AG Mortgage Investment Trust Inc (MITT) 2013 Q4 法說會逐字稿

Welcome to the AG Mortgage Investment Trust fourth-quarter 2013 earnings call. My name is Sylvia and I will be your operator for today's call. (Operator Instructions). Please note that this conference is being recorded. I will now turn the call over to Lisa Yahr. Lisa Yahr, you may begin.

Thanks, Sylvia. Good morning, everyone. We appreciate you joining us for today's conference call to review AG Mortgage Investment Trust's fourth-quarter 2013 results and recent developments. Joining me on today's call are David Roberts, our Chief Executive Officer; Jonathan Lieberman, our Chief Investment Officer; and Brian Sigman, our Chief Financial Officer.

Before we begin, like to review our Safe Harbor statement. Today's conference call and corresponding slide presentation contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are intended to be subject to the protection provided by the Reform Act.

Statements regarding the following subjects are forward-looking statements by their nature: our business and investment strategy; market trends and risks; assumptions regarding interest rates and prepayments; changes in the yield curve; and changes in government programs or regulations affecting our business. The Company's actual results may differ materially from those projected due to the impact of many factors beyond its control.

All forward-looking statements included in this conference call and the slide presentation are based on our beliefs and expectations as of today, February 27, 2014. Please note that information reported on today's call speaks only as of today, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript readings.

Additional information concerning the factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in the risk factors section of the Company's periodic reports filed with the Securities and Exchange Commission. Copies of the reports are available on the SEC's website at www.SEC.gov.

Finally, we disclaim any obligation to update our forward-looking statements unless required by law. With that, I will turn the call over to David Roberts.

Thank you, Lisa. Good morning. We are pleased to report that we significantly increased our core earnings per share in this fourth quarter to $0.67 per share compared to $0.45 per share in the third quarter. On last quarter's call we talked about the steps we had taken to rebalance the portfolio. At that time, we said we believed these steps would lead to enhanced earnings capacity, and they did.

As Jonathan and Brian will discuss, we continued to refine the portfolio during the fourth quarter and since year-end. Notably, we have been able to add credit assets we believe are attractive, and we have actively managed our interest rate hedging. Both of these initiatives have increased our net interest margin while we maintain what we believe is a well-balanced and diversified portfolio.

This fourth quarter's core earnings per share include the contribution of $0.11 per share resulting from the early payoff of our first commercial whole-loan investment. This had a make-whole feature, which is common to loans of this type. Since the quarter's end, we have made a second commercial whole-loan investment and have a number of additional commercial whole loans under consideration. These are proprietary transactions sourced from Angelo, Gordon's real estate platform.

With that, I will turn the presentation over to our Chief Investment Officer, Jonathan Lieberman.

Good morning and thank you for joining us. Thank you, David. 2013 was a challenging year to navigate the fixed-income markets and to manage a mortgage REIT portfolio.

As we discussed in prior quarterly conference calls, we undertook several steps during the middle of last year to stabilize our portfolio from the impact of significant volatility in interest rates in Agency MBS markets. This included shrinking the size of our portfolio, reducing leverage, and actively adjusting the size and composition of our hedges.

During the fourth quarter we began the process of increasing in optimizing earnings capacity for the Company. Our goals during the final quarter of the year and throughout 2014 will be to continue rotation of capital into credit assets; protection of book value; and restoration of optimal earnings capacity for the Company.

Now, turning to book value, while our book value did decline slightly quarter over quarter, it has since improved during the first two months of the year. We don't view the book value decline of approximately $3.4 million on a portfolio in excess of $3.7 billion to be a material change in valuation. Book value for the first two months of 2014 has remained in the mid-$19 range, with December 31 valuation being at the lower end of this range.

Now, before turning to the portfolio, I'd like to spend just a few brief minutes discussing our thoughts on the 2014 outlook, which are outlined on Slide 5 of our deck. Although the unusual harsh winter seems to have negatively impacted some recent economic data, we do expect the Fed to stay the course and wind down QE3-related Treasury and Agency MBS purchases by mid to late this coming year.

