MFA Financial Inc (MFA) 2010 Q1 法說會逐字稿

Ladies and gentlemen, good morning. Thank you for standing by and welcome to the MFA Mortgage Investments First Quarter 2010 Earnings Conference Call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for your questions and comments and instructions will be given at that time.

(Operator Instructions). And a reminder, this conference is being recorded. At this time, I would like to turn the conference over to our first speaker, Ms. [Alexandra Galati]. Please go ahead.

Good morning. The information discussed on this conference call today may contain or refer to forward-looking statements regarding MFA Financial Inc. that reflect management's beliefs, expectations, assumptions as to MFA's future performance and operations.

When used, statements which are not historical in nature including those containing words such as 'believe', 'expect', 'anticipate', 'estimate', 'plan', 'continue', 'intend', 'should', 'may' or similar expressions are intended to identify forward-looking statements. All forward-looking statements speak only as of the date on which they are made. These types of statements are subject to various known and unknown risks, uncertainties, assumptions and other factors including, but not limited to, those relating to changes in interest rates and the market value of MFA's investment securities, changes in the pre-payment rates on the mortgage loans securing MFA's investment securities, MFA's ability to borrow to finance its assets, implementation of or changes in government regulations or programs affecting MFA's business, MFA's ability to maintain its qualifications as a real estate investment trust for federal income tax purposes, MFA's ability to maintain its exemption from registration under the Investment Company Act of 1940, and risks associated with investing in real estate-related assets including changes in business, conditions and the general economy.

These and other risks, uncertainties and factors including those described in MFA's annual report on Form 10K for the year ended December 31, 2009, quarterly report on Form 10-Q for the quarter ended March 31, 2010, and other reports that it may file from time to time with the Securities and Exchange Commission could cause MFA's actual results, performance and achievements to differ materially those projected, expressed or implied in any forward-looking statement it makes.

For additional information regarding MFA's use of forward-looking statements, please see the relevant disclosure in MFA's quarterly report on Form 10-Q for the quarter ended March 31, 2010 and or the press release announcing MFA's first quarter 2010 financial results.

Thank you for your time.

I would now like to turn this call over to Stewart Zimmerman, MFA's Chief Executive Officer.

Good morning and welcome to MFA Financial's first quarter 2010 earnings call. With me this morning are Bill Gorin, President and CFO, Ron Freydberg, Executive Vice President, Craig Knutson, Executive Vice President, Tim Korth, Senior Vice President and General Counsel, Teresa Covello, Senior Vice President and Chief Accounting Officer and Kathleen Hanrahan, Senior Vice President.

We reported today net income of $80.6 million and $0.29 a share of common stock for the first quarter ended March 31, 2010. For the first quarter core earnings were $66.6 million or $0.24 per share of common stock. Core earnings for the quarter represents a non-GAAP financial measure which reflects net income, excluding gains or losses on sales and securities, determination of related repurchase financing and changes in the unrealized net gains and mortgage-backed securities or MBS forwards.

On April 1, 2010, we announced a first quarter 2010 dividend of $0.24 per share, which will be paid on April 30 to stockholders of record as of April 12, 2010. As of March 31, 2010, MFA Financial's book value per share was $7.67.

We are taking advantage of market dislocations by identifying and acquiring non-agency residential mortgage-backed securities with superior loss adjusted yields at prices significantly below par. Our first quarter return on equity was 14.8% and our core earnings represents core ROE of 12.2%.

With $768.7 million of cash and cash equivalents and $337.5 million of unpledged agency mortgage-backed securities at quarter-end, we remain poised to take advantage of future investment opportunities within the residential mortgage-backed securities marketplace. By blending non-agency with agency MBS, we seek to generate attractive returns with reduced leverage and reduced sensitivity to prepay.

In the first quarter, we grew our non-agency MBS portfolio through the purchase of $315.7 million of non-agency mortgage-backed securities including $121.9 million of mortgage-backed securities reported as MBS forwards at an average cost of 72% of par. As a result of high premium prices on agency MBS, due in part to the now completed $1.25 trillion Federal Reserve Agency MBS Purchase Program and the expectation of the pre-payments rates, we strategically reduced MFA's agency MBS portfolio during the quarter through the sale of $931.9 million of agency MBS and a weighted average price of 105.1% of par.

