Invesco Mortgage Capital Inc (IVR) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Invesco Mortgage Capital Inc. Second Quarter 2016 Investor Conference Call. (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, Bob, and good morning, everyone. We again want to welcome you to the Invesco Mortgage Capital second quarter 2016 earnings call. I'm Tony Semak with Investor Relations, and our management team and I are very delighted you've joined us, as we really look forward to sharing with you our prepared remarks during the next several minutes before we conclude with our usual question-and-answer session.

Joining me today are Richard King, Chief Executive Officer, Lee Phegley, Chief Financial Officer, and John Anzalone, Chief Investment Officer.

Before we begin, we're going to provide the customary forward-looking statements disclosure, and then we'll proceed to Management's remarks. Comments made in [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, and 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 sourcing, cost of funds, our leverage and equity allocation. 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 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 Condition 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 statement later turns out to be inaccurate.

To view the slide presentation today, you can access our website at invescomortgagecapital.com and click on the second quarter 2016 earnings presentation link you can find under Investor Relations tab at the top of our home page. There you may select either the presentation or the webcast option for both the presentation slides and the audio.

Again I want to welcome you, and thank you so much for joining us today. We'll now hear from our Chief Executive Officer, Richard King. Richard?

Thanks, Tony. Good morning, ladies and gentlemen, and thank you for joining the call today. We are pleased to announced second quarter Invesco Mortgage Capital core income of $0.42. core earnings, while above the dividend of $0.40, were down modestly relative to the elevated first quarter of $0.44 due to somewhat faster prepayment speeds, given falling interest rates and higher seasonal housing turnover.

Management of interest rate risk is always a focus of ours, and it certainly was in Q2, as rates continued to fall. As of the end of the quarter, the 10-year Treasury was 80 basis points lower year-to-date.

Since the recession in 2008-2009, we've seen a pattern emerge regarding interest rates and credit spreads, where global events drive interest rates lower, initially causing credit asset prices either to fall, or just lag as their prices can't keep up the pace with the improvement in Treasury notes and bonds. Then, rates stabilize, and eventually go up modestly for a time. And in that time period, credit assets dramatically outperform as their prices catch up with the rate rally, and then some, then the process repeats.

As this has played out multiple times now, you should notice that credit assets have tended to lag less and less as rates fall and recover more quickly with each successive mini-crisis. The demand for high quality US credit assets is strong and in a tightening trend, and we expect that to continue. The assets that IVR owns are attractive to those looking for additional yield, but are seeking quality.

Our portfolio has aged, and now benefits from several years of appreciation in underlying property values, and, as such, these securities valuations have become much more resilient to shocks. The adverse market reaction to the UK referendum was very short-lived indeed, and we continued to see our book value performance improve post- the Brexit vote. We are well aware that our book value has tended to do better when rates are stable or rising, so much of our focus this year to date has been how to better deal with falling interest rates.

We were well prepared by having added 15-year agency mortgage-backed securities and some five-year Treasuries in an effort to maintain a positive duration, and that worked out quite well. Despite what appears to be a rebound in US economic growth after an anemic first quarter, we think that rates are likely to remain in a trading range as overseas demand for US assets remains strong, negating much of the impact of stronger domestic growth and slightly higher but still sub-2% inflation.

Book value per share improved 3.3% in Q2, largely due to declining credit risk [premium] over Treasuries, or said another way, spread tightening. I mentioned on our Q1 call that our book value improves when spreads improve, and that we think, in a slow interest rate environment, spreads are going to end up tighter over time. The longer the market stays at a given range of interest rates, the tighter spreads get. That is an accurate description of the environment we are in.

Just through Q2, however, our economic return [and] change in our book value, plus dividends, was a 5.7% return for the quarter, and it was 4.3% year-to-date through June. Given these comments that I've been making, you can probably glean that book value is continuing to improve. And we estimate it's gained about another 5%, not including income, and that puts our book value approaching $18 per share.