Though on a historical basis the pace and strength of the US economic recovery is unremarkable, we do still believe that the US economy is firmly in recovery mode. And while housing probably will not enjoy a repeat of its stellar 2013 gains, we do believe home price appreciation will continue -- slower, and at a different pace in different levels across geographies; but generally, the direction will be for appreciation.

With regard to interest rates, we believe the Fed's comments indicate that the front end of the interest rate curve should remain relatively anchored. Further out on the curve, we would not be surprised to see ongoing volatility stemming from mixed economic data.

Over the past several months some of the lingering unknowns hanging over the mortgage market have been resolved. In addition to the obvious onset of taper, Janet Yellen has been confirmed as the new Fed Chairman -- Chairperson. Mel Watt has been confirmed as the new head of FHFA, and the debt ceiling is no longer an imminent issue.

Despite this, the news out of DC always has the potential to rattle the markets, whether it is a rumor of a new mortgage initiative out of Mel or an unexpected comment from the Fed. We therefore will continue to closely monitor the DC landscape.

So now, moving on to our portfolio, let's start with Slide 3, which details some of our top-level metrics from the quarter. As I mentioned, our book value declined slightly from $19.26 as of 9/30 to $19.14 as of December 31.

Our portfolio stood at approximately $3.7 billion, of which just shy of 35% on a gross asset basis was invested in credit securities. This figure is up from over 22% at the end of 2012, and we do expect a migration of capital into credit to continue.

During the quarter we took off roughly $500 million in swaps, thereby reducing our overall hedge ratio from 114% of Agency MBS repo notional to 99%, which also equates to a reduction from 84% of total repo to 67%.

NIM, net interest margin, benefited from a better mix of assets, lower hedging, and lower funding costs. Risk-adjusted return on equities before deducting G&A and management fees for the new portfolio acquisitions generally exceeded 13% returns throughout the quarter.

Our leverage declined modestly from 4.53 times to 4.42 times, predominantly in response to our growing credit allocation. Over the course of the year our portfolio approach to navigating the challenging markets resulted in a smaller, less levered portfolio versus the end of 2012. A year ago, in 2012, we reported running leverage of 5.26 times with a gross portfolio size of $4.9 billion, in contrast to our current year-end portfolio of $3.7 billion and 4.4 times leverage for the portfolio.

So moving on to the next several slides in our risk deck, additional information on our portfolio is set forth. Focusing first on the Agency book, we reduced the size of our Agency portfolio by roughly $300 million quarter over quarter, with most of the reduction occurring through the sale of lower-coupon 15- and 20-year MBS.

As the pie chart on the bottom of Slide 7 shows, hybrid adjustable-rate mortgages represent approximately 20% of our overall Agency exposure, and close to 60% of our fixed-rate pools have some form of call-protected characteristics. From a prepayment perspective, our pools continue to perform in line with our expectations, with a Q4 CPR of 6.2% and a December CPR of 6.7%.

Now I will transition to our credit book. We grew our credit book by almost $175 million during the quarter, with increase coming across Non-Agency securities ABS and CMBS. You will note this quarter we do not have a line item for commercial mortgage loans that we have been previously carrying. Our loan that was on a Midtown retail property paid off earlier this year -- or late 2013 -- and after factoring in fees associated with the payoff, we had an IRR in excess of 20%.

We are also pleased to report that subsequent to quarter-end we deployed $10 million of equity into another commercial real estate investment on a hotel property located in New York City. This bears a current interest rate of LIBOR plus over 1200.

As we have noted on several calls, we believe that Angelo, Gordon is well positioned to source and originate attractive investment opportunities in the loan space, both commercial and residential. And our investment teams are busy underwriting numerous investments as we speak. We expect the fruits of these efforts to increasingly enter the portfolio in 2014.

Now, turning to Slide 9, we provide an update on our financing and our duration gap. We currently have 30 financing counterparties and are continually being approached by others who are interested in sending financing to us.