With the recent completion of the Federal Reserve Agency MBS Purchase Program, we anticipate acquiring agency MBS in excess of runoff during the second quarter. We will be acquiring both agency and non-agency assets as we go forward.

In the first quarter, both Fannie Mae and Freddie Mac announced delinquent loan buyout operations pursuant to which 120 plus day delinquent loans will be purchased out of the existing MBS pools. Due to the fact that Fannie Mae MBS represents approximately 91% of our agency MBS portfolio, we expect that Fannie Mae's buyout operations will have the greatest impact on our results.

We anticipate that the Fannie Mae delinquent loan buyouts will meet the high pre-payments rates for our agency MBS portfolio over the four-month period beginning in April of 2010. This temporary surge in pre-payments will impact our second quarter earnings due to higher premium amortization expense, a decline in higher yielding agency MBS assets and an increase of lower yielding cash investments.

As a result, we currently estimate that the second quarter core EPS to be in the range of $0.18 to $0.20. We currently anticipate that core EPS will increase in the third quarter of 2010 as pre-payments rates on our agency MBS return to more normal levels and cash assets are reinvested.

On March 31, 2010, MF residential-owned non-agency MBS, including the non-agency MBS underlying MBS forwards with a fair value of approximately $1.5 billion. These non-agency securities which had a cost basis of $1.35 billion at March 31, 2010 were acquired at deeply discounted weighted average price of 64.8% of the face amount of securities and at March 31, 2010, had average structural credit enhancement of 9.4%.

This structured credit enhancement, along with a highly discounted purchase price, mitigates MFA's risk of loss on these investments. Unlike MFA's agency MBS, due to their highly discounted purchase prices, the return on these assets will increase at their prepayment rates on these securities trimmed up.

I would like to go over certain additional data highlights as they pertain to our first quarter results and then open the call for a Q&A period.

Our leverage overall, meaning debt to equity, 2.7 times, our portfolio spread 273 basis points, the MBS net spread 305 basis points, our average cost basis of our agency securities, 101.3% of par. Our repricing to [add] assuming a 15% CPR, 14 months and for the quarter our CPR was 24%.

I thank you for your continuing interest in MFA financial and at this time I'd like to open the call for questions.

(Operator Instructions). Steve DeLaney. JMP Securities.

I just wanted to comment or question the non-agency purchases. They have all -- recently they have been done mostly in MFR and it looks like they purchased about $300 million or so in the quarter. It looks like you purchased non-agency in the MFA unit as well and I just wondered if you could comment on that? It looks like you went up to $423 million and if I recall you had a couple hundred million previously. Can you comment on why some of the purchases were done in MFA versus MFR?

It was [absolutely done] with [MFR]. Bill, do you have some --

No, I'm not sure what number -- (multiple speakers) 23, that's linked to the linked transactions. That is the linked transaction paragraph.

Right, I'm reading that. Well, let me ask you this, Bill. Are you saying that there weren't any --? I must have misread this. There were no non-agencies purchased in MFA. Is that --?

Yes. This linked transaction is talking about MFA as a whole including the wholly-owned subsidiary MFR.

I apologize. I read that as being separate. My bad. Sorry about that.

Just wondered, when we've talked before, we have seen from some of the fixed income research that prices certainly have been trending higher in this non-agency seniors in the last three, four weeks. Fairly significantly, I guess, we are seeing maybe as much as plus 4 points since March -- since the end of March. And in previous conversations, you have suggested that you're buying good quality RMBS and maybe looking for a 7 percentish-type yield [two] turns of leverage to get your return.

But with this price move, is 7% still a reasonable yield objective on the bonds? Or would you be looking at something lower now?

I would say that, first of all, your 3 to 4 points is correct in the last month or so. But we still think that the 7% -- 7, even 8% is a realistic yield bogey.

You know, it's a little harder to buy those assets, but we have been able to continue to buy those assets. And we think those are still good yield numbers.