Our use of cash and the increased capital due to asset appreciation in the second quarter was used to expand our exposure to the 15-[year] agency MBS, which I already mentioned, introduce leverage in the agency portfolio in the process. Our agency leverage dropped a whole turn in Q2, from 9.7 to 8.6. We also funded $13 million of a CRE loan commitment. The commitment's $25 million, and we did that out of cash flow in the second quarter. John will go into more detail about our high quality portfolio, but right now let's turn to slide four in the presentation and look more specifically at the components of the change in book value.

As I mentioned, credit spread tightening drove our book value higher, and it was higher by $0.55 per share. Here we disaggregate that the net change that -- we disaggregate the change [in] the growth components. [Falling] rates in the second quarter caused a subtraction from book value due to our swap hedges, and it's labeled here as derivatives, and that was by $0.61 per share. But, the yields on our assets fell by more than our swaps such that the agency mortgage-backed securities and CMBS portfolio together contributed $0.98 to book value, or $0.37 per share, more than the loss on the swaps that we used to hedge them.

Most of that outperformance was in the CMBS component, as agency MBS performed marginally better than swaps. Our residential portfolio contributed an additional $0.17 per share, and that was due primarily to improvement in the GSE credit risk transfer prices, which outperformed most any asset class on a spread basis.

We paid $0.40 in common dividends of the $0.42 of core earnings. We're happy with the way things are going in our portfolio, with an attractive dividend, strong and improving asset quality, lower interest rate risk, and declining book value volatility. Since we are positive on credit spreads and credit fundamentals, we therefore expect further book value appreciation, declining book value volatility, and a stable dividend, with increased risk retention regulation on the way for securitization.

We also see some attractive opportunities developing in the CMBS market to put capital to work earning low- to mid-teens ROEs with no financial leverage. We expect the volume of risk retention deals to start slowing now in the second half, and for (inaudible) volumes then to pick up toward the end of the year and into 2017. Increased volume will incent issuers to partner with trusted capital providers as the amount of capital needed cumulatively begins to exceed the amount of this risk that regulated institutions will desire on their balance sheet. We have the resources and platform to excel in both residential and commercial.

It makes sense to us that, as we continue to execute on our plan to reduce economic return volatility, that our stock price is eventually going to reflect that we have outperformed our industry. In the long run, the major driving force behind returns to mortgage REIT shareholders is the high level of dividends relative to pretty much any other industry.

IVR management have been focused on reducing book value volatility, believing smoother economic returns will be reflected in a higher stock price over time, as risk is priced out of the stock. Our shareholders have seen excellent portfolio returns and additional accretion from share repurchases. We expect to continue to drive shareholder returns with strong and stable income, and to see additional benefit in the stock price as the discount fades.

Now I'm happy to introduce John Anzalone, our CIO since our IPO seven years ago, to cover our investment strategy and current portfolio positioning.

Thanks, Richard, and thanks again to everyone joining us on the call this morning. I'll start on slide six.

As Richard mentioned, we really like how the portfolio is positioned, with a focus on high quality credit assets and an active risk management that has kept us largely insulated from the impacts of the volatile interest rate environment.

At quarter-end, we had 60% of our equity and 37% of our assets dedicated to credit, and these positions benefited from sound real estate fundamentals as well as from a favorable technical environment. While macro concerns drove Treasury (inaudible) much lower, the market's anticipation for more quantitative easing in both Europe and Asia caused investors to [reach for yield], driving credit spreads tighter. This was felt across both the residential and commercial credit sectors, where not only are the fundamentals solid, but there's persistent negative net supply.

So, we're in a situation where we have more and more buyers chasing a shrinking pool of high quality structured securities. Our outlook for credit, going forward, remains positive, as none of the factors that are driving spreads tighter are likely to end any time soon. Given this constructive view on credit, we are looking to add to both our residential and commercial credit portfolios. In the residential space, we look to selectively add bonds in both legacy and CRT, while in the commercial space we will look to put on additional CRE [runs], as well as look at opportunities created by the new risk retention rules in CMBS.

During the quarter, the only meaningful change on the asset side of the portfolio was an increased allocation to agency MBS in order to add duration over the quarter. As we reinvest in paydowns, we're able to deploy capital as our assets prices and book value increased. These purchases were concentrated in call-protected 50-year collateral, which have less sensitivity to interest rates.

