Invesco Mortgage Capital Inc (IVR) 2012 Q4 法說會逐字稿

This presentation and comments made in the associated conference call today may include forward-looking statements. Forward-looking statements include information concerning future results of operations, our ability to maintain or improve book value, the stability of earnings and dividends, our views on the economy, the positioning of our portfolio to meet current or future economic conditions, our ability to continue performance trends, our ability to select assets with slower prepayment speeds, the credit quality of our assets, and the deployment of capital from the stock offering. In addition, words such as believe, expects, anticipates, intends, plans, estimates, projects, forecasts, and future or conditional verbs such as will, may, could and should and would as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements.

Forward-looking statements are not guarantees and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks identified under the captions Risk Factors, Forward-Looking Statements and Management's Discussion and Analysis of Financial Conditions and Results of Operations in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, which are available on the Securities and Exchange Commission's website at www.sec.gov.

All written or oral forward-looking statements that we make or that are attributable to us are expressly qualified by this cautionary notice. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statements later turns out to be inaccurate.

Good morning, ladies and gentlemen. Welcome to Invesco Mortgage Capital Inc.'s investor conference call, February 6, 2013. All participants will be in a listen-only mode until the question-and-answer session. (Operator Instructions).

As a reminder, this call is being recorded. Now I would like to turn the call over to the speakers for today, to Mr. Richard King, Chief Executive Officer; John Anzalone, Chief Investment Officer; and Don Ramon, Chief Financial Officer. Mr. King, you may begin.

Good morning and welcome to IVR's fourth-quarter earnings call. This morning I am going to start by quickly reviewing 2012, discussing the results for the fourth quarter, and then I'll talk about our goals for 2013. (technical difficulty) earnings call in 2012 we highlighted our goals of one, maintaining and improving our book value and two, paying a stable and attractive dividend.

On the topic of book value, we had a view as 2012 began that we were well positioned. We were confident that the Fed's QE program would cause our assets and book value to appreciate. In Q1, our book value grew about 12%; over the year we grew book value by about $4.42 per share or almost 27%. Each of the major components of our portfolio contributed, Agency, RMBS and CMBS.

We remain focused throughout the year on the dividend as well, using improvement in the value of our assets and the equity and the cash, the appreciation created to increase earnings assets at attractive levels while maintaining a strong balance sheet. We were able to maintain the dividend despite falling yields and faster pre-pays. We paid $2.60 per share in dividends in 2012.

Total economic value added between book value appreciation and dividends was $7.02 per share, which is about close to 43% of beginning book value. We ended the year with $0.16 per share of retained earnings.

On page 3, let's review the fourth quarter. Q4 earnings were $0.77 per share. We paid a steady $0.65 dividend and retained $0.12. In addition to our goals of book value and dividend stability, we had two additional areas of focus to out take more of our capital to credit and to prepare for the fiscal cliff at year-end.

On the topic of book value stability, despite higher rates and wider agency mortgage spreads, our book value was close to unchanged, down less than 0.5% at $20.83 per share, because CMBS and RMBS performed well, reducing our overall book value volatility.

We were cognizant of political risks in the fourth quarter because of the timing of the fiscal cliff coinciding with normal year end balance sheet pressures. In our base case, we did not expect to see a repeat of the 2011 debt ceiling or something worse, but we prepared for the turn by increasing liquidity and extending some repo terms. Maintaining a strong balance sheet in the fourth quarter was a top priority.

We held $286 million in cash at year-end. John will go over the portfolio in a few moments, but let me just say a few words on asset allocation. We reallocated capital out of agency mortgages into RMBS and CMBS to benefit from an improving housing market and a rising preference for real estate among investors. This better positioned the portfolio and resulted in approximately $23 million in gains during the quarter.

