Invesco Mortgage Capital Inc (IVR) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Invesco Mortgage Capital Incorporated's Third Quarter 2015 Investor Conference Call. 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 Tony Semak in Investor Relations. Mr. Semak, you may begin the call.

Thank you, Nicole and good morning everyone. Again, we want to welcome you to the Invesco Mortgage Capital Third Quarter 2015 Earnings Call. I'm Tony Semak with Investor Relations and our management team and I are really delighted you joined us. We're looking forward to sharing with you our prepared remarks as always during the next several minutes before we conclude with a question-and-answer session. Joining me today are Rich King, Chief Executive Officer; Lee Phegley, Chief Financial Officer; John Anzalone, Chief Investment Officer; and Rob Kuster, Chief Operating Officer.

Before we begin, I'll provide the customary forward-looking statements disclosure and then we'll proceed to management's remarks. Comments made in the associated conference call, may include statements and information that constitute forward-looking statements within the meaning of the US securities laws as defined in the Private Securities Litigation Reform Act of 1995. Such statements are intended to be covered by the safe harbor provided by the same. Forward-looking statements include our views on the risk positioning of our portfolio, domestic and global market conditions including the residential and commercial real estate market, the market for our target assets, mortgage reform programs, our financial performance, including our core earnings, economic return, comprehensive income and changes in our book value, our ability to continue performance trends, the stability of portfolio yields, interest rates, credit spreads, prepayment trends, financing sources, cost of funds, our leverage and equity allocation, the impact of the restatement of our financial statements for certain periods and the adequacy of our disclosure controls and procedures and internal controls over financial reporting. In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts, and future or conditional verbs such as will, may, could, 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. 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 Condition and Results of Operations in our annual report on Form 10-K/A 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 statement later turns out to be inaccurate.

To get the slide presentation today, you may access our website at invescomortgagecapital.com and click on the Q3 2015 earnings presentation link you can find on the Investor Relations tab at the top of our homepage. There, you may select either presentation or the webcast option for both the presentation slides and the audio. Again, we want to welcome you and we thank you so much for joining us today. We'll now hear from our Chief Executive Officer, Rich King. Rich?

Good morning. Thanks Tony and thanks to everybody for listening today. I'll start in the presentation on slide three. In the third quarter, we earned core income of $0.40 and declared a $0.40 dividend. Repo borrowing rates were a headwind for earnings in the third quarter. Borrowing rates peaked before the September Fed meeting and then subsided since. In effect, the Fed tightened financial conditions without actually announcing an [increase markets price] and expectations and post the meeting given no rate increase, repo rates declined and they've declined further since quarter-end. Book value was down 5.2% in the third quarter due to spread movements that drive the mark-to-market pricing on our assets and hedges and I will detail that on the next slide.

The fundamentals of our business are healthy actually while the valuations on our stock are quite low. As for the fundamentals, our asset quality is strong and improving and credit premiums are now at levels that are attractive for new investment given the spread increases that occurred in the second and third quarter. Interest rate risk for us is quite manageable given that the assets we hold have pretty high cash flow certainty. Question we often get from shareholders and we've seen in analyst reports and so forth is we understand your strategy, we like your portfolio, but why does the stock trade at such a large discount to book. Now broadly, equity investors expect rates to rise and think that mortgage REITs should be avoided when we are in a tightening cycle and I think cycle is the key word as I don't think anyone would think a 20% to 30% discount to book is appropriate if the Fed raises rates only once or twice. So, let's break this down a bit. Why would an investor think we're heading into a tightening cycle? I think it's because people are accustomed to the Fed tightening interest rate policy by hundreds of basis points pretty quickly one to three years after the Fed cuts rates for the last time and it's been seven years since the last rate cut and since the economy has been growing albeit at a modest pace, it seems to many that we're overdue. Investors are also demanding high credit spread premiums over treasuries for the same reason because after the Fed goes into a tightening cycle, credit spreads widen, before and during the next recession that typically people think would ensue from a Fed tightening cycle. So, an expectation that the Fed is going to tighten multiple times over the next couple of years is priced into credit spreads and rates.

There has probably never been a financial event talked about for [longer an event of execution than this first Fed miss]. So, that must be the consensus view or at least a consensus fear that is priced into our stock. In our opinion, the likely path is the Fed will raise rates a little, not a lot and they'll raise rates that little bit not because they see evidence of inflation or overheating growth like they would in a typical business cycle, but rather because they want to get off to the zero to 25 target in order to signal that these aren't desperate times and we don't need extraordinary measures in the US as maybe they do in Europe and Japan.