In addition to adding asset duration, on the liability side, we took off one interest rate swap. This combination served to extend our duration profile, leaving us better protected against a further drop in interest rates. Over the next few slides, I'll go through our position in each sector.

I'll start on slide seven with agency MBS. Within our agency portfolio, the percentage that we have allocated to 30-year collateral continues to fall, and now represents less than 40% of the book. Additional purchases of 15-year collateral has taken our allocation there to 25%, with the balance made up of hybrid ARMs. The vast majority of our fixed rate pools are call-protected, and this has limited the impact that the lower rate environment has had on our portfolio's prepayment speeds.

Our 30-year book paid at 13.7 CPR for the quarter, which is 2.9 CPR faster than Q1. 15s paid at 10.4 CPR, up just a hair from last quarter. The hybrid ARM portfolio saw speeds move from 12.5 CPR up to 18.4, but this is offset by the much lower average dollar price on that part of the portfolio, thus impacting book yields less. Given the current level of rates, as well as the impact of seasonal factors, we expect speeds to remain elevated for the next several months. This will be slightly mitigated by the still-tight lending environment and the stickiness of primary mortgage rates.

Let's move on to slide eight and residential credit. Our residential credit books looks a lot like it did at the end of last quarter, with none of our allocations moving more than a percent. Fundamentals still look very good, as inventories are limited, mortgage rates are low, and the labor market continues to improve.

Home price appreciation and strong borrower performance have been very supportive to the sector. We saw pronounced rally in GSE credit risk transfer bonds as good fundamentals, strong demand for yield, and negative net supply and other structured security sectors combined to drive spreads significantly tighter. Legacy paper also tightened, but lagged other parts of the market.

It's worthwhile to point out just how little exposure to interest rates this entire [part of the] portfolio contains. On average, this book is well under half a year in duration, meaning the changes in the level of rates don't have much impact on asset prices. This quarter was the perfect environment for the type of short-duration residential credit bonds that we hold, as rates were extremely volatile but fundamentals remained strong, and investors chased spreads tighter.

Slide nine gives a snapshot of the quality of our residential credit investments. There's virtually no change in the credit quality of the portfolio over the quarter. The very high percentage of bonds that trade at dollar prices close to par reflect lower exposure to collateral issues, are attractive to finance, and exhibit little sensitivity to interest rates due to their short duration profile.

The chart on the right gives a breakout of our holdings by vintage. I'll point out two things here. First, our legacy paper is backed by prime or alt-day collateral, or as a re-REMIC of that same type of collateral, and second, our credit risk transfer bonds are [largely] from the 2013-2014 vintage, and now benefit from the seasoning of the underlying collateral. This is evidenced by the recent increase in rating agency upgrade activity in the CRT space. While most of the classes that we own are unrated, we have nonetheless benefited from [the] spread tightening effect of the upgrades on the sector and the fundamental strength that drove them.

Next up is commercial credit, starting on slide 10. Our allocations in the commercial space were also little-changed here in the quarter, with our CMBS position split between newer, high-quality AA and AAA bonds, and more seasoned positions concentrated in A-BBB bonds, with a small amount of legacy paper that is continuing to pay off.

Our CMBS book is benefiting from favorable trends in property fundamentals, and we've seen this impact directly as we've had $645 million of CMBS upgraded by one or more rating agencies already this year. Additionally, the negative net supply in the sector and heightened investor demand for high quality assets has kept the technical environment positive, as well. Finally, we funded one new commercial loan during the quarter totaling $13 million, which was made in conjunction with a $25 million commitment.

On slide 11 we provide a little bit of detail on our commercial loan portfolio. At quarter-end, the portfolio was $305 million, and we've had $112 million of principal returned so far. The credit quality continues to be outstanding, with no delinquencies, and the portfolio is well-diversified both geographically as well as by property type.

Slide 12 goes into more detail on the credit quality of our commercial holdings. The chart on the left shows the loan to value ratio of both our CMBS at 36%, as well as our CRE loans at 67%. The chart on the right illustrates how our CMBS portfolio transitioned to higher rated paper over the last few years. Our BBB and A paper was largely issued in 2013 or prior, whereas our newer vintage paper is almost entirely AAA/AA classes that enjoy substantial subordination, as well as favorable home loan financing.

