MFA Financial Inc (MFA) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the MFA Financial Inc. fourth-quarter 2010 earnings.

At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions given at that time (Operator Instructions). And as a reminder, the conference is being recorded.

I would now like to turn the conference over to our host, Alexandra Giladi. 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 reflects management's beliefs, expectations and 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 -- those relating to changes in interest rates and the market value of MFA's investment securities; changes in the prepayment 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 qualification as a real estate investment trust for federal income tax purposes; MFA's ability to maintain this 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 10-K for the year ended December 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 from those projected, expressed or implied in any forward-looking statements it makes.

For additional information regarding MFA's use of forward-looking statements, please see the relevant disclosure in MFA's annual report on Form 10-K for the year ended December 31, 2010, and/or the press release announcing MFA's fourth-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's fourth-quarter 2010 earnings call. With me this morning are Bill Gorin, President; Steve Yarad, Chief Financial Officer; 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; Kathleen Hanrahan, Senior Vice President; Shira Finkel, Senior Vice President; and [Goodmather Christiansen], Vice President.

Today we announced financial results for the fourth quarter ended December 31, 2010. Recent financial results and other significant highlights for MFA include the following -- our fourth-quarter net income per common share of $0.21 and core earnings per common share of $0.22.

Overall, the value of MFA's assets increased in the fourth quarter. However, due to the fact that, as in prior years MFA, declared two common stock dividends within the fourth quarter totaling $0.46 per share, our book value per common share was $7.68 at the end of the fourth quarter, versus $7.83 at the end of the third quarter.

In the fourth quarter we continued to grow Non-Agency MBS portfolio through the purchase of approximately $509.8 million of Non-Agency mortgage-backed securities, including mortgage-backed securities underlying Linked Transactions. In the fourth quarter, we allowed the Agency mortgage-backed securities portfolio to decline. Agency MBS run-off amounted to $496.3 million while we acquired $362.2 million of Agency mortgage-backed securities.

In the fourth quarter our Agency mortgage-backed security portfolio generated unlevered yields of 3.87%. At December 31, 2010, we owned $5.9 billion of Agency mortgage-backed securities, consisting of $5.3 billion of hybrid and floating-rate MBS, and $665 million of 15-year fixed-rate MBS. These agency securities had an average cost basis of 101.8% of par.

For the fourth quarter ended December 31, 2010, we generated net income available to common stock of $59 million or $0.21 per share of common stock. Core Earnings for the fourth quarter were $61.9 million or $0.22 per share of common stock.

On January 31, 2011 we paid our fourth-quarter 2010 dividend of $0.235 per share of common stock.

I thank you for your continued interest in MFA Financial, and at this time I would like to open the call for questions.

Thank you. (Operator Instructions) Steve Delaney with JMP Securities. Please go ahead.

Thank you, good morning. I was wondering if you guys could comment a little bit on the agency purchases that you made in January. Could you give us a little color on the types of securities that you purchased? Whether they were hybrids or 15-years?

Sure, I'm going to turn that over to [Goodmather].

Hi, Stewart. Yes, it was a combination of both hybrids and 15-year fixed mortgages.

Okay, I mean, can you give us some idea about maybe the weighting between seasoned hybrids versus 15-years?

Sure, Steve, it's Bill Gorin. The majority of these incremental purchases were the 15-year agencies. We are comfortable there with the returns, the duration. While it is 15-year fixed, it is amortizing, and they are prepaying.

And you are buying those for near-term, sort of current settlement, not forward?

Correct.

Okay, great. And as far as the spread, I mean in just the agency book, it dipped a little bit in the fourth quarter. I mean, obviously we know you let the portfolio run down a little bit, but the spread dropped on the agency to 153 in 4Q from 161.

We saw a couple people have a slight temporary kind of spike in speed in the fourth quarter because the low mortgage rates in September and October. Can you comment on -- like that trend -- did higher speed in the agency maybe cause some of that? And if so, is that something you expect to kind of reverse as we move down to the first quarter?