During the quarter we signed a new 85-day evergreen repo for a portion of our credit book. As Brian will discuss, we continue to explore numerous financing arrangements for both securities and loans.

This quarter we have broken out our financing costs for the Agency RMBS and credit piece of the book. As you can see, our average Agency cost is 44 basis points, and our average credit cost is 181 basis points. Funding conditions for MIT are favorable, and we believe cost of funds and financing terms will improve in future quarters.

As a reflection of our increased tolerance for risk and for expanding our earnings capacity, we did open up a duration gap of 0.69 years versus roughly a 0.0 gap that we reported in the prior two quarters. The gap would be narrower if we treated all of our Agency MBS as TBA Agency product. It would narrow the gap by at least one-half. So we are not overly concerned by the opening of the gap, and we think it is healthy for the Company.

On the hedging and interest rate side, we have interest rate and hedging tables, sensitivity tables laid out for you. Commensurate with opening up a modest gap, we did take off $500 million in swaps. At the same time we did maintain the weighted average years to maturity of our swaps by increasing the duration of our overall notional swaps.

We will continue to optimize our hedge book for the current portfolio and believe additional expense savings is achievable in future quarters. Given the construct of our assets and the hedges, we believe our portfolio today should be better able to withstand a wider range of interest rate market movements than our portfolio was capable tolerating a year ago.

With that, I'd like to wrap up by saying we believe our portfolio is appropriately sized and positioned for today's market environment. We are excited by the flow of investment opportunities we are seeing, both in the bond and loan markets. We thought we have accomplished quite a bit in 2013: we have added personnel on the Agency, commercial, and financing side; we have strengthened the overall platform; and we believe this will provide future dividends for the Company.

With that, I would like to turn the call over to Brian to review our financial results.

Thanks, Jonathan. In the fourth quarter we reported core earnings of $19.1 million or $0.67 per share versus $12.6 million or $0.45 per share in the prior quarter. As we mentioned, the commercial loan we originated early in 2013 paid off in December. In addition to the principal, we received a $3.2 million fee in connection with the payoff.

The fee we received resulted in an additional $0.11 per share core earnings in the quarter. Stripping out this fee, we still have a large increase from the third quarter, which was a result of two main drivers. The first was an increase in the yield we earn on our assets due to the rotation in some credit investments and better underlying asset performance.

Additionally, as a result of taking off the swaps, as Jonathan detailed, our overall swap cost decreased significantly in Q4. These factors were the primary drivers of the $0.22 increase to core earnings quarter over quarter.

Overall for the quarter we reported net income available to common stockholders of $13.5 million or $0.48 per fully diluted share. In addition to the $0.67 of core earnings, our net income included realized and unrealized losses of $0.19 per share. The $0.19 of net losses was due to $0.09 of realized losses on our securities and derivatives portfolios; $0.18 of realized losses upon recognition of other-than-temporary impairment and the unlinking of linked transactions; offset by $0.08 of a net unrealized gain on our securities and derivatives portfolio.

To give you a better sense of our current $3.7 billion portfolio, I'd like to highlight a few more statistics. As described on Page 4 of our presentation, the portfolio at December 31, 2013, had a net interest margin of 2.46%. This was comprised of an asset yield of 4.13%, offset by repo and swap costs of 0.89% and 0.78%, respectively, for a total cost of funds of 1.7%.

We are pleased that our net interest margin at year-end was 34 basis points higher than the prior quarter-end. The increase was driven by an increase in our weighted average yield with the rotation into higher-yielding credit investments from lower-yielding Agency securities, as well as the improved underlying performance of our securities.

This increase in yield was partially offset by a higher weighted average funding cost, which is a natural result of the shift to credit investments, which come with higher funding costs than Agency securities. The last contributor to our increased net interest margin was a significant decline in our swap costs, as I previously mentioned.