So in our view, it won't be a tightening cycle, but a small adjustment. Growth in most industries is just not robust here in the US and rather anemic in most of the world. Earnings have been driven by margin improvement and buybacks, not growth. Core inflation is not showing signs of increasing from the [1.25%,1.5%] and CPI has been at risk of deflation sitting around 0% and it's been at this level once before I think 2015. I've been in the business since the early 80s and once in 2009, when we kind of were in desperate times. I don't think we should be too worried about the inflation monster. Deflation is just as real of a possibility. The government is mired in gridlock and still awash in debt. Tightening cycle, I just believe is the wrong mindset. We believe we may get a relatively minor adjustment and may see the funds rate go up to -- from 0 to 25 to maybe 50 to 75 if the economy continues to go okay.

We're still in the gravitational pull of the deleveraging cycle, which should keep economic growth and inflation in check for a number of years. Low debt growth, which we have has generally meant low interest rates, which we also have, but IVR in the mortgage REIT space is trading like all this tightening is happening and that we believe is a huge opportunity for investors willing to be contrarian on that. Buying back IVR with strong asset quality buying the stock for us with limited rate risk due to hedging, 13% dividend yield makes a lot of sense to us. In addition, it will meaningly improve our book value and earnings. Now is actually becoming a great time for us to reinvest in assets, but in fact it still makes more sense to buy IVR stock at recent valuations and that's what we did in Q3 and that's what we intend to do in Q4. We intend to buy again at least $50 million probably in the next month or so and then assess whether to do more and I suspect we probably will.

Let's turn to slide four in the presentation and talk about book value. Quarter three was somewhat of a hostile environment for book value for mortgage REITs as there was a pretty big drop in rates and a risk-off environment driving spreads and valuation. We saw a typical credit spread widening in a correlated fashion. Real estate tax spread like CMBS widened along with investment grade corporates and of course high yield and emerging market debt. At the same time, there was a rally in rates of nearly 50 basis points [in] 10-year interest rate swaps such that our hedges decreased our book value. You can see on the graph on the presentation that the impact on our book value in the table that the agency MBS actually increased $0.40 per share and CMBS $0.06, but our derivatives that hedge those assets not lost in the quarter nearly $1 more than that. GSE CRT and non-agencies don't have any meaningful rate risk that's hedged, but selling price due to credit spread widening and then there was an offsetting impact from the benefit of share repurchases.

So that left us with a book value per share decline of $0.96. Clearly not a result we like to see, but it is book value we expect to recover because spreads are cyclical and mean-reverting and we very much expect spreads to improve, not only the cyclical, but they are also seasonal and we do expect later this year and in Q1 that does probably improve. On the right, we show the volatility of our book value per share on a rolling eight-quarter basis. You can see that the swings in our book value have decreased. We employed disciplines to keep volatility in book value to a minimum while still earning attractive income. The most important discipline is keeping interest rate risk low. We aren't the traditional mREIT kind of role that does well when rates fall and poorly when rates rise. Strong asset quality is the key for us and we would rather employ appropriate leverage on assets we feel very, very confident in and hold risky assets with low leverage. We accept some cyclical credit spread premium volatility so long as we strongly believe that the asset is going to mature and that we can hold it and continue earning the yield on it. Over time, spreads mean revert and its effect on book value is transitory.

We maintain a diverse portfolio of agency, residential, and commercial real estate bank debt and finally, we manage our capital to benefit book value as well and most recently buying shares at a large discount to book and as stated, we do intend to do more of that. We see our stock as extremely undervalued. Our agency portfolio is quite short in duration and John will get in to that, has limited extension risk because it's made up of hybrids and high coupons that actually benefit if rates go up and prepays [slow]. Our RMBS assets are largely backed by loans higher in the quality continuum prime and Alt-A or super-enhanced classes [re-rem x] predominantly fairly short average life and variable rate. Our CMBS are predominantly investment grade bonds collaterals collateralized by high quality seasoned loans. We're confident in our assets. We couldn't buy our seasoned portfolio today without paying up a lot versus where we bought it. So buying our stock at a big discount makes a lot of sense. I think of it like this, if we get one standard deviation improvement in book value over the next year and the price to book just improves to 20% discount from where it is like over 30%, the stock performance with the dividend as well is kind of astounding and personally, I like our chances of achieving that. So I think our stock is trading irrationally low. I'm going to turn it over to John Anzalone, our CIO who will now tell you about our portfolio and strategy.