Okay, so yes, speeds definitely did increase in the fourth quarter. You saw it -- rates reached absolute lows towards the end of the third quarter and early in the fourth quarter. So on the agency [split side], speed definitely increased.

You know, since then, rates have backed up dramatically. And you look at the [refinance acts] and also take into account seasonality going forward, you would expect us to trend down into the first quarter and forwards.

Okay. And obviously I think the spread, obviously, on your new purchases is probably going to be incremental to that, as to that blended legacy spread as well.

Shifting over, one question on the non-agency side if I may, you put a nice table in here reconciling the linked transactions. The tables aren't numbered, but I'm sure you'll know which one; it's the one where you just, on the non-agency RMBS, you go from GAAP to non-GAAP. And the linked transactions -- it's about 700-and-some million -- but for the quarter you had an average linked balance, I think, of $622 million in RMBS. And the spread there on those transactions was 5.15 versus your GAAP spread, I guess on just the RMBS that were not linked, was 7.31. I assume that reflects, maybe, that some of these linked transactions are newer transactions and that lower spread reflects higher prices in the marketplace.

Is that 5.15 -- can you comment on how that spread on the linked transaction kind of compares to what is available to you today in the market on the non-agency side?

Sure, Steve, it's Craig. You are right. I think it's probably a function of two things. One, they are newer purchases. And two, in some cases the linked transaction may be higher-quality assets, may be investment-grade-rated assets, so they may have slightly lower yields as well.

As far as sort of where those spreads are now, I would say the paper that we buy today probably yields anywhere from the low six-handle yields to the low seven-handle yields.

Okay.

And financing -- rates have continually tightened in. So I would say financing can be as tight as LIBOR plus 100, LIBOR plus 150 these days, starting to maybe look a little bit expensive. So somewhere between plus 100 and plus 150.

Okay. Okay, good. I guess the benefit is, too, that even though the yield is lower, it looks like you're using -- at least on the linked transaction -- a little higher leverage multiple there on those transactions versus the others.

Yes, and again that goes to the type of the asset. So the better --

-- the quality.

-- of the assets, so for instance investment-grade-rated assets, will typically have lower haircuts, so the haircuts could be as low as 10% on investment-grade-rated assets.

Okay, thanks very much.

Bose George, KBW.

Good morning.

I know this will be out in your 10-K, but can I get your duration GAAP numbers?

Yes, so -- duration for the entire portfolio of 80 basis points.

And just the way you break out the, whatever, the net assets versus liabilities and the net GAAP?

As a duration, liability duration?

Yes.

The duration of the assets is close to duration of the liabilities (multiple speakers).

Your 10-K is out today, which I can obviously wait for it too.

Oh, okay. I don't -- can you break it out?

Yes, I know it is in the 10-K, and why don't we do this? We'll [show and look it up] as we go along, but it's in the K, and we will try and answer the question as we go along.

Yes, no problem. And, actually, let me just switch to an accounting question on the Re-Remics. I briefly talked to you guys about it earlier, too, but just to clarify; so on day one, when you guys do the Re-Remic, all the assets show up in that transfer to a [VIE line] and there is no liability. As you start selling the AAAs, the liability shows up as securitized debt liability. I just wanted to make sure what happens on the asset side. Is there any change on the asset side?

As far as what happens when we do the Re-Remics transactions, we obviously transfer the assets into a trust, a VIE, which we consolidate, and simultaneously the A1 portion is sold off into the marketplace to third-party investors.

So when we consolidate that trust, we reflect the assets, that $700 million that you referred to in the -- MBS has it transferred to consolidated VIE. And that's on the assets on that balance sheet. And the liabilities that are sold to the third-party investors, approximately $220 million, related to the A1 -- that's what's showing up in the securitized debt lime on our liabilities side of that balance sheet.

And the underlying assets, it's as if they never really were sold, so as they continue to pay down and as they change in value, that's reflected in our financial statements -- the asset side of our balance sheet and through our income statement for the interest income, and the change in value goes through equity, through other comprehensive income.