At December 31, our book value was $19.14, a small decrease of $0.12 from last quarter. This decrease resulted from a net $0.19 loss on our securities and derivatives portfolio, as described above, but was offset by our core earnings exceeding our common dividend by $0.07 per share.

I would like to point out that in our earnings presentation on Page 15 and 16 we have included roll-forwards of our book value and our undistributed taxable income from September 30 to 12/31, which we think will be very helpful for our investors.

I would like to also mention that we had some one-time adjustments in the fourth quarter to our undistributed number resulting from some positive items, including the reclass of ordinary income to capital gains, where we have offsetting capital losses; the immediate recognition of ordinary losses on the termination of ineffective hedges; and a decrease in the amount of tax discount amortization booked. Additionally, these three items reduced the amount of excise tax that we are required to pay for 2013.

On the funding side, we have been seeing repo costs decrease post year-end, specifically in relation to our credit portfolio; and we continue to explore ways to extend our maturities, as seen with the 85-day evergreen financing we entered into in the fourth quarter. We were pleased to announce that we recently entered into a $100 million facility with a 2-year term to facilitate investing in nonperforming/reperforming residential loans and are in discussions with other banks about adding additional facilities if needed.

That concludes our prepared remarks. And I'd now like to open the call for questions. Operator?

(Operator Instructions) Joel Houck, Wells Fargo.

Really like the disclosure in the slideshow, guys. I think you guys have improved on that dramatically.

One item, though, that if you guys could add, I guess, would be the breakdown of leverage between the Agency and the credit book -- maybe what that was at the end of December, and what it was a year ago, to give us a sense of how you guys have -- where the deleveraging has come from. I'm assuming it is mostly on the Agency side.

Yes, it is really a shift of -- again, the shift to credit. The Agency securities are obviously a lot more highly levered than the Agency book. We can definitely think about including that in the next presentation, as you are probably right; it is probably a good disclosure to have.

Do you actually have -- just as of December 31, do have the breakdown between how much -- or at least the capital allocated between Agency and Non-Agency?

The capital allocation is a little bit higher than 50% to credit, I would say. It's probably about 55% to credit, and about -- well, maybe 52.5% to credit and 47.5% to Agency. And I think that has changed from last quarter, where we were about 50%-50%.

Okay, that is helpful. And then my last one is: there has been a -- obviously, now that the taper has started, we have seen spreads tighten this year. And that has been helpful, I guess, particularly on the Agency complex.

But for the most part, managers remain -- I guess mortgage rate managers remain cautious as the year plays out, because if the taper actually goes to zero, there is questions about who that marginal buyer of, particularly, the 30-year complex, which is very -- you know, has a high degree of negative convexity. What are your thoughts in terms of how the year plays out with respect to basis risk and spread widening, particularly on the Agency side?

I know you guys have said you are going to increase capital to the Non-Agency side, but certainly you still have to obviously focus on protecting book value on the Agency side. What are your thoughts as the year plays out?

So I would say that we do agree that there is a question of the marginal buyer, but you have seen a dramatic curtailment of origination of Agency MBS with the decline of refinancing. So you are seeing supply off over 50%. So that factor, the fact that many money managers are under-allocated to the sector.

We would say that the credit spread right now is -- or the basis is on the tighter side. And we would not be surprised if later in the year, it was to drift wider. But I don't think it is going to drift dramatically wider.

In response to that, we have repositioned the portfolio over the last six months to increase our allocation to hybrids. We have kept lower-yielding 15-year assets, which will be not as materially impacted by the taper or the curtailment of taper.

And then we may, and have in the past, engaged in some basis hedging where we think it might be achievable. The up in couponed Agency assets will be less affected by a basis widening than current-couponed, or 3.5 or 3s. So we took steps to really reduce our overall exposure to that sector.

All right. Thanks for the color, guys.

Andrew Wessel, Sterling Capital.

Just had a question about -- during the fourth quarter your stock, as well as most of your competitors', were pretty heavily pressured and kind of were bottoming out then. A lot of your peers have reported now, and we have seen pretty healthy buybacks at the majority of them of common equity.