Okay. And Craig, could you just give us a little color on the evolving conditions in the non-agency repo market, just in terms of availability and terms versus what you -- we were originally seeing say three or four months ago?

Yes. I would say every month that landscape improves. We have more lenders. I think the terms get better. You know, we have seen haircuts as low as 10% on sort of higher quality assets. But even lower quality assets, we have seen haircuts as low as 20%.

So we continue to see more and more counterparties. I think we have [size] documentation with 8 right now which is up from 5 at the end of the year. And we have a couple more that are in process. So it's more available, more plentiful and it's good to see.

Are you still looking at six-month terms, generally?

Six months, sometimes three months. It really, it varies by assets and by counterparty.

Right and what's kind of a range of -- you know, spread, pricing above LIBOR?

I would say probably from LIBOR plus 100 on the low end. And on the high end, probably LIBOR plus 175.

Very good. Appreciated. And thanks for the color on the non-agency. I am going to drop off and give somebody else a chance, but just with a comment, I think maybe the most interesting sentence in your press release was that the -- you anticipate acquiring agencies in excess of runoff during the second quarter.

So I would hope someone will ask you about that because I think that's the first time you've purchased agencies since August of 2008. But thanks for the color.

Bose George with KBW.

Good morning. I'll take Steve's cue and ask you about that. And good job selling securities ahead of the buyouts, and you noted you are willing to redeploy capital now to non-agencies. I mean into agencies, but obviously agencies are pretty rich, as well. So I'm just curious where you guys are seeing the opportunities and where we could see some of that capital being deployed?

I will give you [under $25,000] and then we will turn it over to Ron who runs the agency force portfolio, but we have continued to see a certain amount of opportunity in the agency sector.

So it has -- certain areas have continued to be attractive to us. But in terms of detail, Ron why don't you --?

Sure. Thanks, Stewart. Bose, we have seen some pretty good new activity in the new issue market for the agencies. We have seen a lot more issuance over the last month than we did, say, a year ago.

We are seeing, adjusting for repo and adjusting for swaps, we are seeing spreads in the 200, 225 to 250 basis point range depending upon the type of assets. And we are not really having much effect on the overall effective duration on the portfolio. Does that help you?

Yes and what kind of premiums would it be for those assets?

The new step that we have is it's about a 2-point premium so slightly higher than what our current average is.

One thing and -- let me give you some numbers. So we have a large [Miami] portfolio, we expect high pre-pays this quarter. We expect pre-payments in excess of $1 billion this quarter. And we will publicly tell you, right now we more than reinvested and committed to purchase more than that $1 billion. In fact, we have already committed to purchase $1.3 billion this quarter.

We are actively buying, so I don't really want to run, blab too many of the details. We are definitely in the buying mode.

And part of the rationale is, look, we publicly said we want the agency portfolio less than $7 billion. We have been saying this for six months. We've actually decreased it more than that because it is expected high prepays. So we are building there and we need to replace the $1 billion this quarter.

But I'd like to -- just to let people understand on the call, having said that and, as Steve Delaney had mentioned, we hadn't bought an agency since August of '08. We are being very selective, very careful and in terms of the duration of the portfolio, we are very, very much aware of that. We have been on -- we put on some swaps and we do some other, other [other] matters to kind of hedge that risk.

So we are very, very cognizant of that part of the portfolio and the interest rate risks inherent therein.

You know there's two parts. Duration is one. That's your sensitivity of your assets. The other important variable is how levered that is. So you know, some might have a duration of 1. Someone else might have a duration of 1, but if one guy is levered 10 times and one guy is levered four times, you can't just compare it to ratio, (technical difficulty) leverage.

And we put up good earnings, good book value growth with very, very little leverage.

Great. Actually, that's great color. Just to confirm. So you guys, the 1.3 billion is agencies that you have committed to purchase in the second quarter?

Yes.

Okay, great. And then just switching back to the non-agencies briefly, this 7% yield that you guys referred to, is there any change in the loss assumption that goes into that 7% yield?

No, I would say that our methodology and how we analyze the securities is pretty much not changed at all. You know, I think if you had asked me two months ago, I would have said probably 7 to 9%. And there were certainly plenty that were in the 8s. I think more are probably in the 7s now, but you know, no. We really haven't changed the way that we analyze securities.