But I was just wondering, like, if you sell, say, decide to sell further down in that securitization, like, how does that show up on the balance sheet?

So to the extent that if there was in the future a sale of another class of securities by the trust, and we continue to consolidate that trust, then you would see an increase in our securitized debt liability.

Okay, so that's the only change?

But Bose, absent that, that 221 securitized debt number, that number will decline as that A1 class gets prepayments. And remember, the A1 class gets all the prepayments from the entire transaction.

Okay. Okay, great, thanks a lot.

Jason Arnold, RBC Capital Markets.

Just had a quick question on the $540 million of agency MBS purchase in January. It certainly seems well-timed, given where prices have gone, but I'm curious if prices have gone down enough on this side for you to refocus capital deployment to the agency side of the portfolio? Or is this more just simply opportunistic purchases?

So, Jason, let me answer that. I mean, basically we used to have a $10 billion agency portfolio, and we allowed that to decline to below $6 billion. I would say, due to the fact that the absolute prices and the absolute yields are more attractive now than they were late last year, we probably will be growing the agency book closer to $6.5 billion.

Okay, over -- for the quarter, I guess, or just in general, as you balance that out with the non-agency?

That's over the course of the quarter.

Okay.

You should be -- so that's growth from about $6 billion to about $6.5 billion over the course of the quarter.

Okay, terrific, thank you. And then I guess just one other quick one. If you could briefly remind us of the notional value of swap maturities that are coming up here in 2011?

About $800 million. That's about $200 million a quarter.

Okay, and then I would assume that the pay-fixed rates are all north of 4% on that?

Probably high in the threes or [some towards] --

Okay, terrific. Thanks so much, guys.

In other words, that will be in the 10-K, which will go out later today.

Excellent, thank you.

Mike Taiano, Sandler O'Neill.

Good morning. Just had a question on the table where you guys break out the spreads for both the agency and non-agency portfolios. I'm just trying to reconcile -- it looks like, overall, your spread remained relatively flat at 2.74%, but you had a fair amount of compression in the pieces. So I was just curious as to how do I reconcile those two?

I'm not sure -- what's your question?

So, you know, the spread for, say, the agency book went to 1.53% -- I think it was 1.61%, and the non-agency was 6.77%, I think it was close to 7.5% last quarter?

Right. And then the agency portfolio was obviously much larger than the non-agency portfolio.

Correct, right. Okay, so that's [dictatable] -- you still were only down a basis point or so, but that is what the reason is?

Yes.

Okay, okay. And then just secondly on, just where you guys feel -- how you feel about leverage at this stage. And you know, a number of your competitors have been out raising capital over the last several months. And I was just curious, you seem like you are under-levered, at least on the agency side, relative to peers. Just curious as to what your thoughts are there.

That would be a fair statement as of December 31.

But I will tell you, though, in terms of the leverage -- and again I think we're comfortable where we are. However, as Bill said a few moments ago, we've seen some value on the non-agency -- excuse me, on the agency side -- and we continue to see some value on the non-agency side. So we will continue to look at -- look at the leverage. We basically do that every day anyway. But again, the fact is that as these opportunities continue to present themselves, we will take advantage of them.

Incrementally, we are increasing the leverage from both the agency and non-agency portion of the portfolio. But it's incrementally.

Great, thanks a lot.

Henry Coffey, Sterne, Agee.

Good morning, everyone. Looking at page 3, which I found very helpful, about 35% of your agency assets have sort of a -- less than two years to reset. And as you start to lay on more agency assets, are you likely to keep the swap book right where it is, given the relative sort of short duration of the existing portfolio? Or how are you thinking about what level your swaps need to be at as you put on new assets?

So, Henry, part of our swap book -- which is pre-existing -- was based on a much larger agency portfolio. As we've mentioned in our last phone call, we are probably over-hedged which is to the detriment of our spread in the agency.