Thanks Rich and thanks to everyone dialing into the call this morning. I'll start off on slide six. Our portfolio allocations remained stable over the quarter with 65% of our capital and 50% of our assets allocated to credit exposure. Despite the spread widening that we experienced during the quarter, the fundamentals underlying our residential and commercial assets remained strong. We continue to prefer to invest in assets that will benefit from continued improvement in the real estate market and are seeking to minimize our interest rate risk as uncertainty around the timing of the Fed lift off builds.

As Rich talked about, we were successful at inflating the portfolio from the impact of changes in rates as the correlation between our book value and changes in rate continues to hover around zero. However, the portfolio was negatively impacted as spreads in our assets widened along with all other fixed income markets. Compounding this, we saw swap spreads de-couple and go in the other direction due to a number of issues including a rebalancing by central banks as well as a surge in corporate issuance.

The good news is that we believe these impacts will be transitory as long as the high quality credit assets that we own continue to perform as expected. The ebbs and flows of credit spreads don't impact our ability to generate good returns. This is very different than owning assets that contain a lot of convexity risk. In that case, changes in interest rates create the need to readjust hedges and losses created there are very difficult to recoup. It's for that reason that we have structured our portfolio to have exposure to high quality credit and it worked to reduce our interest rate and convexity risk.

I'll go into a little more detail on this over the next few slides. In our agency book, the goal has been to construct a portfolio that has a stable cash flow profile, thus reducing our convexity risk. To accomplish this, we've increased our exposure to hybrid ARMs 38% and also have a 16% allocation to 15-year collateral. The 42% that we own in 30s is well seasoned and is predominantly made up of bonds backed by various forms of prepayment protected collateral.

CPRs in the portfolio were up modestly during the quarter. We do expect to see speeds decline over the next few quarters as seasonal factors take hold. Slide eight gives a snapshot of our residential mortgage credit book. As you can see, it contains a mix of newer production paper, credit risk transfer, and new issue RMBS as well as legacy positions.

Again you can see it in the duration numbers from the table that these bonds do not have much if any correlation to interest rates. And while our CRT paper was impacted by the same concerns that drove spreads wider across the entire fixed income space, our legacy paper held in quite well. Going forward, we expect that our residents of credit assets will benefit from continued strength in the housing market where we've seen further gains in home prices, sales, and housing starts. Slide nine gives a snapshot of our CMBS book. This portfolio is more concentrated in post 2010 production as our legacy positions are shortening in duration and paying off. The majority of our positions are split between two groups, post 2010 BBB/single A paper and post 2010 AA/AAA paper. While the favorable trends in property fundamentals will continue to benefit both groups, I want to take a minute to explain why we own each. The BBB/single A bonds that we favor were originated predominantly in 2010 to 2013 when the post crisis underwriting was at its tightest.

Combining those underwriting standards with depressed property valuations made investing in lower rated subordinate bonds very attractive. Once property prices started to recover and competition drove underwriting standards loose, we moved up the capital structure to invest in AA and AAA tranches in large part financed by the Home Loan Bank. This was exactly the correct call and market pricing bears this out. While all CMBS experienced spread widening this quarter, our seasoned BBB positions, single A positions held in much better than newer on the run bonds. Away from CMBS, we closed one floating rate mezzanine loan totaling $34 million and the pipeline there remained steady. Finally, I'll spend a minute on financing. We continue to have a diverse funding mix with 71% of our funding represented by repo. Funding costs were moderately higher during the quarter reflecting quarter-end balance sheet pressures at the banks as well as uncertainty around the Fed decision. While we have seen funding rates moderate somewhat this quarter, we expect to see further volatility around funding rates as we approach year-end and subsequent Fed meetings. With that, I'll open the floor to Q&A.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Dan Altscher, FBR & Company.

Rich, especially appreciate your comments earlier on. I think that the message was pretty loud and clear as to how you think about the stock price, but I want to ask about the buyback since you said it seemed pretty convincingly that $50 million buyback from the next month or so, is there a valuation, a price or some sort of metric that says this is an absolute level where we buy back stock versus an absolute level where it's less compelling?