Just to reiterate we are not chasing assets with the idea that we are going to look at lesser assets because it's the yields. The yields, in fact, may be a little bit less and the price may be a little bit higher, but the methodology hasn't changed one iota since we started this.

Great, thanks. And then just one last thing. What was the duration gap at the end of the quarter?

Give us one second. I believe it was about 0.65.

Are you asking asset liabilities this [month] or are you asking the duration?

Duration.

Duration. It was about 0.7.

Okay, great. Thanks a lot.

Douglas Harter from Credit Suisse.

Thanks. I was just wondering if you could sort of talk about sort of the willingness to add new sort of non-agency repo while you are sitting on a lot of cash and sort of how you balance that?

Not -- our willingness to add non-agencies?

Yes. I guess it's sort of why add -- why would you be adding the repo while sitting on the cash? Why not deploy the cash first and then add sort of the repo later?

(multiple speakers).

Two things. I think, one, as we have opened new lines up on the non-agency side, there has been certainly a desire to put some assets on those lines. There's been a lot of interest on the lending side.

But I think the third thing is that based on what we said about Fannie Mae pre-payments, those pre-payments will generate a fairly large principal receivable.

If the credit department of the bank gives you the repo, they want you to use it. They don't want you sitting on those unused lines. It doesn't do them any good. They have to allocate to potentially going to use it, they want to make the money.

So when they give you the line, you want to use it.

And again we look at the Fannie Mae being a three- or four-month situation. That is not going on forever. So we felt it was a prudent way to handle our cash positions and to be able to address the repo on the non-agencies which, again, became available to us.

So I guess sort of as you got into the back half of the year, past, post the GSE buyout, then you would have sort of expect that those cash balances to decline?

Right. We -- again, we -- as we just said we have already committed to buy $1.3 billion during the quarter and we will probably go through some more during the quarter. So yes but you can look for that.

But again it is very important to be very prudent. Again, when you look at the Fannie Mae program, and what they started to do, again they started in March with coupon 6.5 and higher, April 6 and higher, May 5 plus, and June 5 plus. So when you look at that and we look at our portfolio, we want to make sure we have enough cash to meet our obligations. And we certainly have had that.

Great. Thank you.

Mike Taiano with Sandler O'Neill.

Good morning. Just to hit on the agency MBS purchases question. So is it fair to say that the reason for the change is not because the prices have gotten all that much better, it is more just because you are getting a lot of cash flow from the Fannie Mae buyouts and you have to basically redeploy that?

That's part of it. But to be very candid with you, that is certainly part of the reason. But we also like the value that we see in that. But having said that, we also are being very selective. We are being very careful on the other side because, again, you might say to us where are our interest rates going to be over the next two or three years and, generally, they are not going to be lower than they are today. They are going to be higher. We recognize that.

That's, you know, we are not going into this blind. We recognize it. We put on some edges on the other side to address most of those problems and, again, I think to reiterate what Bill said a moment ago, we are 10 times leveraged.

So when you look at our leverage and you look at what we purchased and look at the existing portfolio and you put it all together, I think we are very well situated going forward.

We took the number below where we wanted to go just because if we could sell assets of [105] and we thought 25% of them were going away the next month at PAR, that was a good trade to make. But we have publicly said we wanted it closer to 7. And part of the reason we aren't comfortable buying these assets here, as you mentioned the prices have not pulled back. It is that the swap rates are so attractive.

Right. And the amount of leverage you anticipate on the agency and the amount of leverage you anticipate on the agency, MBS purchase, is it somewhere in the 6 to 7 times sort of range?

We really --. There isn't a bogey. Again our leverage is relatively low right now, as Roger mentioned, we permitted to purchase quite a number of securities, so I would look for that leverage number to go up and I'm really not prepared to give you a precise level at this moment.

Remember we said we expected about $1 billion more to run off. So purchasing $1.3 billion is only $300 million growth, relative to the capital in excess of $2 billion. So it is not a big change in leverage strategy.