Right, I agree.

So incrementally we are adding more agencies than we are adding swaps. So the swap ratio will go down.

Are you also, though, likely to shorten the duration of those swaps as well?

No, not -- to the extent we've been adding 15 years, no.

And you made some fairly encouraging comments about the pending March quarter. Everything you've said so far says we should look at modestly stronger numbers. Do you want to add anything to that, or --?

Again, I was just -- it was based on where we are today. I would think that the next quarter should continue to be a positive quarter. But to give you any further guidance is very, very difficult. And we would prefer not to do that.

Thank you.

The big wildcard is prepays (multiple speakers) --

(multiple speakers) -- prepayments, and that's really where we are, and it's kind of difficult to forecast.

Based on what we've seen is, there should be a benefit from the incremental assets we've been adding.

Are you comfortable talking about your January and February speeds, or would you rather pass on that?

Well, we do expect in general that the speed should come down going forward, but I don't feel comfortable giving a specific number on it like that.

Thank you, thank you very much.

[Joe Plevoric, Snyder Capital].

I guess a question on new non-agency purchases. How much leverage do you plan to put on new purchases? And is it more attractive doing repo or Re-Remic at this point?

As far as leverage on new purchases, again, it really depends on the asset. So the better-quality assets have lower haircuts, and therefore we could have higher leverage than the lesser-quality, which might still have 30% haircuts or so.

And as far as repo versus Re-Remic, you know, they are all sort of interrelated. And as Steve Yarad said earlier, the Re-Remic transaction is really just a financing. So we look at the two of them and we use repo on retained securities from the Re-Remic that we did.

You know, we have more counterparties -- I think we have 11 counterparties right now -- we've seen some longer-term repo on the non-agencies. So the financing is really very liquid right now. And we have increasingly more attractive and longer options.

That's great, thanks.

Daniel Furtado, Jefferies & Company.

Good morning, everybody; thank you for the time. The first question is, the non-agency purchases in the quarter -- are those kind of [fair-way] with what you've been doing in the past, senior cash flow type stuff, or are you starting to move further down the stack in those purchases?

They are generally the same stuff -- the senior-most security in their respective deal structures.

Got you. And help me understand kind of what would trigger your decision to sell further down in that Re-Remic. Is it kind of absolute yield on the next slice of securities, or just -- you know, when you thinking about the game plan of when or what would cause you to sell further down in that deal, what is the primary driver there?

I would say it is just purely economics, right. So as the A1 piece continues to pay down, the A2 piece gets shorter. So the shorter it gets, obviously the tighter the execution. So right now we are very happy repo-ing those -- the A2 tranches is also triple-A rated, so we are very happy to repo that. It would obviously be more expensive if we were to sell that than repo is. But at some point we continue to look at sort of where that might trade as it gets to be a shorter and shorter security.

Got you, okay, understood. And then finally, a question on agency leverage. Can you help me understand the kind of -- just, again, just how you think as a management team? Are you more comfortable taking leverage up as you see opportunities in the market from a spread perspective? Or are you kind of more focused on prepays and the cash drain there from a repo -- I'm sorry, from a leverage perspective? I guess, in other words, are you more likely to take leverage up if speeds slow or if yields widen, all things equal?

You have to have a view on interest rates, obviously, and what you think might or might not happen. So in terms of us wanting to buy, buy agent, or purchase additional agency assets, in terms of the leverage, it's really those opportunities. So the opportunity is there, yes. And as I think Bill said a few moments ago, incrementally we are going to increase the leverage on both our agency and non-agency side. But it's a matter of the particular security that you buy, the niche within the agency part that you are willing to acquire and where you think rates are going to go. So again, you can expect that on an incremental basis that our leverage will continue to go up. But again, that will be on an asset-by-asset type basis.

By the way, you talked about two variables. [You were] talking about the variable, your expectation of prepayments, and spreads. There really is a third variable which we think [fifthly] -- the absolute price and the absolute yield, because hedges tend not to be perfect.