On page 4, let's talk about the Q4 book value change chart on the upper right. The changes in each asset bucket represents a change in the value of other comprehensive income, OCI. Our agency mortgage portfolio OCI was down $0.90. But not all of that decline was lower prices. Part of that decline was the result of portfolio reallocation. Selling agency MBS created gains in the quarter which reduced the OCI in the Agency bucket by about $0.20 in this case. We retained $0.12 of that $0.20.

Our interest rate hedges, slots, also offset $0.30 because interest rates rose in the quarter, increasing our fair value. The remainder of the Agency MBS underperformance in the quarter was the result of spreads widening, which we believe is temporary and likely to improve. The spread widening in our Agency MBS made them much more attractive to us and led in part to the recent equity offering.

Increased values of RMBS and CMBS, as I stated, made up most of the remaining difference in Q4 such that book value was within $0.10 of where we started.

So what do we expect in 2013? We are excited about the prospects IVR sees in 2013 and beyond. We believe housing is transitioning to a growth phase where housing meaningfully is going to add to the US economy. We see housing attracting investors in 2013 and expect that the inflow of capital will lead to broadening credit availability. Private label securitization will return in a more meaningful way and then be much more prevalent in 2014.

We also expect to see several pilot risk sharing transactions on behalf of the government selling the first loss credit risk on agency mortgage pools. We believe this will be the beginning of a very meaningful opportunity for IVR for years to come.

For 2013, our goals remain maintaining or improving book value and providing an attractive and stable dividend. We believe, however, that the best way to achieve those goals will be to continue to allocate more equity towards credit assets which will appreciate as recovery and housing continues. We believe a virtuous cycle is beginning with historically low prices on homes. With low interest rates at the same time, housing affordability is extraordinarily high. We will be positioning IVR to benefit from new opportunities that come with improving housing markets.

Some of the evidence of strength and housing includes a very large decline in existing inventory to 4 1/2 months now of supply which is again about half of the level from 2007 to 2011. We see positive signs in demand. We see surveys showing home traffic is up significantly along with new home sales, pending and existing sales are better and net demand -- that is the number of sales less inventory -- is very strong, indicating higher prices.

We have seen positive signs in distress sales. We have seen distress sales fall from half of home sales to about 30%. Short sales are growing as a portion of all distress sales and, again, the price discount for distress sales is also shrinking.

We also see household formations beginning to improve in 2012 and we should continue to increase given pent-up formations and supportive demographics.

Certainly some challenges remain in the housing market, namely there's shadow inventory, tight lending standards and we see a full pipeline of refis partly due to HARP, making it harder for buyers to get a loan and there is some remaining regulatory uncertainty for sure. But we have seen most of these problems waning while the factors that are showing strength are improving.

We expect prices to increase in 2013, home prices, in excess of the consensus of approximately 3.3%. We think sales are being held back by the tight lending conditions for purchase loans especially and which we expect to loosen up gradually over 2013 and past.

Invesco Mortgage Capital intends to position itself to fill a huge long-term need for credit capital in the mortgage market.

With that, I am going to pass the call to John to go into more detail on the portfolio, our investment strategy, and discuss our progress on the deployments from our recent capital range.

Thank you, Rich. On slide 6 I will start with the portfolio update.

As Rich mentioned, our focus during the fourth quarter was to reposition the portfolio to take further advantage of the improving housing market. To that effect, our Agency book decreased by just over $600 million while our managing [CRMBS] book was up by $453 million and our CMBS was up almost $300 million. I will elaborate on those moves over the next few slides as I go through the sectors individually.

Additionally, we carried more caps into year end, $286 million versus $190 million last quarter as we were positioning defensively heading into the fiscal cliff discussions. That cash has since been deployed which will further increase earning assets.

Total leverage on the portfolio increased from 5.8 times to 6.1 times.