Okay. And then just a question on the non-agency so I'm just curious to get your view on, I guess, the more recent changes to the [hand] program and you know, talking about principal reduction and sort of how you view that. Is that a good thing for MFA? How would that be a principal reduction? How does that flow through the securities? Is it come through as a pre-payment or how does that work exactly?

Our understanding is that most principal reductions, the first mortgages, will come through the credit waterfall as a loss. So you could say on one hand that that's a bad thing because it increases losses.

On the other hand, we model losses into our assumptions when we purchase securities. And we lay out at a table in the Q where we show what our credit discount is and overall the whole portfolio is about 28 points. But I can tell you that, in general, the loss of earnings that we assume just to get those numbers are typically on the low end, probably 40, 45% and on the high end as high as 70 or 75%.

So I guess the way -- nobody really knows, but I guess the way that we look at it is if you had principal reduction and let's say that the mark to market LTD on the loan was 150%, which is pretty high. And let's say that they forgive the principal down to 100, that's basically a 33% loss of earnings.

So if that modification works, that is, if the borrower does not re-default, then we probably used default numbers that were too high to begin with. But more importantly, the severities that we assumed were too high.

Does that make sense?

And so would that loan note stay on your books or how would -- that won't be effectively replaced by a new loan?

Well, the loans will -- unlike agencies, where any modification causes a pre-payment, in non-agencies the loan would stay in the pool. There would just be a loss associated with that mortgage.

So the loss would flow through the deal, but whatever was left, you know in that case if it was 150 and they [modeled] it down to 100, the 100 would stay in the pool.

Okay. Got you. So you are not getting the principal back. You would then just start to collect the coupon on the new loan?

That's right.

Okay, got it. Thanks a lot. That's helpful.

There is no recovery like there would be on a liquidation. But it's just a loss.

Daniel Furtado. Jefferies.

Thanks for your time. Quick question, on the -- couple of them -- on this $900 and change million in sales, did these occur before or after the GSEs announced the buyouts?

Well, some people like to point out how pressured they are. We sold in the fourth quarter. So clearly that was before February 10 but, honestly, most of these sales were done after the February [tax] announcement.

Okay. And then how about the thoughts from new non-agency RMBS issuance? And I'm not necessarily talking about the deal that was out in the space, but to the extent that that market comes back, is new issuance something that you would look to invest in? Or are you guys strictly vintage securities from a non-agency perspective?

I think what we did say is that we are going to look. We're going to look at both. We like the -- we would like to see the history. I think it makes Craig's job a little bit easier. He can make some very good educated guesses, if you will. But, again, good to rule out new originations. It doesn't make a heck of lot of sense. So we will look.

But right now, we are very comfortable and looking where we can see a little bit of history. And we can get a much better feeling about the value of the security.

Okay and then -- thank you for that. Then the decision to reenter this non-agency market -- I mean the agency market, excuse me. Is there anything technical from a REIT rules standpoint or anything that's causing this philosophy shift? Or is this just a philosophical shift on your part?

I wouldn't -- I can't answer the question exactly the way you ask it. So I will do my best to give you some color.

As you know, there's -- we have no [whole] pools. Right? And it's got about 55 -- what is called the 55% test. We don't get close to it. Because I have to sleep at night.

However, having said that, when you look at the amount of Fannie Mae delinquencies and when you look at this buyout program, you want to be sure. So as Bill had mentioned a moment ago, we anticipate maybe $1 billion in buyouts for this quarter and that's fine.

But, again, which particular pools are going to be bought out? Everything we have are whole pools. So you need to be careful and we are extremely careful with that.

Okay. And then so, I guess would this -- do you think you -- I mean in terms of that agency market, because I mean, I definitely like your philosophy that you were employing before, that if prices are too high, we don't like them. Now you are back in the market despite the fact that prices have [ground] higher.

You think this is -- this purchasing, assuming that pricing stays exactly the same, do you think this is like a 2Q event you replenish the portfolio and then kind of wait for pricing to get more sane? Or do you continue to look for value in that agency market 3Q and beyond?

Look at the philosophy of the Company. We bought -- what did we buy? You know some people have labeled us or other folks an agency REIT. Well we own a very nice portion of non-agencies that are doing very well for us. We are very pleased with the philosophy.

