that are currently characterizing the economy today, HBA growth of around 6.5% according to CoreLogic, existing home sales relatively low, so supply is somewhat light and also there is less shadowing inventory out there. Home affordability and factors like that are beneficial. Just broad economic growth in the recovering economy and also credit standards are loosening to some extent. We compare that with the returns available in the sector and as I discussed in the initial comments, low double-digits to mid-teens. And given the housing fundamentals relative to returns that certainly mirrors a place in our portfolio. But nonetheless, it also has to compete with the commercial sector as well as the agency sector for capital allocation, and we look at it holistically. And there is certainly room for all three of those sectors, as well as middle-market lending and we take a top-down approach looking at all of these markets and then we decide what’s the - not only what are the most attractive sectors, but also how should the portfolio look from a diversification standpoint to sort of maximize the risk-adjusted return of the portfolio for long-term.

That’s a great answer. Actually it helps to think about this outside of the context of just what is the short-term ROE in terms of how do you think about balancing the portfolio. So thank you.

Rick, it’s Kevin. What I would add is, you’re well aware of our strategic evolution here since you’ve been around the block as long as we have. Just to put it in two simple terms. What we’ve done now with the credit business is both resi and commercial, similar when we brought CreXus in couple of years ago, we just feel the liquidity of our agency business is a real strategic weapon for us in terms of really two things. First, competitively by definition since we’re large, we can move more quickly and be opportunistic. And secondly, and it ties to our move with Chimera is, we can do these businesses and we’ve built these businesses for not just the last couple of years but for a decade or so. We can do it much more efficiently. We have a scalability that really not many other money managers or institutions have. So it’s really a continuation of that, and really liquidity has always been our weapon and you’ve seen our lower leverage through the years and I think it just allows to be opportunistic, and we have - we’ve had the expertise in-house as David mentioned, and now it’s just a matter of making sure we’re disciplined enough aligning our priorities and measuring the risks and returns of each strategy which we’re doing every day here.

Got it. Thank you.

Rick, to your second question regarding TBAs and our strategy overview. We do discuss it, not to the extent we did last quarter, but we still think the sector is relatively attractive. We think it actually offers better value in the current environment relative to specified pools, given the fact that financing rates are still special. Last quarter, even though they were modestly less special than in the quarters past based on our conservative assumptions regarding prepayments et cetera, we do believe we financed that position at negative rates and we expect that to continue going forward as long as the Fed remains a large part of the MBS TBA market through the reinvestments. So we anticipate that it will remain meaningful portion of the portfolio. We don’t anticipate increasing it substantially, but we think it’s going to be here for the near-term.

Okay, got it. And last comment. My job is not to provide any advice to you guys and we don’t see it that way. But Kevin, if you don’t allow Wellington to have some influence in your opening comments going forward, our lives will be a little bit less interesting going forward.

I kept my sarcasm to a minimum on this call. I thought people had enough of it.

Again I’m not here to advice but it was not interesting today. Thank you guys.

Thanks Rick.

Thank you. The next question comes from Joel Houck with Wells Fargo. Please go ahead.

Thanks. Kevin, congratulations on new CEO role, and Wellington, more sarcasm is preferred.

Thanks Joel.

Thanks Joel.

So, on the Chimera, obviously you took a different approach than CreXus here. You’re divesting yourself at Chimera. I’m just curious as to - was it because the difference in price to book connection that you didn’t want to bring it in. What kind of - why was the decision made this way when you went the other way with CreXus a few years back?

Joel, we’ve certainly looked at a number of potential options including possible M&A scenarios, and we believe the conclusion that we came with the separation was the best value for both companies, whether it is not - we looked at both situations under same light and tried to make a determination what was in the best interest of our shareholders, given where the market was for the underlying assets.

I also think just with any strategic move, we’re always planning, we’re always strategizing, but then there is the time for execution. And I think in this situation, it’s more efficient for us really to build and we’ve done that over the past couple of years with the expertise we have in-house. There is public company expenses and other cost savings and things like that, which make it as a prudent move. But overall, I think we look at whole alternatives all the time and when you have to pick a point in time to execute, this was really I think most efficient for both companies for both boards and really it couldn’t have gone - there is a lot of work that went into it in terms of structuring, but it couldn’t have gone more smoothly and more amicably. And I think it speaks to the relationships we have normally with management, but with Paul Donlin and his board. And I think it’s clean as it can be which just really allows us to be independent and to grow - just to grow more quickly for both of us.

Okay.

And we certainly congratulate the Chimera team on this transaction.