No, I mean it's very compelling, I don't think we're anywhere close to where it isn't compelling. I've argued in the mid-80s that there were competitive reasons why it didn't necessarily make sense and so if you think of it in that range, we're below 70% of book.

I think it's always a decision based on where you can invest capital away from buybacks, right. And we've seen obviously with credit spreads wider, it looks more attractive than it has in the past few quarters to buy bonds, particularly CRT bond and CMBS, but like Rich said, I think we're pretty far away from it being competitive with stock buybacks.

I just want to be clear, we don't think for a second that buybacks push price a lot. It's really the attractiveness of it is the increase in book value and the increase in their earnings at these levels.

If I remember correctly, some of the thoughts were around buybacks in the past and clearly, you've shown the acumen to do them and before back at the end of 2013, I think. In some ways, buybacks increase our leverage, they reduce our -- potentially reduce our market cap, reduce our scale, reduce our size, reduce what have you. Is that just not part of the equation anymore? Is that part of maybe the push and pull?

It's definitely -- I'm sorry I cut you off but it's definitely part of the equation. It's just that the difference in amortization and accretion at 30% discount relative to [cost 15 to 20] is much more compelling. Yes, all else equal, it's not that we don't want to continue to invest and grow the business, we just think in the long run, we grow more by being prudent and improving our earnings and book value this way.

Okay. Got it. I hear you. Maybe a different thought since there has been a significant amount of spread widening, I don't think you've been too interested in agency maybe for a little while, but at what point does agency start to become compelling, given where swaps have really moved down to as an investment.

Yes, agency has actually held in fairly well compared to say -- I mean we look across the landscape and clearly I would say CMBS and credit risk transfer bonds have suffered a lot more than agencies lately. We don't not like agencies, we just don't like some of the stuff that comes along with them, which is just more difficulty to hedge, things like that. So not to say we would buy agencies, but I think right now we'd still leaning towards incremental assets, we'd be leaning towards things like CMBS and commercial loans clearly, right.

Yep. Got it. Okay and then one final one for me, since you are active users of the FHLB, have you heard any updates on kind of the policy on the regulatory front as to if there's anything maybe materializing by year-end or are we still kind of just in this holding period where we don't really know what's going on.

There really hasn't been any fundamental change. We're waiting to hear from FHFA.

Doug Harter, Credit Suisse.

Can you talk about where you see leverage levels going and if we go into a more volatile period around kind of the first Fed move and as this quarter demonstrated, are you making any further changes to leverage to try to further reduce book value volatility?

Let me just make sure that everybody understands that buying back stock doesn't mean higher leverage. We can manage our leverage, our portfolio is liquid, we have a lot of cash flow and so leverage went up a little bit this quarter and we're comfortable with our leverage and also think about this, our assets continue to season and become less volatile and I think you can see that in the book value volatility chart and the decline over time.

So you think about it, you buy a CMBS with a nine-year average life three years ago. Commercial properties have appreciated a whole lot in the last three years, I think like 14% in the last year and so, you end up with loan to value effectively getting down towards 30% or something like that on the book, plus something that was a nine-year is now a six-year. so you end up with an asset that is just becoming better and better and lower and lower volatility, both in terms of spread duration and just risk and so the same leverage today on this portfolio versus a year ago is actually less risky and we're very comfortable with our leverage just given a high quality of our assets and the shortening. So, I mean to answer your question, we're comfortable with leverage where it is. We're not looking to increase it.

Got it. I guess as the best way for us on the outside to see that comment about the reduced risk of the portfolio as it seasons, is that in that book value volatility chart that you guys show?

I think that's one way and I think we'll think about some additional disclosures to show the improving quality of the portfolio.

Great. I think that would be helpful.

Trevor Cranston, GMP Securities.

Understanding that you guys view the buybacks as the most compelling opportunity right now, can you talk a little bit about where you see the returns on new asset investments to the extent you'd be making them today and also maybe comment on any meaningful changes you've seen in spread levels since the end of the third quarter? Thanks.