And despite the fact that your stock was trading on the 15 handle in December, and you knew that your book value was going to probably end the year in a 19 space, there was no effort -- there was no buyback authorization made. There's not one present, and there was no stock repurchase, obviously.

So can you help me square that up with not taking an opportunity for an immediate 20% return on equity versus a 4 to 5 times levered 10%, 12% return on equity? Help me with that decision process.

It is David Roberts. We always think about everything to increase stockholder value over the long term. And I think the key is over the long term.

There is a certain critical mass in terms of size that will allow us over -- again, over the long term to deploy what we consider to be the optimal portfolio. And that is something we always take into account, as well. So I think that that was a factor in terms of our thought process.

So you're saying that long term you expect to generate returns in excess of 20% as opposed to a 20% return opportunity you would have had on a buyback? And I'm just -- I'm feeling to understand that.

No, that's not what I said. What I said was that when we think about shareholder value, we consider the overall size of our equity, which impacts both our ability to over the long term create the portfolio that we think is going to consistently generate good returns. And we also think about the liquidity of our stock, which is also another factor.

So I think you and I are talking about different time frames. I think that would, as you put it, square the difference between the way you are approaching it and the way we're approaching it.

I am thinking of it as a shareholder with a two-, three-year horizon, where the opportunity would be to generate a better than 20% return, especially with no risk in the leverage, right? You are applying 4 to 5 times leverage to generate a return that is inferior to a 20% buyback -- 20% return buyback opportunity that is kind of bird-in-hand.

I just think -- especially as your peers, some larger, some smaller, were stepping out and buying back stock in size, and you guys didn't do it. I worry longer term that when investors think about management team's willingness to defend their stock, even with an externally managed structure, where, obviously, equity goes down and your management fees go down, they are willing to step up and do that, whereas you all weren't -- it is concerning from a fiduciary standpoint.

That is my point of the question. I understand liquidity. You are a $500 million market cap company; it's not like you are $50 million or $100 million. And you have been more than willing to issue equity at 10% premium to book. So I guess I have a hard time understanding why you're not willing to buy back at a 20% discount. And I think liquidity alone doesn't really square it up.

Right, which is why I mentioned it as one of a few factors. And I would also point out that it sounds like you are a keen follower of our stock and our --

Well, we're your, like, number 3 or 4 shareholder.

Right. So you would probably also know that the management owns a lot of stock, including myself and Jonathan. So we clearly are very much aligned as fellow shareholders.

Okay. Well, I think in the future, as a shareholder, it would be helpful for at least an authorization to be out there, so that given the opportunity to take that -- obviously, you are well hedged. Your hedges have performed great. I think it is fantastic that your book value has been as stabilize as it has while still generating an above average -- above-peer average return on your portfolio. So that is -- obviously, very happy with that result.

But when you are given those opportunities, they're not all that often, and a lot of times it is tax loss selling, or people just don't understand the story, or everybody is pressing the sell button at the same time. You get an opportunity, and it's not all that often, that you can act on it, I think having a buyback authorization available to use would be helpful, at least just from a perception standpoint.

Appreciate the comments. And we will definitely take it into consideration, and thank you. We will discuss it. Appreciate it.

Trevor Cranston, JMP Securities.

On the commercial loan side, obviously you guys had a nice result on the loan that paid off in the fourth quarter. I was wondering if you could just expand a little bit on the profile of the loans you guys are looking to make in the near term and also talk a little bit about the markets you are focused in.

It sounds like the two you have made so far are in the New York market. Is that where you are going to be primarily focused? Or is there a chance that you will be expanding into other parts of the country, as well?

This is David Roberts. We certainly would look at opportunities outside of the New York area, but we would tend to focus on markets where as a firm we have a long history of expertise in terms of buying properties and really understanding markets very, very well. And that is certainly one of the advantages.

And we're typically looking for situations where you need that type of market knowledge, and confidence, and experience to be able to make an assessment of a loan. So typically I would think a lot of the properties that we would be lending against would have some amount of transition.