Yes, I think it will help investors. This move will provide more clarity in terms of strategy to both companies, no question about it. Just to switch gears on here a little bit. If we go to the Slide 20, the interest rate sensitivity and the MBS spread sensitivity table, these are always interesting, particularly the interest rate sensitivity, everyone seeing as [ph] parallel shift. I think there is a growing notion, perhaps sentiment that if the Fed raises like they are signaling they are going to perhaps 25, 50 basis points, who knows. That it could because of the underlying weakness when I was saying it could push long rates down. So if that’s the case, and by long ways let's just use the 10-year as an example, so that we can, I guess, crystallize the discussion. If the 10-year comes down 25, 50 basis points, is that roughly representative of a negative rate change here where you’re showing an increase in NAV at 2.5 or negative 25 and up 3.8 for negative 50?

Yes. Joel, this is David. I would say it all depends on what the rest of the curve does. To your point, already this quarter the curve flat and pretty materially the front-end is up about 7 or 8 basis points with the 10-year note down about that same amount. With respect to how we hedge? As we talked about, we did have a steepening bias on in the second quarter, and we spoke pretty extensively about that actually in our Q4 call in February and we felt like the risk associated with potential for MBS extension was high. We needed hedges out the curve and also with respect to our view, we felt that the flattening that was priced in the yield curve out the horizon was little too much, particularly when you consider the slow pace we anticipate that the Fed to raise rates at. But to your question, in terms of how would we perform? It’s important to note that we did slightly adjust those hedges down the curve in the second quarter. So as you can see from our futures position, we added a couple of billion in front Eurodollar position and took some of that long, short exposure off. Also in the interest of disclosure in the month of July, we actually further added to our front-end hedges. I think we are up to about $8 billion in Eurodollar contracts in the front-end. So we have moved some of our hedges down the curve. But how we would perform in the environment you’re talking about, let's say, we did back to 165 10-year note or thereabouts where we bottomed out at in late January, more spreads had not performed pretty well but very well in that environment as we witnessed. So that would be the dominant factor in terms of our performance I would imagine. We do carry duration on the balance sheet, but the spread component of it would be the larger impact I think, we’ll benefit from the duration chain or the change in rates. I would image that if the front-end of the curve doesn’t follow soon which is really can under that environment that you would take the average of the rate shift since we are reasonably well hedged across the curve now and use that to determine what the impact associated with rates would be. So just to give you an example, for this quarter, rates were up 43 basis points in the long-end and only about 9 or 10 basis points in the front-end. The average for the quarter was about 25 basis points between two sides of 10s. So if you look to this past quarter, the rate impact associated with our portfolio is about 1.7%. The opposite would be occurring in a route and that’s how I would look at it taking the average of the yield curve change.

Yes. You guys - Annaly did, on a relative basis, quite well this quarter most of the companies have reported. So congratulations on that. Just on the MBS spread sensitivity that that bottom chart. Can you - you were looking at the most great example was out 25 and how - maybe take us through some history here and I know the GSEs are not as influential as they used to be when spreads had widened, but after kind of the demise of the GSEs, can you talk about how often we see a 25 basis point spread widening in MBS on a quarterly basis [ph]?

Sure, ‘98, ‘03, ‘08 and 2013. So it’s about once in four, five years I would say.

Okay. That’s helpful. Thank you very much. Again Kevin and Wellington, congratulations on your new role.

Thank you, Joel.

Thanks Joel.

Thank you. The next question comes from Brock Vandervliet with Nomura. Please go ahead.

Hi, great. Thanks for taking the questions. So to follow-up on that, so twos 10s right now are about 155 basis points. You’re positioned in Q1 for a steepening from here on out staring closer now at the Fed, it sounded like you’re more positioned for a moderate flattening, but I just wanted to confirm.

All right, Brock, this is David. Yes, I wouldn’t say we’re positioned for a moderate flattening. I’d say our duration exposure is more even across the curve. How we look at is and evaluate our hedges is and where the curve is today and it’s what’s priced in the curve over the horizon. And if you look at the forward rates over the course of the next year, twos 10s are expected or priced to flatten almost 50 basis points. So that will flatten on. To breakeven on that trade, you would have to experience a flattening in the curve about four basis points a month. So we’re not implying to put a full flat thereon, but we realize the terms going to be whipping around a little bit as we debate between September, December and what the highs look like thereafter. So our position is currently is to try and be as well-hedged across the curve as possible. But if you had to ask - if I had to say, can we think the curves to flattened 50 basis points over the next year? I would bet not. We know it’s going to flatten, but we would take the under on that, meaning that the 10-year note we expect to underperform the forwards and we expect the front-end to outperform.