As usual our -- financing on slide 13 -- there isn't a whole lot to report on the funding side, which is a good thing. The financing markets have been stable, and our cost of funds has been relatively stable, as well.

That ends our prepared remarks. Now we'd like to open the call to Q&A.

(Operator instructions.) Bose George, KBW.

With the meaningful increases in book value and what you've noted you've seen already quarter-to-date, can you just talk about where incremental returns are and where you see the best opportunities to invest incremental capital?

We're going to continue to [park] incremental cash into agencies waiting for better entry points into credit. On the residential side, even though it's rallied a lot, CRT still has the highest ROE of any of our target assets, probably in the low double-digit range. As that market continues to expand, both in terms of investor base as well as in counterparties that are willing to finance them, we'll look to opportunistically add there.

In CMBS, we just saw the first [residential] deal price. I think as that market develops, as Richard mentioned in prepared remarks, and over the course of the next few months, we really expect that we'll find some opportunities there, as well. And finally, in CRE space, we're trying to continue to put money to work there also, especially as we see more of the 2006 and 2007 vintages mature.

So, overall, I'd say right now, most of the hedged ROEs that we're seeing are in the high single digit range, with CRT being a little bit of an outlier, probably a little bit in the 10% to 12%, 13% range, depending on the class.

One on the risk retention opportunity. Can you just talk about how the structures work? Will you partner with [B piece buyers]? And also I guess there's a very long holding period. Does that mean you end up equity funding the asset? Is it too early to know what the returns on that are?

It is kind of early, Bose. I think, from what we look at now, it looks like you could earn low to mid-teens, with upside if losses are less than we forecast on the collateral.

But basically, we would have to partner with an issuer, and it really is going to play out over time whether issuers retain vertical or horizontal, or an L-shape. And the rules obviously that aren't fully baked yet in terms of capital treatment and so forth will dictate the structures. So, I can't really say specifically at this point in what way we would play, but we would be more likely to keep horizontal bottom in conjunction with an originator issuer.

Douglas Harter, Credit Suisse.

Given the commentary you just had about available returns and the strong book value performance, can you talk about how you're viewing share repurchase today?

Yes. In the second quarter, we didn't do any. We have actually a relatively short window as well, just because first quarter results were [fairly] late in February [ending onto] a blackout period before the end of the quarter. So, it's a short window to operate, and the stock price was performing pretty well.

And so, I think it really depends. I think my comments -- we really do expect some favorable movement in the stock price. But, if that's not the case, with book value moving up, if the stock price doesn't reflect that, then we'll be interested in share buybacks.

Can you just give us a little sense as to how the volatility of book value might have been throughout the quarter, given that there was definitely volatility in the broader markets over the course of the quarter?

Really, book value just continued to appreciate -- oh, I'm sorry, throughout -- I thought you meant since quarter-end. No, during the quarter--.

--I think, broadly speaking, it went up (inaudible) the whole time. We had a very brief respite around after the Brexit vote. I think spreads widened really briefly for a few days, and then they started tightening again.

Right, but book value was still up substantially even after the Brexit vote.

Right. Like we had said on the call, we had moved to a little bit of a longer duration profile just ahead of that because we knew the risks were skewed towards lower rates in terms of (inaudible) portfolio. And that was pretty stable through this trending higher. If you look at any of the credit spreads over time, that's what our book value really moves with. They pretty much ground tighter through the quarter, and then accelerated through (inaudible) quarter-end, [happened right].

On that last point of credit spreads having continued to move tighter, at what point do you start worrying that maybe the risk reward of spreads, or new incremental investments, isn't as attractive, and maybe there's as much risk of spread widening versus spread tightening?

I think we'll drive that more off fundamentals. As long as we continue to see property appreciation and very low delinquency and very low net supply, there just really isn't a driving force for spreads to widen in any consistent fashion. We may still get episodes where some news globally comes out, rates rally a bunch, but as I was saying, that really isn't a permanent spread driver. It's just a risk-on/risk-off temporary driver.