Got you, got you. Understood. Alright guys, hey, thanks again for the time, take care.

[Matthew Kelly], Morgan Stanley.

Thanks, guys. I'm just hoping you can give us a little color on the competitive space within buying non-agency RMBS now. How are you seeing that kind of trend over the last couple of months versus end of last year?

You know, I would say that prices have continued to sort of grind higher there. But that being said, there's still a lot of paper for sale every week. So from a supply standpoint, I think we still have plenty of paper to look at; that's the good news. The bad news is that prices are incrementally higher.

Okay, and within that space, then, have you shifted any of your strategy from one side of the paper to another?

Not really. You know, I would say if you look at the average composition of what we own, it really hasn't changed that much over time.

Okay. And then just one follow-up for me. Any reaction from you guys at first glance from the GSE White Paper on Friday? How that kind of impacts you? Or what you think kind of next steps are there?

You know, I was asked that question before the White Paper and basically had the same answer. It seemed to me to be somewhat [clear] in terms of [G-fees] going up, and the risk parameters on both Fannie Mae, Freddie Mac or whatever the new entities may be in terms of privatization and where that's going to stand. What I see going down the road for MFA relative to the various changes that will probably occur over time, and that's the key, it's over time was -- I was fortunate enough to be down to Washington about a month or so ago. And the question was, is this change going to occur over three months, three years? Is it -- one of the congresspeople said maybe 10 years. Well I don't think it will be 10 years. But it will probably be in anywhere from a two-to-four year period of time that we will see some of these, some of the changes.

And for MFA, I think these are all positives, whether they are agencies or agencies as we understand them today -- if they are non-agencies -- and as you know, the conforming loan limit looks like it's going down as of October. Again, we are certainly in a position to be able to do the underlying analysis of agency securities, non-agency securities.

So, no matter what form they come in, I think these are opportunities for us. And again in my career, whenever there has been some confusion or changes, that always brings opportunity.

Okay, great. Thanks, guys.

Jim Ballan, Lazard Capital Markets.

Great, thanks a lot. I was wondering if you could help me out a little bit with understanding the net interest spread with these MBS, including the linked transactions. Just my thought is that on the net yield side, you are including the incremental assets from the forward purchases -- or I'm sorry, the linked transactions -- and that causes the yield to be higher there. But maybe you could help me out with that calc.

And also just, on the cost of funds side, just maybe how you get to the differential there between the number, including the linked and not including the linked transactions?

[Brook] is going to answer that question. But before we do it, a little housekeeping. Because we've previously gotten questions about linked transactions. Let me repeat the explanation. It really -- it simply is, if we acquire a non-agency and repo it at the same time with the same counterparty, rather than counting the non-agency MBS as an asset and the repo as a liability, they are netted.

Economically they are separate, business-wise they are separate; this is the accounting convention we've been told is necessary. It does cause some confusion, but basically it's the same. Some of the newer non-agencies we bought -- [I have to be shown as linked] -- So I don't know if that helps you or not. Hopefully it helps somebody, but (multiple speakers).

Are you looking at the table on page 8 of the press release?

I was just looking at the text of the -- I think my pages are different than what some of the other people have been are talking about. But just the paragraph that starts "during the fourth quarter of 2010, that these interest earning asset portfolio net yield was 4.78 etcetera etcetera".

Yes, so here's the difference. The difference is, if we are using GAAP, we are excluding the MBS that are linked. So therefore you are excluding non-agency assets and non-agency asset yield more than agency assets. So by cutting out a component of the non-agencies, that's why the overall GAAP yield is lower than the yield if you are including all the non-agencies. Does that help you, Jim?

Yes. But I guess, though, the one question I still would have is, shouldn't the net number be the same? Or what's the difference in the net number, then?