As you know, we raised $359 million of capital a couple of weeks ago to take advantage of opportunities we were seeing in the market. As it stands now we have approximately 85% of that capital deployed. The raise is particularly well-timed as we were able to quickly put the money to work on the Agency side just as valuations were cheapening. We are very pleased with the specified pools that we were able to pick up as [pay ups] some prepaid protected collateral were also softer. On the Agency side, the raise is fully invested.

On the Credit side, we are also making very good progress with over 1/3 of our credit allocation complete. In non-agencies where we have made the most progress, we have been focusing on increasing our allocation to legacy positions which will stand to benefit the most from the uptick in housing.

On the CMBS side, we are anticipating that the new issue pipeline will increase providing us with opportunities to take advantage of improving CRE fundamentals.

Let's turn to slide 7 in the Agency sector. We made quite a few moves within the Agency sector during the month as we saw some shift in prepayment behavior. The larger shift involved moving away from higher coupon investor pools mostly in 4's and 4.5's and moving into lower coupon loan balance in geo-paper in 3's and 3.5's.

We noticed that the rates being offered to investors were moving closer to where regular borrowers could obtain loans and speed on that paper was beginning to tick up. As I mentioned earlier, we have seen softening in pay ups particularly on lower coupon specifieds. So we moved into those stories.

These moves generated about $20 million in gains while strengthening the prepayment protection of the portfolio. On the funding side, we have seen the repo rates fall since the end of the quarter tiered with 30-day repo rates now in the high 30s down from the high 40s at year end. Leverage increased slightly to 9.3 times with another strong quarter on the prepayment front as the CPR on our 30-year collateral declined from 13.1 to 11.6 CPR.

While we saw an increase in speeds for 15-year collateral and hybrid ARMs, those sectors only make up about a quarter of our agency book. Overall approximately 90% of our Agency collateral has some form of prepaid protection.

Now let's turn to slide 8 in Non-Agencies. We made good progress in adding to our Non-Agency book during the fourth quarter with the book increasing by $453 million. These are primarily legacy bonds and, in fact, our allocation to legacy paper increased from 31% of our Non-Agency to over 40% during the quarter. And that will continue to increase as we are also directing new capital towards legacy paper.

As Rich went over, we are more positive on housing and are looking to position the portfolio to benefit from this fundamental improvement. Further, technical factors are still overwhelmingly positive. As net supply remains negative we expect over $100 [billion] in negative net supply in 2013 and demand remains robust as investors search for yield. We continue to see yields decline as our hybrid ARM collateral resets lower and new purchases are put on at slightly lower yields.

Funding costs have improved helping offset the decline in yields and leaving our net yield only slightly lower. Leverage in our Non-Agency book stood at 3.3 times at year-end.

Finally, I will discuss CMBS on slide 9. Just as we are seeing improving fundamentals on the Residential side, we are also seeing CRE fundamentals continue to improve. We added almost $300 million to our CMBS book during the fourth quarter with new investments concentrated primarily in A-rated new issue bonds.

CMBS rallied strongly during the fourth quarter with prices on our book up about $2.0 average. That strong performance has continued since year end with our CMBS prices up between $0.50 and $1.00 on average as investor demand is fueled by the need for yield.

We saw our average yield fall to 4.82% reflecting the increased credit quality of our book as well as tighter spreads on new purchases. Funding costs fell slightly to 1.50%, leaving our net yield at 3.32%. Leverage on our CMBS book stood at 2.9 times at year-end.

That concludes our prepared remarks, so, operator, can we open it up for questions?

(Operator Instructions). Doug Harter, Credit Suisse.

Could you talk a little bit about where how book value has fared in the first quarter, given some of that weakness in pay ups that you referenced?

Sure. As of yesterday, book value was approximately unchanged over the quarter. And really it was the same dynamic that was going on in the fourth quarter in that Agency slightly under performed in credit, gains offset that. It was a little bit of a different flavor to it this quarter as Non-Agency prices improved a little bit more than CMBS prices so far in 2013, whereas in the fourth quarter, CMBS kind of led the way. But we are seeing very stable book value.