And those are opportunities to put on assets, and that's what we like to see. So, it's really going to take more of a fundamental move for us to not like credit, or a change in underwriting, something like that.

Trevor Cranston, JMP Securities.

First question, on the improvement in book value since quarter-end, can you say if you think that's been more attributable to any particular part of the portfolio than the other, or would you just say it's generally been strong performance across all your asset classes?

It's generally been strong across. It's definitely been led by CRT and CMBS more than -- agencies have done well, and particularly 15s have actually done particularly well since quarter-end. But, it's hard for -- agencies can't keep up with the spread tightening like we've seen in CRT or in CMBS. That's been pretty strong. Those are on the order of 30, 40, 50 tighter depending on the class. So, they've had a big move.

Yes. Earlier in the year, structured space in general lagged in terms of credit spread tightening relative to corporate bond high yield. And now they're really participating strongly.

Right. One other thing that's happening, too, since quarter-end, I think it might have started a little bit before quarter-end, but with the pretty big moves in LIBOR, we've seen swap spreads widen pretty much across the board, a little bit more on the shorter end, but certainly across the entire curve. And so, that helps also, obviously, in terms of book value, so that's helped across all assets.

On the duration positioning, with rates are today, would you guys say that you are comfortable maintaining a longer duration position? And then, as a second part to that question, you mentioned that you had terminated a swap. Can you just give us the details of the one that was terminated? And also, I think you commented that you had a long Treasury position, so if you could just give us the size of that, maybe that'd be helpful. Thanks.

Sure. At the end of the quarter, the size of the Treasury position was $150 million. And so, in answer the broad duration question, really we haven't -- you characterize it as a longer duration position. That's really not the case. What we've done is try to maintain our equity duration in a range, and this is our equity duration, so [not a duration gap], in a range of two to five years, so similar to the shorter, intermediate bond portfolio, say.

And we've said before, but the rationale for that isn't necessarily a view on interest rates as much as it is a recognition that the correlations between credit spreads and rates tends to be negative in that, when rates fall, credit spreads don't keep up, and when rates rise, credit spreads tighten. And we've seen that over and over. And if we ran a zero duration, we would end up having more book value volatility, so we run a positive. It also has the benefit of extra yield for taking that [few years] of interest rate duration.

So, this equity duration's been between two and four, for the most part, two and five. And typically, when it gets -- if it looks like rates are going to rally, like we correctly forecasted in the second quarter, we just buy ahead. So, we'll buy ahead of our factor down. Every month you get this period where you get factors. Basically your principal is reduced from your MBS portfolio, and you need to replace that. And we'll buy ahead of that to put additional duration on, knowing it's going to come back down over the month.

And so, we did that. And then, in the second quarter, because of the just strength that we saw in the demand for fixed income assets globally, we added some Treasuries just from a complexity standpoint, and they were five-year Treasuries. So, it modestly added to our duration. It's not a dramatic change, and we're still within the two to five equity duration that we normally operate in.

And do you have the notional balance in the term of the swap that was terminated?

I don't (Inaudible) in front of me. I apologize. We can have a call afterwards. It'll be in the Q.

David Walrod, Ladenberg.

You briefly mentioned at the end of your prepared remarks about financing. Given some of the volatility in the second quarter, was there any disruption as far as repo availability or willingness of your counterparties to lend?

No. Funding rates were pretty consistent throughout the quarter. I think at the end of the quarter we were about a basis point or two higher than at the beginning. There was a small blip right after the Brexit vote, and that quickly reversed. So I think we may have -- I think funding rates went up maybe eight basis points on agency repo, and then right back down to -- went from maybe 62 to 68 or 70, and then back down to the low 60s again, so we didn?t really see that.

The one thing that's happened with the money market reform, LIBOR has been spiking higher. We looked and found that LIBOR rising in isolation, sort of not taking agency funding with it, which is what's happened, is actually kind of beneficial to us because we have over $6.5 billion of swaps, and we receive LIBOR on all of those. So, as LIBOR goes up, we directly get more money.

And only our credit repo, which we have about $3.2 billion, is directly tighter to LIBOR. And we have a fair number of assets that [float] on LIBOR, like CRTs and ARMs, things like that. So, overall, the impact of LIBOR going up is actually slightly beneficial to us, given that we have more receiving of LIBOR than paying of LIBOR directly.