Because it doesn't show up as a spread component. The income from the linked transactions (multiple speakers) --

Jim, if you look at our income statement and you look at our interest income and interest expense on our unlinked transactions, if you like -- the agencies and sort of non-agencies that are not accounted for as linked transactions -- that excludes the spread on the non-agencies that are accounted for as linked. And if you look further down our income statement, you'll see the gain on linked transactions (multiple speakers) line -- that does include the underlying spread on those transactions that are accounted for as linked, in that presentation. If you look at the text, we show both. We show it on a non-GAAP basis as well.

So if you just look at our income statement, the spread is actually on two lines -- on the linked transactions, it's in the gain, on linked transactions, and on -- the rest of it is just in the normal sort of net interest expense line.

Okay, I've got it. I've got it, thanks, that's helpful. And just one other thing, just -- can you give us the net accretion and amortization number for the quarter?

I think it is slightly positive. (multiple speakers) It's 373,000, so it is basically breakeven -- the premium amortization of discount accretion is about the same.

Got it, got it. Perfect, thanks a lot, gentlemen.

Gabe Poggi, FBR Capital Markets.

A quick question in regards to the price appreciation on the non-agency side. Do you guys think this -- or how do you think about it? Is this indicative of a chase for yield, or are you seeing better underlying credit quality? And if it is the latter, how do you guys think about what you guys own? And then the potential for a reversal of the reserve you guys have? Thanks.

Gabe, it's probably a function of several things. One is that, you are right -- to some degree it is a chase for yield. We have seen some slight improvements or at least leveling off in 60-plus, but I think the jury is really still out as to, ultimately, what the credit component of that is. It's good to see. But I think there's a lot of wood still to chop there.

We did -- this will be in our K -- we did reverse about $17 million in the fourth quarter from our credit reserve. So we continue to look at all those securities, security by security.

The other thing to keep in mind -- and I think this has also contributed to some of the price run-up -- is the availability of leverage. Leverage just gets more and more available, and in some cases for longer terms. So I think that also has to have some effect on the market pricing.

Okay, that's helpful. Thanks, guys.

[Isidore Moskow], a private investor..

Good morning. I'm calling in regards to a question I had -- is, the earnings for the last quarter and the dividend that is going to be paid -- I must have missed it in regards to what you all said earlier.

You're talking about the fourth-quarter earnings?

Yes, fourth quarter. Is the fourth quarter ending 12-31?

Yes, it is.

Yes, and earnings for the fourth quarter? Net earnings?

The core earnings were $0.22.

$0.22, that's what I wrote down. The dividend will be paid of $0.23?

I'm sorry, the dividend was paid at the end of January.

Oh, the end of January.

January 31.

And that was $0.23?

$0.235.

$0.235, okay. [For it takes 92] -- so does that vary on each quarter as a general rule? A little bit?

You're asking does the dividend vary, is that your --?

Yes, yes.

The dividend will vary based on the taxable income of the company. That's what it's based on. That's what the dividends are based on.

By the way, thanks for the question. And one thing I'd like to add is, as everyone knows, we are going to look to declare our dividend during the quarter rather than after the quarter. It has sort of become the industry norm. So going forward we will be announcing first-quarter dividend within the first quarter rather than right after the first quarter.

Right, so say [year one] a yearly basis then you got the end of March and then end of June?

Yes, that's -- (multiple speakers).

All right, fine. Thank you very much, I appreciate it.

Matthew Howlett, Macquarie.

Could you tell if the lock-out feature on the Re-Remic you did -- what was on the subs -- how long until they start receiving cash?

Well, I guess the lock-out, if you will -- the A1 tranche, which is the one that was issued to third-party investors, it gets all the principal, and so it is paid down. So I think when we first issued it, I think it was $248 million, and it was down to $221 million at the end of the year. So that's three months of pay-downs. But all the principal will go to that A1 until it is completely paid down. After that, then all the principal will go to the A2 until that is paid down, and so on and so forth.

What's the average life of the A1, Craig?

The average life was 1.3 years.

(multiple speakers) got you, okay. And then everything goes down in sequential, subject to just standard triggers? Is that typically how it works?