Great and just -- and with rates backing out I guess you kind of answered this, but I guess go into a little more detail as to why you still find this the pay up stories as attractive?

Well, I think we do like, continue to like higher coupon mortgages and given the premium on those it is really important to have prepaid protection given just, I mean we probably are biased towards rates going higher, but certainly there are some risk and rates that are going to go lower. So I think those pools just have a better convexity profile. So we are always going to pay up for higher, better convexity in the Agency book.

But still, we are still very much skewed towards higher coupon mortgages which we think that embedded I/O and that is going to be decent protection against rising rates also.

Great. Thank you, Don.

Kenneth Bruce, Bank of America Merrill Lynch.

Good morning. I guess I was hoping you might be able to elaborate on the risk-sharing bonds that you anticipate coming out later this year. Is there any thoughts around what those investments would be proxy to? How are you thinking about what the return profile would look like? If you could give us some color on that, that would be helpful.

Sure, yes. I think what is likely to happen this year is we will have a number of pilot transactions that take various forms, senior subordinate structure, maybe embedded note and maybe a pure derivative form.

And from what we've seen recently in the private-label market, you have seen some improvement in execution and certainly ROEs on buying loans and securitizing has tightened. And the Agency transactions are similar to that. So there is likely to be some competition for it. But the amount of volume that needs to get done in the Agency market is obviously is quite large over time.

And in addition to that, as the housing market picks up there will be a lot more loan production and you should seek improvement in the ROE on securitization as well.

So we are positioned for both of those things. And we think this sale has to be priced attractively. I can't really tell you exactly what the ROEs are going to be except that there is a huge need for capital in that space. And that, for the government to get out of the way, it is going to have to be attractive.

Right, I mean, I guess, is there anything that you would point to as maybe being an appropriate reference rate, not knowing how the market is going to evolve? I guess I may be hoping you could provide to some context as to what you would look at for proxy for that part of the market.

We are going to look to try to generate the types of ROEs like in the low double digits, I would say. And maybe slightly higher. A lot of the ROE on any one transaction is going to depend on how thick the traunch is. Obviously the [center], the higher the ROE will have to be.

And as you are looking at the private-label market, could you elaborate just as to your strategy in that part of the market? Is that something you envision accumulating loans and then securitizing or just participating in other securitizations?

Yes. I think first up, I would say, we have been very patient on this score because we have just seen better value for our shareholders and holding securitized assets and financing them. And that is still the case today. But what we are doing is we are setting up, we are going through the steps we need to take to be able to buy loans and securitize them because we think it is time to get set up. I think earlier we just thought this is way too early.

But, yes so, essentially, we are not looking to originate. We are not looking to service, but we are looking to position ourselves to buy loans from originators and securitize those loans.

And maybe lastly, if -- is there a minimum allocation of agency MBS that you think is appropriate for the portfolio? Or how should we look at that going forward?

I think that -- well, I guess that kind of depends on the environment. I mean, right now we are favoring credit simply because we see, like Rich went over, so many positive signs in the housing market.

But, clearly, there is going to be a minimum amount we need just to meet our whole pool test. So that would be the minimum (technical difficulty) there. And but as long as we see ROEs that are decent and we feel like we can find pretty good prepayment protection stories and hedge effectively, you will still see us active in that space. But and I think in terms of our allocation to credit, really, what that depends on mostly is finding enough credit that we are comfortable holding. That really is the limiting factor in terms of there's some positive signs we are seeing pretty decent flows on the Non-Agency side and the CMBS market is, obviously, the pipeline is improving there.

So as those come on, it is more of an evolution than a we don't just dump all of our Agencies and pile into credit. I mean, it is we definitely take our time and find bonds we like.

Thank you very much for your comments. Appreciate it.

Bose George, KBW.