Got it. That’s very helpful. And just going back to the TBA for a moment and you’ve been later to the party there, but you seem pretty confident that specialness is going to be remain investable here. Do you have any longer term perspective on that based on how long you think the Fed will continue to reinvest or some other thing, or is this really a tactical month-to-month strategy?

Sure. First, I think I will say, the firm has been involved in the TBA market for very long time. It’s just that it wasn’t meeting full enough position to break out to put out on the balance sheet. In terms of specialness, when we talk about specialness, I would say that it’s not nearly as prevalent as it was when the Fed was actually adding to their portfolio relative to now when they are simply reinvesting the runoff. That being said, financing rates in production coupon TBAs, which is largely where we are invested in, are close to zero, whereas short-term repo rates around 30 basis points and thereabouts. So there are financing advantage, even with very little specialness, it’s still meaningful when it comes to the return on the portfolio. Now it’s there for two reasons. Obviously the Fed it is still reinvesting the run-off from pay-downs which creates demand. Number two is that the Fed buys exclusive TBAs and as a result, the worse to deliver follow-ons go to the Fed and then the higher quality bonds which tend to pay up - traded to slight pay up will be regarded as more pressured are sold in the secondary market or sold on the pay up basis, even if there is simply TBA deliverable, they are new production or some characteristics as beneficial. So the market has a lot of demand for the TBA sector. And as a result, there is a premium on rolls that cover short positions that are used to hedge them as specified pools et cetera. And that will remain the case as long as the worst to deliver goes to the Fed, and we expect that to continue at least through the next year. The market is expecting Fed to stop reinvesting sometime in the later part of 2016, as Kevin talked about and we’re confident in that view. We’ll get through a couple two to three tightenings and then that will probably be something for discussion beyond that.

Brock, what I would just add separate from the microeconomics of David’s description of our TBA strategy or just the overall agency portfolio, just the fact the reason we have these other businesses isn't just to have them around. It’s to have a capital allocation discussion tied to some of these uncertainties you’re talking about in the interest rate - in the world of interest rates and curves, is the fact that we have these three credit businesses that are on one balance sheet that complement the arguments that David tries to make on behalf of the agency business. So the beauty is that we have a number of options here, and whether it’s a moderate flattening or a minor flattening, we don’t - we really are more focused on pricing at the relative risk returns of the strategies and I think we just have a different - a bigger macro view when we look at each of them in isolation. So there is a strong risk culture here that checks and balances that we feel is a strategic weapon as it relates to approaching this, hopefully this lift-off and beyond.

Great. Thanks very much for the color.

Thanks Brock.

Thanks Brock.

Thank you. The next question comes from Steve Delaney with JMP Securities. Please go ahead.

Thanks. Good morning, everyone, and Wellington, thank you very much for all you’ve done to help build a mortgage REIT industry that we enjoy working in every day.

Thank you, Steve.

Great. So look, it’s been a long call. Just one quick question at the end and it probably won't surprise you. I’m interested in credit. So in your vision for the credit platform, I’m just curious if you ever see yourself buying or building an origination platform?

It’s not in the offering [ph] but I’ll let David talk a little bit more about that.

Got it.

Hi, Steve, this is David. I would say, we wouldn’t rule anything out. For the time being, our focus is, as I said, new issued prime jumbo, legacy primarily prime, as well as non-performing loans and re-performing loans. That’s the focus that we have today. We have scale for those businesses or for those sectors and we have expertise in it. That’s not to say we couldn’t expand beyond that in a pretty efficient fashion or engage in strategic partnerships or relationships within the sectors I talked about or beyond, but for the time being, those are the sectors we’re focused on and we’ll take it from there.

Steve, we’re really well positioned to grow organically. And I think external growth we’re looking at all the time. We get a lot of people pitching us on opportunities and things for sale. A lot of people are trying to talk Texas market and different asset products and strategies but I think the simple answer to David’s partnership, we can grow organically and frankly through JVs and partnerships, both in the residential businesses and we’re doing it in the Annaly Commercial Real Estate Group right now. That’s just a way for us to scale this platform more efficiently than to take on big infrastructures and people and all the risks around that.

Understand, because those infrastructures certainly have a cyclicality and as we’ve seen could be painful as people try to build those, but we’ll look forward to seeing how it all plays out and excited about the new diversity into the overall strategy. Thank you all. Have a great day.

Thank you, Steve.

Thank you, Steve.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Wellington Denahan for any closing remarks.

Thank you, Anita. And thank you everybody for participating in our Q2 earnings call. I want to again thank our entire management team, and specifically thank Kevin Keyes for all he has done for this company and I look forward to his leadership in the years ahead. Thank you.

The conference has now concluded. Thank you for attending today’s presentation. You may disconnect your line.