So again we could look at either/or. So we are not sticks on the agency, we are not fixed on the non-agency. It is a blend which is exactly what the press release says. And it says, where is the value? And again with that value on the non-agency side, we will continue, we will certainly continue to be active in that market.

Having said that, are there certain strengths relative to being a REIT where you have to have a certain amount of agencies? [Hopefully] the answer is yes.

But having said that, that -- we like the agency market. We always have. And we continue to. So that is not the absolute reason, it is a reason.

Got you. Thanks a lot for your time. Very helpful. Very helpful. Have a great day.

(Operator Instructions). Mike Widner with Stifel Nicolaus.

Thanks for taking the questions and thanks for the color. So I'm assuming the 10-Q will be out sometime this morning as you guys customarily do.

It will be out before the end of the day.

So let me just see if I can get you guys to give us a little more clarity on how you think about the relative attractiveness of the two halves of the business today. I mean, and I don't know how you want to express it, but maybe in terms of what kinds of ROEs you would expect, the type of leverage you're running on the agency versus the non-agency, and how you might see your relative allocation or expect your relative allocation of equity to go across those two pieces of the business.

You know, and this sort of ties in with the last question. So once, the point brought up was you need to have the majority of your assets and whole pool agencies. We've said this before and I know you guys all know that. And we are easily there, but as Stewart points out, if you lose $1 billion you don't know which $1 billion the agencies are going to prepay so you need to build in that cushion.

So I think we communicated that. The other thing is, we have added some credit risk which, because of the credit enhancement and because of the prices we pay, and because of the credit reserves we build in, we are very comfortable with. But a company like ours also gets paid to take some form of interest-rate risk. And some companies take a lot more and some take a lot less and we tend to be on a lot less, but we have to have some.

And Ron pointed out duration was 0.7 and you know our leverage is probably at the bottom of a level with everyone else and compared with the environment, we do have to accept some form of interest-rate risk. We are not growing it substantially, we are mainly replacing runoff.

So to the extent that we are buying versus selling, that is a difference, but it is not like "Gee, we are taking up multiples of leverage here."

So it's not a big change. Did that help you, Mike?

I mean, a little bit, but I guess I'm -- maybe if I throw out some numbers you can respond. I mean, if I look at the non-agency part of your portfolio over the prior couple of quarters -- and I haven't really crunched all of the numbers for this quarter -- but I mean, you are kind of in the 10, 11% ROE range and the non-agency part of the business.

And I was just wondering if that's kind of the range you are shooting for? If you are hoping for things to be better and you know we all know prices on that side have appreciated nicely and that's worked in favor of your book values. But with asset prices being a little higher, how do you think about that part of the business and the relative trade-offs of having to put more leverage on to get better returns, and just generally where do you expect that directionally to be heading?

Well, on the non-agency side that 10 to 11, that number is correct. But that's an asset yield. Right. That's not an ROE. So unlevered, it's 10 to 11. So add leverage, obviously, and that number can increase.

And then we've also discussed the current state of the non-agency market and where loss adjusted yields are. And those are probably in the 7 to 8% range. And as we've also said there is obviously leverage available on the non-agency side. Haircuts have been as low as 10% and on the high end, they're probably 30 or 35%.

Okay. Well -- I mean, that certainly helps. I'm just really mostly looking for the indication of how you view the relative trade-off between the two right now because obviously you are in a position where you have a lot of capital and you could overweight one part of the business relative to the other going forward. And you know just all else being equal, current prices, current assets, current things that you see out there, current expectations for the fed.

I mean, do you have a slight bias one way or the other? Or should we look for the mix of allocation, mix of equity allocation across the two parts to stay roughly the same?

I think you'll see roughly the same. I don't see a large differentiator one way or the other.

Okay, well, thanks. I appreciate it.

Matthew Howlett. Macquarie.

Thanks for taking my question. Just a follow-up on the hybrid business model. Longer -- longer term out, maybe next year into the 11s and 12s, can you eventually see spinning out MFR? I mean, given really the treated non-agency side what you guys came in at the right time and that appears to be going where you need to keep on adding more and more leverage to generate the double-digit ROE.