Good morning. Just curious. The decline that we saw in your -- in the prepayment speeds on the 30-year fixed, was that partly because you saw higher prepaying assets earlier in the quarter or --? Just curious about that.

Yes, I think that was most of it. What we found and we go through this process pretty much constantly, but as we go through the portfolio we try to figure out which stories are working better than others and the one that really stuck out -- well, there's actually two that stuck out.

One that stuck out was the investor property pools in that we were seeing the rates that were coming to -- were available for investors, were converging on what their regular type borrower are. And those guys tend to have -- be in a better position to refinance. So we moved out of those.

And also there is a real divergence in terms of pools originating before and after June of 2009. I mean pretty much even the stories that -- or the paper that does have prepayment protection, that was HARP eligible, we are starting to see that paper pick up in speed. So we did move out of some of those.

In some ways though that it is a bit encouraging in that we are seeing it is kind of counterintuitive, but when we see low balance pools that are HARP eligible start to increase in speed, to me that tells me that sort of the low hanging fruit has been picked in terms of HARP and they are going after loans that are probably less profitable to refinance. So we are starting to maybe get comfortable with the fact that that HARP might be starting to burn out. So (multiple speakers).

Great. And actually follow up on that, just on HARP. Do you see any political changes that could give HARP a little further boost this year?

We don't anticipate any major changes. I think if there are changes they might be, we consider, more around the edges. And I think that recess appointment being made unconstitutional makes it a lot less likely that the [demarco] gets replaced in the near term. So some major changes to HARP is probably not in the cards anytime soon.

Great. And just one follow-up on that the first loss credit risk. Is there any feel for the timing of that? Could that be a first half of this year thing?

It could be. That's hard to predict. I would guess more second half.

Great. Thanks a lot.

Termer Cranston, JMP Securities.

Thanks. It looks like the overall leverage went up a little bit this quarter even though the allocation in the portfolio shifted more towards the Non-Agency bucket. Can you talk a little bit about how you are thinking about leverage today and what you view as the target for the portfolio once the capital from the raise is deployed?

Sure. Yes, I would say just on that what we were looking at in the second half of last year was kind of gaining confidence in the housing recovery and interest in allocating and buying more assets that benefit from the housing recovery. So we did increase leverage on the Non-Agency book, and in terms of -- and in CMBS as well and we are comfortable with the levels we are there.

On the Agency side, it has been relatively constant. And I would say on new capital we are looking at same type leverage numbers that we have on the existing capital.

That's helpful. And then to follow up on the idea of the questions about HARP. We have seen some headlines recently about some possible programs coming through about re-fi'ing underwater borrowers who are in Non-Agency securities. Can you maybe share your thoughts on the likelihood of that type of thing coming through and how it might impact your portfolio?

It would be a positive. At this point, I haven't seen anything that indicates a likely path there. I know there is a desire on the part of the administration to accomplish that. It is kind of tough to see how that gets done unless the government is willing to essentially do something like TARP and put their own money towards it.

So I would still say it is not that likely, but it would be beneficial in that that would lower a lot of estimates on RMBS and improve ROEs.

All right. Thank you.

Mike Widner, Stifel Nicolaus.

Good morning. So, I have got a couple of questions for you and let me prefix by saying the book value appreciation, I think, is about 27% for the year. So, very impressive there.

You talked about going forward that your focus would be more on maintaining as opposed to raising and you would like to raise, but let me just ask about that opportunity. I guess specifically you had a couple of strategies that played out well in 2012 and, mostly, it was the shift into credit and credit assets performed very well. And you also, I think, got into some of those investor pools and other things before those things fully rallied.

But how do you -- I mean, with a lot of those opportunities that are now being exploited, how do you look at the book value opportunity in 2013 and, specifically, where do you see opportunities for assets that are not fully appreciated and not fully priced into the market yet?