I'll take the second part first on spread widening. The spreads are pretty much wider across the board in the third quarter as everyone knows. CMBS was on AAA's are probably 20 wider in the quarter whereas single A's are anywhere from 40 to 60 depending on vintage and depending on the bond. We're probably another, call it 10 to 15 wider during October stacker in the cap this year T-bonds are also in that same range (technical difficulty). So I think everything is another slightly wider during the third quarter, but not nearly as dramatic as in Q3. In terms of where we see ROE is, those are definitely a lot better. I think we talked on the last call or previous calls, we didn't see a whole lot in the double-digits in terms of levered yields or levered ROEs and now we're starting to see pretty much across residential credit we're in low-double digits, call it, 10 to 11 type range. Credit risk transfer bonds are probably a few hundred basis points higher than that depending on the bond for unrated tranches. Commercial again looks pretty attractive, the caveat there is we don't like the lower rated subordinate bonds on new issues. So they widened a lot, huge ROEs if you're willing to buy those but we're finding a lot we like there. So call single A and higher type commercial in the very high-single digits levered. So, the environment is a lot better than it was.

Okay, that's helpful. And on the funding side, have you guys seen any increase in rates so far for funding the goes across year-end and do you think it's reasonable to expect the kind of the magnitude in the increase of funding levels as we go into December would kind of be similar to what we saw in September around the Fed meeting?

Yes, I think so. We've seen a pretty strong pattern over the last few quarter-ends that in prior years you'd always see funding pressure at year-end, balance sheet pressures, you see higher repo rates around the turn of the year and we're starting to see more recently is that, that effect is happening around quarter-ends also. So if you look at where our funding levels are on a day-to-day basis, definitely around quarter-ends -- there is definitely an impact there. So, I would expect that to continue into this year-end too and then again, it has I think Fed meetings are another [long growth] as the Fed prices different probabilities of a rate hike -- that directly gets priced into repo.

Joel Houck, Wells Fargo.

I guess a more conceptual question. You guys along with everyone else has been kind of for many quarters now have been allocating more capital to non-agency and while I agree with you on the Fed regarding that they do anything I think is going to be limited, I don't agree that it's because everything is okay with the economy. In fact, one would argue if they can't even raise 25 basis points in September, there's something seriously wrong with our economy. And so the question is, there's probably more risk of deflation if the Fed raises 25 basis points, 50 basis points because that tightening relative to the rest of world is going to strengthen the dollar and there's all kinds of -- we've already seen the negative effects from that. So, wouldn't that mean that non-agency we'd see continued spread widening and that asset class probably today is not as attractive as agencies and that the paradigm is changing on everybody in real time and so therefore especially given where swap spreads have compressed to, that the agency trade on a hedge basis is far more attractive today than non-agency. I'm just curious as to your thoughts on that?

Well, first of all the Fed could have raised rates in September, except that they couldn't and the employment -- things have been gradually improving as far as -- I think most people would agree, but, so I think it's really more they don't need to raise rates because there's nothing growth-wise or inflation-wise that's pushing it, but things are gradually improving. That's our opinion. And as for the -- because where we are right now, we'd rather own high quality credit assets with lower leverage where you have known cash flows and the subordination in these bonds is building up pretty dramatically. So you have super-low LTVs [on these] seasoned CMBS that we had on our AAA CMBS even from last year let's say. So, some of the issues with repo are a lot less because you only have three turns of leverage and not six, seven whatever that you have on agencies. So, there are a lot of benefits to really seasoned high quality credit assets. I would agree with you probably if you're talking about really risky credit assets like emerging markets or new issues subordinate stuff, but our portfolio is really quite solid.

Okay, and that's fair enough. The other dynamic going on here is, as managers, there's always a trade-off between new assets and buybacks and I think you've at least gone as far as actually doing buybacks where some of your peers that give lip service to it. However, if the agency complex in your own estimation not necessarily mine, but you guys notice it far better than we do, but if agency is not all that attractive, why not shrink it even more buyback stock, which as everyone saw this quarter is clearly accretive to book value. I think the market in the discount to your stock or anybody in my view that is aggressively buying back stock to increase book value is going to be far better received in terms of valuation than otherwise. So, what are your thoughts about the pace of buybacks and accelerating those and taking down kind of the least attractive asset class that you own?

There are a lot of considerations there. I mean I hear you. We love the opportunity to accrete book value and accrete earnings through buybacks, but I do think you do have [for your] considerations you have lending agreements that have covenants based on changes in equity, you have competitive concerns and I think we're going at this with a great deal of thought and doing what's best in our opinion for the shareowner.

Mike Widner, KBW.

Let me ask you a real simple one first. You talked about the benefits of the kind of hybrid ARMs in the portfolio and rate resetting. Just what percent, roughly speaking, I don't need an exact number, of your agency hybrid ARMs would you call current reset ARMs or either actively rate resetting or rate resetting in the next say 12 months?