The one that paid off, for example, was going through a transition where one of the tenants was in bankruptcy. There was an opportunity to buy that tenant out, to redo the building. It went very well. And then the owner decided to do an overall refinancing. So that type of profile, where there is some element of transition, which is also the area that we as a firm tend to focus on on our property investing.

So I would think that it will be in major markets, which is where we have the most expertise. And again, some element of transition, which allows us to use our experience and expertise to make loans where we think the risk/reward is attractive and we can generate good yields.

Okay, that is helpful. And then on the roll-forward you guys provided on the undistributed taxable income, there is a line item there that shows, I think, $0.08 of recurring difference between tax and core earnings. Could you guys just comment on what the key drivers of that are, and if that $0.08 number is a good ballpark to think about going forward?

It is. And that is why we have shown it. It is really related to the net amortization of the premium discounts between our Agency and credit. And it is -- within $0.01 or $0.02, that is the number we expect it to be for next year.

Okay, perfect. Thank you.

Mike Widner, KBW.

First, just a simple question. With the prepayments dropping pretty significantly on the Agency portfolio, I didn't see any one-time benefits in results, but several of your peers have had one-timers in there. So just wanted to check and make sure that there wasn't some other premium amortization catch-up or something that's one-time in nature in the quarter.

We had a one-time catch-up, but it was only about $0.01. So it was pretty insignificant. That is why I didn't highlight it in my remarks.

Really, the retrospective adjustment that folks take -- so it's really more kind of projections versus actual. And I think it was in the second or third quarter we had a pretty big one, because I think that was when interest rates started to rise, and everyone projected that CPR would decrease.

So even though it was lower quarter over quarter, it wasn't that much lower versus the projection. So the fourth quarter didn't really have such a big pop from it.

Okay, got it, thanks. Appreciate that.

So going back to your comments during the opening discussion, I thought I heard you say new investments were getting to pre-expense ROE levels around 13% for recent investments? Was that the right number?

Yes, it is, with leverage.

Yes. Okay, so I guess what I am thinking about is, if we look at your performance in the quarter after pulling out the one-timers, or just looking at your net spreads and leverage on the portfolio, it suggests pre-expense ROE levels around 15% on the current book of business.

So what I am wondering is: does that mean that we should expect ROEs to sort of migrate lower? Or is there other things that is going to -- and granted, we're only talking 200 basis points, but just trying to directionally understand which way things are heading. So should we expect that the new assets are coming on at lower-leveraged ROEs? Or is there -- should we expect there's going to be some offset to that in terms of either higher leverage, or hedges running off, or less hedges?

I could take the beginning of that. I think in the quarter, off of -- the yields were a little skewed because of the payoff. The $0.11 actually translated into a higher weighted average yield for the quarter.

So I think going forward, it is more in line with where we expect. And I think putting it to work at plus 13% is pretty consistent with the rest of the portfolio. I think it ranges between 13% to 14%-ish ROEs. So I don't see there being much of a decrease from what I described as the core part of core earnings this quarter. I think that is what we would expect going forward.

I will just say that I also generalized with the 13%. We are generally trying not to add any asset or any investment that is generating less than a 13% gross. Many of the investments we have been making are above 13% gross, but I wanted to pick really kind of towards the bottom end. And I'm generalizing, because there may be some assets, let's say, like the new hotel loan, where the yield -- the ongoing yield is about 12%, 12.25%, but that we ultimately expect the ultimate ROE to be higher once we get other payoffs, prepayments, whatever would come about that will ultimately pay off, like, the property that paid off in December, where it jumped us up to 20%.

We do have several assets in the portfolio that are below 13% that have to run off. And we expect them to run off in the course of 2014. And there are reasons why we are just not liquidating, because they have optionality where they could jump up their return from, let's say, 11% or 12% to something higher. And so we really would prefer to hold on to those assets.