Right. So, that is the idea behind our shift into more legacy RMBS is at lower dollar prices versus the [re-remix]. It is meant to capture more book value appreciation. So on the Agency side if you have a, let's say, mildly rising interest rate. Our goal is to generate dividends and hedge interest-rate risk and you may get some book value improvement from Agency mortgage spreads tightening. We think they are relatively attractive.

Coming into 2012, prices were seriously undervalued so you got a lot of lift last year, so yes, you can't expect anything like that, I think, going forward. But we do think you could see continuing spread tightening and credit assets and some spread tightening in the agency market. So I think it is reasonable to expect some book value appreciation.

So let me take that two sides sort of separately and just follow up on the Non-Agency side first. You guys have stuck pretty close to the top of the credit stack overall and if I look at what you're holding right now in the CMBS side, your average carrying value, I think, is about [109 and 4], so they are up there pretty high. And so I guess one -- I question, is there a top on that? I mean can we move a whole lot higher than 109 and change?

And then on the RMBS side, yeah, you guys have stuck pretty close to the top of the credit stack. It has worked out very well for you. But your average carrying value right now is 92 and change. So is there -- do you see opportunity to be deeper down into the credit stack where you can still get stuff at say $0.70 or it is all a matter of how far down you want to be. But do you see any opportunity moving deeper into credit as opposed to just shifting the allocation toward credit? And if it is just an allocation issue, I guess the question is do you really see upward opportunity -- or potential for those prices and where they are?

The answer is, yes, we see upward potential in prices. We like prime and I will take collateral better than subprime. So dollar prices are more likely to be in the $0.80 than in the $0.70 range like you have mentioned.

Yes, I would say CMBS with high dollar prices, those are -- we think more about spread duration than actual duration in terms of how the prices are going to react. So we think that -- I mean, right now we are considering single A is the sweet spot for where we are profitable taking risk and putting leverage on that. So I think that is (technical difficulty) still we expect to see some spread tightening there.

And CMBS is obviously I mean, there is no convexity risk there so dollar prices are really constrained in the same way that they might be in agencies if you get too high a dollar price. So, and it is easily hedgeable.

So, then my final question and I apologize I am easily confused sometimes, but you guys mentioned a couple of things where you said you think that rates are likely to rise and then, at earlier times, you said that you think spreads are likely to tighten. And so for example, you said you took the opportunity to put the capital to work quickly on the Agency side because you liked the backup in rates, but then at the same time you have kind of indicated that you think with housing recovery and the virtuous cycle starting and all that that rates are likely to go higher.

So it makes me say, well, this is really a great time to be putting money to work or is there better opportunities ahead? And then similarly on the Non-Agency side, you spoke about you think that spreads are likely to tighten and things are going to get better, which on the Non-Agency side I guess I can understand, but on the CMBS side, I am not sure that there is really any credit risk at all priced into those assets. And so again would those not be negatively impacted by an improving economy and potentially arising or steepening slow economy? So it just feels like you have kind of said --.

Well, on the Agency side I think it's, we took advantage of -- it wasn't so much a rate move that -- but it was more of a spread widening move that we took advantage of. So our strategy on the agency side is, we are trying to find assets that we can hedge in a way that produce stable ROE stream and very cognizant of that. The risk of rates is a bit one side -- is skewed obviously towards higher rates given how low rates are. So we try to buy collateral stories that are going to be less impacted if rates rise.

So, really, what it comes down to and that is why we found it attractive was much more of a -- we found a local -- a spot where spreads were locally wide and we could buy prepayment protected pools that produce a pretty good cash flow. They are going to have better convexity characteristics. That is kind of what we are thinking there. And the backup is the Fed is going to buy however many billion a month, they are going to buy for the rest of the year is positive there.

So I think that's on the Agency side it is more of a -- that is more of the story. Whereas on the credit side, I think an improving housing market -- whether that [pretends] to a gradually increasing rate environment or a sharply increasing rate environment, whatever that leads to, we think that the spreads are at levels where we think we will see improvement there in terms of potential price gains, but also that with the hedges we have on are going to produce a stable and sustainable cash flow stream. So that is how we think about it in terms of that.