It's relatively small. I mean we bought mostly I say [five-ones and seven-ones].

The benefit really on those isn't necessarily the short-term reset, it's the extension risk limitation.

That makes sense. I was just curious if it was 30% or something, but it sounds like it's pretty minimal.

Yes, it's small.

Okay.

And the prepayment risk on [it is real short to reset] stuff can be pretty difficult to manage.

Yes, it's certainly true although I guess I was surprised to see your speeds on your ARMs were actually pretty low relative to what we saw in the industry. So, I think that's pretty good. Let me follow up on, I think a couple of questions, but some of the hedges as well. You talk about spreads having kind of widened out across asset classes, which they obviously did during the quarter and then that making them more attractive, like what in particular would you say has become the most attractive to you right now given that spread widening and you've already said you weren't all that enthralled about agencies even with the spread widening there?

Well, credit risk transfers have really had quite a dramatic widening lately. So those I mean we're looking at close to mid-teen ROEs on those and of course they're floaters, so we really like that aspect of it. So, I mean that would be probably on the high-end of where things are. CMBS, you're getting close, I mean you are talked about AAA bonds that you're getting close to double-digit ROEs on, which are pretty attractive also. So, I think those two areas and then again on the CRE loans, we really like that because the loans we're making are floating rate again, same sort of thing, pretty attractive risk profile there.

And we look at that, I mean that has an operating business component where we want to be constantly in the market and you know we've become known with lenders and this particular mezzanine loan space and so we want to be consistent in that business and always be providing capital.

Okay, thanks. That makes sense. So, I guess I have a two-part question here. Spreads, I think everything moved wider and one of the questions people have is, why did spreads move wider and what might cause that to change and then related to that, where do those spreads stand relative to so-called normal levels and I think what you guys would probably agree with and at least I hope so, is we're coming from a place where spreads across pretty much everything were extremely tight by historical norms and they've widened out to levels that some might argue are wide and some might argue were closer to normal depending on how long a time period and sort of what kind of part to the cycle you include in a definition of normal.

So, I guess the first part of question is, what do you think was actually driving the spread widening in the most recent quarter and then as you guys think about whether spreads are wide versus tight, how do you think about where we are in the cycle and more specifically that means -- I think most people would argue there was virtually no credit risk priced in anything six, nine, 12 months ago, spreads have been widening all year and we might be back to a level where a modest amount of credit is sort of priced in, but are we closer to the next recession than the end of the last and so how do you think about the credit risk component and whether or not we're adequately priced for that especially given what you said about the economy. I mean the Fed's not realistically in a position, the economy is not realistically in a position where we're going to go things are firing on all cylinders and we really got to clamp down on rates because growth is just too good and we're overheated. I mean we're improving, but I mean we're limping along and it's pretty hard to call impressive. So that's a very long multipart question but I'll let you take it from there.

So on the kind of why spreads widened, I think the thing that we think about the most is that for what we actually own, the underlying fundamentals still look good. So that's the first thing. So, we see spreads widening along with high yield and emerging markets and sort of corporates to some extent (multiple speakers). As we say, there were real concerns. In emerging markets you've got concerns over what's happening in China and a large part of high yield is going to be impacted by oil prices. So I mean they actually have real fundamental concerns in the other parts of fixed income and we look at our markets and think wow, there's not really any fundamental reasons directly related to housing or commercial real estate. So, we view that as we're not overly concerned in terms of the actual assets like I would just point out being high quality assets are the key (multiple speakers).

I mean a lot of you know is seasonal, we've had every and if you look at the kind of second and third quarter relative to the fourth quarter, first quarter -- I think at least four out of the last five years, you've seen that same pattern and I wouldn't be at all surprised to see that again. Then on top of it, the whole thing about will the Fed go or won't they go is I think it really rationally probably agrees that this isn't a beginning of a normal kind of business cycle thing where they tighten a lot because there's no reason to. So, I think there's a reasonable argument to make that when the Fed had actually does raise rates and give some verbiage around that, that you might actually see spreads tighten because there's just a lot of uncertainty priced in then the last thing is just, if you think of the overall kind of credit market this year there and I think next year as well, there's a ton of corporate supply. In past cycles, I want to go back to your comment about kind of normal spreads because CMBS spreads are really wide compared to where they were basically from the beginning of that market until the credit crisis. They were much tighter. So they are normally wide given the fullness of time. It's just that they've got so wide in the credit crisis and then people so [if you think of things] in the last six-year context, they are a lot tighter than they were at wides, but they're definitely a lot off the types at this point.