Okay, I appreciate that. And I guess the reason for the question is that, yes, you guys are running expense levels of a little over 300 basis points, all-in. And yes, you're paying a $0.60 dividend; once you strip out some of the one-timers, you earned kind of mid-$0.50s, $0.55, $0.56, depending on what you want to pull out.

And if I run 13% ROE minus 300 basis points of expenses, that suggests -- given where your book value is, that suggests an ongoing earnings power slightly below $0.50 versus a $0.60 dividend. That is obviously where I am heading.

I guess I just -- could you -- any more clarity on how you are thinking about that? And again, the reason is you have a headline number of $0.67, which looks like a nice beat. Certainly there are some one-timers in there, but I'm just trying to get a sense for where you guys feel directionally investors should be -- should set their expectations.

I think the numbers seem right. The fourth quarter was a little bit high on the expense side due to some kind of extra costs towards the end, so you could probably strip that out a little bit.

I think it's more like Jonathan said; it is, especially at some of these lower-yielding assets, putting them to work at higher returns; and maybe optimizing some of the financing structures that we have, that we can actually invest in extra cash that we hold our unlevered securities. I think we think that there are other ways to optimize going forward, as well.

Okay, well, thanks. I appreciate it, guys.

Jason Stewart, Compass Point.

I would have expected, I guess, little bit more on the resi NPL side. And I'm just wondering if you could give us some thoughts on whether you were waiting to line up the financing, or perhaps the ROE of that investment opportunity has changed?

The ROE has not changed. Due to timing, and considerations of when certain sellers were in the market, and what capital we had available at a distinct moment in time, it just didn't come together in the fourth quarter. But we expect that residential whole loans will be a larger portion of the portfolio in 2014.

But it's just -- securities are much, much easier to add to the portfolio. They are predictable when you can execute, and loans have their own kind of life and operational issues that go along with them. And sellers who may have other considerations and issues may have to delay that timing.

Yes, that makes sense. And maybe with this facility, you could give us an idea of, with what you are seeing in the market today available for purchase, what kind of ROEs on the resi whole loan? And if you can break it out between performing/nonperforming -- however you want to do it. A general characterization of where the ROE of that segment would be would be helpful.

Yes, I would just say that the ROEs for NPL, RPLs, reperforming mortgages, and nonperforming mortgages will, we believe, exceed that minimal ROE target of 13% gross with optionality. And we are kind of agnostic on the class -- the RPLs or the NPLs -- as long as that distinct pool achieves that type of return hurdle. We do not see very attractive returns on the jumbo side, where banks are right now being very, very aggressive in terms of portfolio lending.

Okay. And then on the securities book of the Non-Agency, it looks like, just looking at the summary statistics, which are great to have, the additions were high-quality asset classes, fairly short duration and maybe a little CMBS. Could you give us any color? Because I know you have rebalanced that book late last year to reduce interest rate risk a little bit. Maybe what you were looking at, what the opportunities are there?

I would say you actually did a very good job of summarizing where we added credit. We added credit with probably average durations of two years. We added hybrids or floating-rate RMBS Non-Agency. So either hybrid or HELOCA type of product. And then we added some CMBS, which is generally legacy CMBS that is inside of three-year. And then we will be adding in the first quarter a additional CMBS loan.

Okay. So on the CMBS side, there is no -- you haven't done any investments in B-notes or anything like that off of new conduit programs?

We have done some B-ish type of notes, but not off of conduit.

Okay. Thanks for taking the questions. I appreciate it.

Merrill Ross, Wunderlich.

Actually, it was asked and answered for the most part. I would just like to hear about how you are hedging basis risks a little bit more specifically than you generally answered before.

We will put on TBA shorts in lower-couponed. That would be the predominant method that we would utilize to hedge the basis. And they carry better for the cost of that TBA short, relative to swaps. And the expense of the swap, both on what we pay for the swap as well as the roll-down of the swap, is higher than that TBA short.

Thank you.

We have no further questions at this time.

Thank you, everyone, for joining this call, and we look forward to speaking to you again with our first-quarter results. Have a good day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.