So we're not -- like, our view is not that we think rates are just going to go up immediately and we are going to position more fully that way. It is much more trying to put on those kinds of cash flows that make sense.

Got you. And so -- I don't know, I don't think it is an outlandish view to necessarily say that the Fed's on hold for a long time. It is going to keep buying Agency MBS no matter what. So I can certainly see an argument that spreads are going to tighten on agencies or continue to tighten on agencies after we get past this little hiccup.

And yet at the same time, the economy is going to improve, but not to the extent that we are going to see 6.5% unemployment by year-end. So the reality may very well be that the curve continues to steepen potentially being good for spreads going forward. But at the same time agencies could continue to price higher because the Bed is just going to buy till the cows come home.

(multiple speakers) On the economy I mean I would just add that the housing, we expect to be the bright spot in the economy. You still have clear fiscal drag and entire tax rates and de-leveraging in some spots. So we are not -- just to be clear we are not saying we think interest rates are going to go up a lot.

Well, I think -- I guess one last question and I will get off. Certainly the things that have been going on in housing are extremely interesting, I will say. You talked about inventory. You talked about, I think you alluded to home price improvement and whatnot. Do you have any concerns whatsoever about the extremely high investor share of those purchases and it's both institutional and individual, 30 plus percent of sales going to all-cash buyers and whatnot and guys like Blackstone putting $2 billion into single family.

I mean at the same time, you hear other people talk about that is great and other people talk about it's a huge risk because are we not re-creating exactly what got us into this mess in the first place. Any thoughts on that and sustainability of that? And then I am done. I promise.

I don't think we are re-creating what was done in the first place at all. The credit standards are extremely tight. It is tough for qualified borrowers to get loans still, unless they are way above the qualifying bar.

And cash buyers, I mean, that is really a reflection of what I just said. It's easier to buy a property if you have cash than it is if you have to borrow money. So, we think that that provides future list in-housing prices as credit comes back. I mean, affordability is superhigh. We don't look anything like we did what led to the problem where house prices were unattractive and lending was easy.

Yes. I'd agree with that. Well, very nice 2012 and thanks for humoring me with the questions.

Sure. Thank you.

(Operator Instructions). Daniel Furtado, Jefferies.

Thanks for the opportunity, everybody. Nice quarter. The first question I had is when you mentioned that you are now in the early stages of setting up to buy loans thinking about the new issuance market whereas before you hadn't really done anything in that regards, are you talking about bulk transactions from big banks? Or are you thinking of flow transactions from, say, a network of smaller banks?

We are thinking of both.

And then, I know this may be a little bit getting ahead of the situation, but how do you think about the pullout from MBS purchases at the Fed and the impact of the space?

And what I am thinking or what I am getting at is that most REITs with Agency portfolios are hedgeless swaps, but when the Fed halts purchasing of MBS I don't think it is hard to imagine a scenario in which asset prices sell off ahead of rates moving higher, which would leave a period of time in which the swapped hedges are largely ineffective from a protection of book value standpoint.

I mean, is the answer to that conundrum or question being short TBAs or am I just completely off course here?

Well, I think that's -- in some ways that's why we like our model so much, right, is because we do have a place to go outside the Agency market if we see that coming. I think our view is that the Fed's going to do what they said they were going to do, right. They are going to continue buying until -- keep conditions easy until we get employment improving and things like that which we think is fairly a decent ways off.

But I mean, that is part of what the strategy is now, is to move more towards credit assets to if something like that happens it will lessen the blow. That's really all you can do if you are predicting that Agency spreads are going to widen materially.

Right now, I mean Agency -- despite the Fed buying Agency spreads are historically pretty attractive.

I got you there, I was just a couple of steps ahead there. But thanks for the commentary. Nice quarter, again, guys.