Brock Vandervliet, Nomura.

So, just in terms of the risk retention and developments there, do you think that market really begins to show more traction prior to Christmas when the rule officially changes, or do you think participants really just pound out as much traditional form CMBS non-risk retention deals, in other words right up until the deadline, and we really are talking about risk retention evolving early next year?

I think the mix will slowly kind of pick up, first of all just in issuance pick up some, and the component that's risk retention pick up. But, you'll still see old-style deals. And whether you have a risk retention deal or not, the sponsor doesn't necessarily have to hold on to it until the rule kicks in.

So, I think the key probably is that the first few deals in the third, fourth quarter, you probably see more sponsors holding the risk retention kind of a proof of concept and developing the market. And as that market continues to grow and the amount of capital needed accumulates, we think the opportunity is going to develop. So, it's probably more of a 2017 opportunity than 2016.

And I'm assuming, given that return profile, which to confirm that's low- to mid-teens, and that would be unlevered, that would pencil very strongly relative to your other opportunities so that, if and when this does develop, we could expect you to be taking advantage of that?

Yes, absolutely. And for the most part, it looks like financial institutions like the capital treatment they get holding the vertical slice. And that means that there's a great deal of the bottom of the capital structure available, and well-underwritten deals. And that's probably going to be the biggest opportunity. There may not be the risk retention piece. It may not be the piece that you have to hold, or it may be if we partner and hold a horizontal slice.

Max Meyer, Wells Fargo.

With the [move the] share around Brexit and interest rates, and the volatility in January and February, could you just comment on the relative attractiveness of (inaudible) options, mortgage options?

We follow the markets obviously and the implied volatilities. And with yield repression, if you will, and quantitative easing, you're seeing volatility continue to compress. And you do get spouts, or periods of rate moves, but we really do expect rates to stay relatively low. And so, we're not at this point that interested in spending the premium along the optionality.

I would say we've been more focused on driving convexity out of the asset side of the portfolio than focused on trying to buy convex assets and then try to hedge the convexity, which is much more difficult to do. So, we've been moving away from interest rate risk for a number of quarters now. So, if you look at our portfolio and the evolution of it, the amount of convexity risk in our portfolio has really decreased quite a bit, so there's not as much need for that in the first place. And that's kind of how we are trying to approach it in large part.

I guess as a follow-up to that, then, can you just talk about why you decided to add duration with the 15-years (inaudible) as some of your other peers have done, take down hedges to offset the reduction in asset duration?

We did a little bit of both, and we took off one swap and added some 15s. I think we like the relative value of 15s at the time. They'd underperformed during the first quarter. We like the call protection that we were able to purchase. We bought -- generally speaking, I think they were almost all specified pools. In terms of what we were able to buy in the ad, they just add a little bit more earning assets to the portfolio.

So, we did do a little bit of both, but we did have extra capital because book value is increasing. We were getting margin back, things like that, so we had cash to invest.

I guess I was just curious in light of -- I'm looking at the residential credit equity allocation. I think it's come down 8% or 9% over the last year. So I was curious if its--.

--All resi credit?

Yes. I was curious more if it's relative value, you see more value in the agency, given where spreads are at, or just difficulty in offsetting swaps.

Part of it's really just having flexibility, and a part of it is the opportunity set in the resi space is just reduced. The legacy stuff's largely put away, and yields aren't that attractive. We like the CRT space, but the thing that limits investment in CRT is the number of people that finance it is just less. So, we're cautious about having too much on in that space.

And then, from the flexibility standpoint, adding agencies is nice because it's easy to reallocate capital away from agencies, so when we do get a spread widening event, you move out of agencies into credit. And when you get spread tightening like we're seeing, we move into agencies and let the credit portfolio just run down. It's not that we've really been selling it, just our non-agency portfolio have relatively fast prepayment factor-downs.

At this time, we have no further questions.

Okay. Well, I just wanted to say thank you to everybody on the call, and we'll talk to you soon.

That concludes today's conference. Thank you for participating. You may now disconnect.