I mean, at some point would you -- do you feel like this is a business you can stick with over the long haul, or do you feel like at some point you are just going to go directly to the agency side?

First, we are not a hybrid REIT, all due respect. We are a real estate investment trust. We like residential. We invest in residential mortgage-backed securities. So for whatever that's worth, I think there is an extension.

And in terms of, in terms of MFR -- look, we like the business. We like the idea that we have done it under the umbrella of MFA as a wholly-owned sub. All of it, all of it makes sense.

You know, looking at the future, a lot of different things could happen. So would I rule it out 100%? No, let's never rule out something 100%, but the formation of MFR residential under the MFA umbrella is exactly -- looking in hindsight -- is exactly the way it should have been. And I'm very, very glad it is exactly what we did.

An advertisement for the Company being run as one, the non-agency assets that are yielding an excess of 10% unlevered have very little sensitivity to interest rates. So we decrease our interest rate risk by running that portion of the portfolio.

The other interesting thing -- and it's a coincidence -- in this quarter the premium amortization on our agency and the discount accretion on our non-agency were equal. So you had no impact on EPS due to prepays.

So again that's --. We see great synergy between the two. But the focus is residential mortgage-backed securities, agency and non-agency.

Got you, no. They certainly have been an excellent trade. I guess the question would be as the non-agency side continues to rally as the economy improves, if you have to use more and more leverage on that side or maybe even deep down more and more credit analysis, I don't know if you are taking down below senior pieces, you know, maybe part of the new, the new issue market if that ever comes back, we're starting to see it come back a little bit. Do you feel comfortable really diving down into the credit side at some point and taking really the credit risk that is going to go with that business over the long run?

We have been and we will continue to be very, very selective in terms of the securities. I don't know how many Craig looks before he determines that he is going to make a purchase.

So that philosophy is not going to change.

A little perspective. Between January and June of last year, the consensus was we were too early and starting in July the consensus was we were too late. So we don't think it is too late. We think yields in excess of 7%, loss adjusted unlevered, is still incredibly attractive in a zero interest rate world.

Great. Got you. And then, just on the forward purchases on the agency side, any more color? I know you said it was roughly [102]% you are buying stuff at. Any color on the coupon, the yield? You know (inaudible) analysis looks like new issue stuff. Any more color on that point would be great.

Ron will give you some color. The only thing I would like to say because we have bought and we're potentially [going to keep] buying, I just don't want to give out everything in terms of what (multiple speakers) our particular selection process might be. But Ron, at a $[25,000] fee if you can give some color.

We are seeing spreads north of 200 basis points, you know on a swap -- adjusted for swap basis? You know, I [left it before] the premium is slightly from what we bought so far, purchased so far is slightly higher than our average of 101.3%. It is a little over 102. But again we are seeing very good spreads especially in a very low interest rate environment and we are able to do very well in the swap market.

Is that, on that spread analysis at, I mean, is the asset a little more focused on the asset yield side or are you seeing stuff yielding over north of 320, sort of that area, when you run them against [your] curves?

We are seeing in the 300 to 320 range.

Greg Eisen with ICM Asset Management.

Regarding the agencies that you are going to be buying in this quarter, will they be of a similar character of the agency book that you already have? Specifically meaning focused on, I guess, the hybrid type loans as opposed to fixed rate loans or anything else?

You know we've always looked at the hybrid side of it and we continue to look at all sectors of the market. We are not limited in what we can look at. So I would continue to say that we certainly understand or appreciate the hybrid market. And we continue to look at other parts of the market as well.

Okay, second question and I stepped away from the phone for just a second so I don't know if you may have answered this when I was away from it. But you mentioned the adjusted yield spreads that you could earn on the new agencies, adjusted for swaps. And I think you implied that you are putting swaps on the books along with the new agencies. Is that correct?

Yes.

Okay, because I was kind of modeling out that you're just going to let your swaps run off for the rest of this year. Because it looked like you had from the beginning of the year around $800 million of swaps to run off which, by my figuring, it was added to earnings in a pretty nice way since you are paying over 4% fixed and receiving next to nothing on the adjustable side.