And with better credit underwriting standards, generally.

Yes and way better credit underwriting standards.

I don't want to say push back on that a little bit, but just earlier this week, we had the head of the OCC make comments about concerns in multi-family credit standards and are they adequately being reserved for bank balance sheets and the growth in that space. He's certainly not the first to suggest that maybe underwriting is slipping and that we've certainly heard plenty of people say we've got an asset bubble in commercial credit markets, multi-family markets. I don't want to draw parallels between mortgage and subprime auto, but I mean certainly you've heard many people complain or I would assume you've heard concerns and issues about the ease in standards there. Again, I don't know.

No, it's a lot, I think you have to draw comparisons between resi and commercial. There's a reason why we started out buying BBB's and have moved into the top of our capital structure, because credit standards and competition has caused credit underwriting to loosen in commercial, generally. That has not happened in resi generally.

That doesn't keep an article coming out every once in a while saying, there's some subprime guy got a loan, which is ridiculous because credit standards have never been this tight and they're not loosening.

Keep getting tighter.

So I think in the resi space, we continue to get like 5% appreciation for a year in home prices and really no measurable loosening in lending standards and on the commercial side really for us, it's just the underlying property appreciation has been so big that the LTVs are really low at this point for our portfolio.

I don't want to push back too much on that but I guess I hear this story a lot that credit is extremely tight and poor borrowers can't get loans and at the same time I look around, I go well, you can get a government mortgage at more or less all-time low rates with kind of standard -- I mean DTI and LTV standards are if anything easier than a government loan was in the past. FICO scores and availability are going down. The government's doing accommodative programs where you can include income from other tenants in your house if you are a low-income borrower. So, while I hear the story, I look at the actual facts about loans, I mean other than the fact that you actually have to provide documentation, I would push back on this notion that credit standards are actually tight. I think they are diligent in terms of prove everything that you wrote, but I guess tell me who is the borrower that's not being served today that would have been served in any time other than 2003 to 2006.

Our main concern as a Company is I think maybe off track worried about underserved borrowers. I think the big deal here is look at our results in terms of delinquencies. I think we had close to 4,000 loans in our securitization book and we have no serious delinquencies. So, I think the proof is in the pudding Mike as far as credit standards and what the results are.

So I'm not going to agree with you and you know we've said for many notes that you are top picks. I don't want to be on the wrong side of raising concerns. I think the valuation everything you said is great and we love your portfolio and I think your avoidance of deep credit risk is actually one of your strengths. So I don't want to be perceived as being on the wrong side of that debate. I think the narrative to your question about why does the stock trade where it is, I mean the narrative that doesn't resonate with investors is it just feels like bonds in general have a lot of risks and so that's why I push on kind of -- some of the concepts I hear from investors is the economy is not strong and so anyway, I'll stop there, I think that you guys have done a fine job. I think it was a fine quarter and I agree with you about buying back stock and I agree with you on the valuations. So, thanks for all the answers as always. Nice quarter and I will shut up.

Thank you. (Operator Instructions) Brock Vandervliet, Nomura Securities.

I appreciated your discussion on I guess on page nine on the slide deck of how you originally got into the BBB's, when not only the assets were depressed coming out of the financial crisis, but underwriting standards were super tight. How do you look at mezz now, kind of on the flip side of that when we have seen so much appreciation in commercial and specific to this deal, could you talk about some of the economics around this $34 million loan?

So on the CMBS side, we've not been investing in BBB CMBS in any of the latest deals --

So in the last couple of years.

Yes, it's been a while. Fortunately, we do like AAA underwriting and AA and AAA and we've been able to finance [those in home loan] and still get pretty good ROEs on what we think are very well underwritten at least for that part of the capital structure on bonds.

On the commercial loan, we've been in the same ballpark in the call it LIBOR plus 7% to 9% unlevered in the commercial space and we can really pick our spot. We have the big real estate franchise in Invesco that we use to help us originate these loans and we see that as a strong business going forward and will continue to do that.

And then asset there, was that multi-family or office or what?

I don't think we've disclosed that, but let me double check before we say on this call.

(Operator Instructions). At this time there are no questions in queue.

All right, thank you. Thanks everybody for listening on the call today and we'll talk to you next quarter.