Gabe Poggi, FBR.

Good morning. Two quick questions. Can you give us an idea of where you're buying the legacy Non-Agency paper you were talking about, kind of increasing capital allocation to? And then, the second question is your most recent capital raise, if you back out the gains on sales and obviously late you have a lot of gains baked in here from a dividend stability standpoint, but wanted to get an idea of how you viewed the ROE on that new paper or the new capital deployment from an accretive standpoint relative to the 65 or what your core earnings was in the quarter, once you back out those gains?

I will start with the Non-Agency purchases. So what we're looking at and obviously against, we are focusing on the legacy paper. So it is away from re-rate mix at this point. We are seeing yields call it between 4% and 4.25% which would be considered to be loss-adjusted unlevered deals. So, if you take that with an average cost of funds somewhere in the [1.5 to 1.75] range you end up with a pretty decent NIM on that portion of the book. And then --

That's helpful.

Then the second part was ROEs going forward. Yes, we expect ROEs to be roughly similar to where we have seen them over the past few quarters. So we didn't expect things to be materially different. Agencies looked a little bit better. We are expecting mid to low teens ROEs on the Agency trade given where we have been on paper. Kind of similar for -- I just gave you what we expect in RMBS.

And then CMBS might be a little bit less in terms of expected ROEs in that our unlevered yields there are probably 3 3/4% to 4-ish with slightly higher funding costs. Because obviously those are much longer cash flows. So there's a swap cost embedded in those.

But we really like having that. And when we have seen it in the last two quarters, even the you would have said, hey, ROEs are a little bit less on CMBS over the past few quarters, we have seen a lot of the value improvement coming from that. So we really like the diversification into the commercial area also. So I think that is important to have all three pieces.

Great. That is really helpful. Thanks.

Scott Ballmer, [SAV] Capital.

Hi Rich, John, nice performance. Congrats. Quick question for you. I think you highlighted a handful of things since quarter end that would -- you'll probably be positives to run rate earnings just ticking them off, invested the excess cash or some of the excess cash you had at year-end, putting the offering to work at pretty good levels in the pullback. And then, repo rates coming down it sounds like almost 10 basis points.

Is CPR potentially another positive? Just that we have had three or four quarters of high CPR and maybe the combination of a little bit of the burnout. You mentioned burnout on HARP, but maybe burnout on the whole portfolio.

And then secondly, rates going up a little bit. Do you think that that is another kind of positive to run rate earnings over, let's say, over the course of the year? Thanks.

Yes, absolutely. I think we are pretty, I guess, sanguine about CPRs going forward here. We think there's obviously -- we have seen a slowdown in our 30-year book. We wouldn't be surprised to see slightly lower (technical difficulty) going forward for all the reasons you've mentioned.

I think -- the big -- the real key is if rates if we get rates to go up a little bit you would see, you could see a material slowdown in CPRs. Because we have had -- we do have higher rates and you have that dynamic of when rates go up, you get a lot of people lock their loans because they think they are going to miss the opportunity. So we did see a little bit of spike when rates went up in terms of speeds.

But and also we think our -- the way we have repositioned our book particularly to us is we think is going to be positive. We are very comfortable with the stories we own right now. We think we have dodged a few of the mines there over the last couple of quarters.

So, we are pretty -- I wouldn't be surprised if that was a little bit of a tail wind.

Fantastic. One of the most attractive things that your stock, I think, versus some of the others and the progress you have made is just being able to maintain the dividend over the last six or seven quarters is -- I think some of your peers have fall pressure with CPRs going up and rate contraction. And sort of combination of everything you have done has yielded a great outcome. So congrats on that. Appreciate it.

Thanks, Scott. We feel good about things.

At this time I show no further questions.

Well, we appreciate it. Thank you.

Operator, we can now disconnect.

Thank you. Today's conference has ended. All participants may now disconnect.