Could you tell us what kind of fixed base swap rates you are faced with now in the market?

Well, let's give you this -- because again we don't want to lay out our whole strategy. But it [started when we bid about hedge] about 40%. So that may be a bit approximation for you. To the extent we are adding new assets, around about 40%. But it shouldn't mess up your calculations. You do have the old assets going away just way -- those old swaps going away the way you've mentioned about $800 million this year.

And the new swaps you can look that up yourself, what's the swap curve, for three-year swaps and five years, I mean. You can get that. It's public data.

Okay, so you are buying on a three- to five-year side. That answers that question. And I guess my final question is kind of a hypothetical. If we just at the moment assume the continued strength in the economy and the market returned to some level of normality and the [9HZ] bonds that you hold continuing to price up in the direction of PAR, but not getting to PAR, yet at the same time the agency world somehow fixing itself even though Fannie and Freddie are wards of the government, and you are able to buy reasonably priced agencies back in the one-to-one range and yet your non-agency book moves back up to 85, 90% of PAR.

Could you see, on the other hand, selling off non-agency bonds to take the capital gain and redeploying back into a more leveraged agency portfolio to change the character -- the whole character of the portfolio again -- as the environment changes that way?

So I guess I should be a wise guy and ask you to repeat the question. Look, we -- it's kind of a question that I was asked before. Relative to you know, MF Residential, would we ever [spit] it out? And again the best way I can answer your questions and the question that was asked previously is that we really liked the idea of having one asset class complementary to the other.

Again, the prepays go up generally, of course, the housing sector -- one side of us, we are going to pick up close to 30 points and the other side of us we were going to have some premium amortization. So one is a terrific buttress against the other. So we really enjoy that.

Having said that, you can never say never. You know, using your thesis of all of a sudden all of the bonds Craig had purchased who were at that average price anywhere from $65 to $70, became PAR, sure, we would sit down and take a real good hard look at that and say, "Hey, does this make some sense, we take those gains?"

So we always look into -- you look at that, but with hypothetically, which is how your question was posed, hypothetically we would look at it. But right now, I will tell you we are very comfortable with the strategy that we have engaged in now for the last couple of years.

The one thing I would add on to not agency side, we do look at the entire portfolio and all the bonds very frequently. We have a pretty regular surveillance process. And you will see in the Q we actually did sell one non-agency bond in the first quarter.

Basically the reason for that was we saw the bond trade in the market. It was a bond that we owned. We look at our assumptions that we used to purchase the bond and felt that we were still very comfortable with those assumptions. And at the implied market pricing the bond was about a 2% yield. At least in our mind.

So that made sense to sell. It is generally not what we would do, but we look at that.

So in your scenario where the market improves and the prices grind significantly higher, is that just because prices went higher or is that because the underlying technicals or the underlying fundamentals have improved? Because if that is the case then the yield on those bonds still may be very attractive.

Got you. I appreciate it. Thanks for answering my questions.

Bose George, a follow-up, with KBW.

I just wanted to ask about the possibility of doing a re-remic transaction or is that kind of on the back burner given the strong re -- available [with the] repo in non-agency market?

We continue to look at it. I actually pulled up some numbers because we get asked about this on all the earnings calls. And when this re-remic or resecuritization market first came about, which is just about a year ago, it was in March of '09, the yield on the AAA bonds was 12%. By June it was about 8.5%. In September it was about 7.5%. And in December, it was 6, maybe a little bit inside of 6.

So as we've said before, the market for those bonds continues to improve. There have been some innovative structures that have seen very, very attractive levels.

So we continue to look at it. With the repo market there is not the same sense of urgency maybe that there would be if the repo market were not as robust as it is. But suffice to say, we are very much on top of that. I think it is probably safe to assume that the repo market for financing is a short to intermediate term strategy and the resecuritization strategy would be a longer term solution.

Okay. Great. Thanks for that.

Mr. Zimmerman, there are no other questions at this time.

Well, I'd like to thank everybody for being part of the call this morning. We look forward to speaking with you next quarter. Thank you again. Goodbye.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.