Yes.

Okay, and then on -- just on as leverage goes up on the non-agency side, any due -- more either financial leverage or more of these Re-Remic -- I mean, do you hedge duration risk in that portfolio? How do you look at that going forward?

Well, you've probably noticed, we added a table in the press release where we look at -- on page 3 -- where we break out agency and non-agency. So it's a good question. It's something that we talk about all the time.

I think to this point we view the pricing on non-agencies as much, much more sensitive to credit than it is to interest rates. But we do obviously keep a keen eye on which of those assets are longer assets.

So the short assets, if it's less than two years -- and I think that's 57% of the market value of the non-agencies -- so those are fairly short assets. And the coupons on those assets will reset. So those, we wouldn't worry so much about. It's the longer stuff. So we keep a keen eye on it.

Again, up to now we really think these assets have much more sensitivity to credit. And in fact look at what's happened to interest rates in the last two months or so, and look at the pricing on non-agencies.

Right, so it offsets -- it sort of offsets that risk -- the forward curve? Is that sort of how the -- the tightening has offset any risk to the forward curve?

Well, yes, I guess you could say that. I mean, I think they sort of move in opposite directions, right?

Right, right, right.

So I'm not sure that we expect them to always move in opposite directions, but it's certainly what we've seen in the past.

I mean, we've been saying this for two years. We think there is a negative correlation between these very high-yielding assets and interest rates.

Got you. No, it looks like a great trend. Just, didn't know what you would consider -- I mean, as the requirement for leverage increases with these [new non-agencies] would you look to go to floaters? Would you look to buy fixed rate with swaps? Just to lock things in as sort of that credit discount dissipates as spreads tighten on the upside -- I mean, would you have to go to hedging in order to get the ROEs that you [want and over]?

I don't think it's unreasonable to expect at some point in the future that we might begin to hedge those liabilities, again, on the longer assets to reset or the fixed-rate assets.

But you're not there. Right now it's not -- you're not there yet?

Correct.

Great, and just a last question, just on that G&A run rate, anything you can tell us on what you expect in terms of '11?

The run rate going forward for the G&A?

I'm sorry, what was that?

Your question is on the run rate going forward on the G&A?

Yes, right.

Well, you know, I think you've seen our disclosures for the fourth quarter -- that G&A has been ticking up slightly as we've expanded our analytic capability on the non-agency portfolios, and we've taken on some new hires. And we did have a couple of hires late in the year in the fourth quarter, and we will get the full year of those next year.

So I don't want to throw a number out at you, but it may incrementally go up as you had the full-year effect coming into that.

Yes, great. Thanks, guys.

Thank you, and next we will go to the line of [Michael Garber], a private investor.

Yes, I appreciate your time. I was going to ask you, on your longer-term ARMs and your fixed rates, what is your all's exposure compared to the market as far as subprime assets?

Well, on the non-agency side we don't own any subprime assets.

And on the agency side, as you know, it is Fannie and Freddie.

Okay, I appreciate that.

Okay, thank you. And there are no further questions at this time. Please go ahead.

Well, I want to thank everybody for joining our call. We look forward to speaking with you next quarter.

Thank you. Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation; you may now disconnect.

e year in the fourth quarter, and we will get the full year of those next year.

So I don't want to throw a number out at you, but it may incrementally go up as you had the full-year effect coming into that.

Yes, great. Thanks, guys.

Thank you, and next we will go to the line of [Michael Garber], a private investor.

Yes, I appreciate your time. I was going to ask you, on your longer-term ARMs and your fixed rates, what is your all's exposure compared to the market as far as subprime assets?

Well, on the non-agency side we don't own any subprime assets.

And on the agency side, as you know, it is Fannie and Freddie.

Okay, I appreciate that.

Okay, thank you. And there are no further questions at this time. Please go ahead.

Well, I want to thank everybody for joining our call. We look forward to speaking with you next quarter.

Thank you. Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation; you may now disconnect.