New York Mortgage Trust Inc (NYMT) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by.

Welcome to the New York Mortgage Trust fourth-quarter and full-year 2015 results conference call.

(Operator Instructions)

This conference is being recorded on Wednesday, February 24, 2015.

A press release with the New York Mortgage Trust fourth-quarter and full-year 2015 results was released yesterday.

The press release is available on the Company's website at www.nymtrust.com.

Additionally, we're hosting a live webcast of today's call, which you can access in the Events and Presentations section of the Company's website.

At this time, Management would like me to inform you that certain statements made during the conference call, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although New York Mortgage Trust believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that the expectations are attained.

Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday's press release and from time to time in the Company's filings with Securities and Exchange Commission.

Now at this time, for opening remarks, I would like to introduce Steve Mumma, Chairman, CEO, and President.

Steve, please go ahead.

Thank you, Operator.

Good morning, everyone, and thank you for being on the call.

The Company generated fourth-quarter net income of $1 million or $0.01 per share, and for the year we had net income of $67 million or $0.62 per share.

The performance of our portfolio in the fourth quarter was impacted by significant market volatility and the timing of certain sales and acquisitions of our distressed residential loans, as well as our negative outlook for the reinvestment environment during the period.

Anticipating further spread widening in the fourth quarter of 2015 and into the first quarter of 2016, we've elected in large part to forego putting our excess liquidity to work, maintaining a higher than usual cash position and lower than normal leverage.

Our net interest margin was directly impacted by this decision; together with our sale in September of approximately $120 million of distressed residential loans, resulted in a decline in the Company weighted average earning assets in the fourth quarter as compared to the prior quarter.

As spreads have widened, the evaluations of some of our multi-family CMBS securities, which were tremendous drivers for earnings for the Company in 2013 and 2014, have pulled back over the course of the last two quarters.

Other income was negatively impacted by these reduced evaluation for our CMBS securities as well as our withdrawal of loan sale in the fourth quarter, which we now expect to complete in the first quarter of 2016.

Our fourth quarter was challenging, our portfolio performed extremely well over the last three years, which is a period that has been marked by an increasingly dynamic and volatile market environment.

Even when you factor in our results for the most recent quarter, the Company has produced an average annual net income per share of $1.07 and an average annual rate of return on equity of 11% over the course of the last three fiscal years.

We've accomplished this by being selective in the different types of assets we've invested in, at times taking the role of first mover, such as with the Freddie Mac K-Series first loss multifamily CMBS securities, identifying assets that we believe are well-suited to our expertise, taking gains when we believe an asset is fully valued, and maintaining a greater cash position when we believe markets are unfavorable for reinvestment.

For example, we watched spreads tighten throughout 2013 and 2014 on our multifamily CMBS securities, which we benefit from.

But this tightening lets a less attractive reinvestment environment.

Concluding that certain of these assets were fully valued, we sold a first loss multifamily security during the fourth quarter of 2014 and realized a gain of approximately $23 million, which helped reduce quarterly earnings for that quarter of $0.42 per share, or $0.15 higher than what we declared as a dividend for the quarter.

The markets have continued their difficult ways in 2016, impacted by continued oil price volatility, a deteriorating global economic picture, and uncertainty surrounding future federal reserve moves on interest rates.

While credit spreads have continued to widen, our actual credit positions are performing at or above our expectations.

Moreover, we believe the spread widening will ultimately lead to more attractive investment opportunities in 2016, which we believe we are well-positioned to take advantage of through our excess-liquidity position.

We will maintain our focus on adding both multifamily and residential credit assets in 2016, and we continue to pursue longer-term less callable financing to finance these assets.

Our book value per common share December 31, 2015 was $6.54, down approximately 4% from the previous quarter and down 7.5% from December 31, 2014.

We declared a fourth-quarter dividend of $0.24 per common share that was paid in January of 2016.

We declared and paid a total $1.02 for the year, bringing our annual economic return or change in book value and dividends declared to a positive 6.9%.

For the year, we had net income attributable to common stockholders of $67 million or $0.62 per share.

We closed on an underwritten public offering of 3.6 million shares of our 7 and 78 Series C preferred stock, resulting in net proceeds to the Company of $87 million.

During the year we sold our remaining $35.6 million of our CLO securities, realizing a gain of $3.2 million in closing out an investment we entered into in 2009.

We sold a total $146.1 million in distressed residential mortgage loans, which resulted in a net realized gain before income taxes of approximately $29.1 million, and we acquired approximately $156 million in distressed loans during the same period.

Included in our press release is a capital allocation table and a net interest spread table.

These tables disclose balance sheets amounts, interest income and interest expense, weighted average yields, and weighted average earning asset balances by investment silo.

Also, we added tables for both capital allocation and interest spreads for the last five quarters in the financial table section at the end of our press release distributed last night, that we hope will be helpful going forward to better see the transitions we have made in our portfolio.

Our average earning assets decreased by approximately $53 million in the fourth quarter as compared to the third quarter.

This was a deliberate decision as we continue to be cautious in the current market environment.

Portfolio generated net interest income of $16 million and net interest margin of 304 basis points, a decrease of $2.3 million and 50 basis points respectively from the previous quarter.

These decreases were mostly due to our distressed loan activity.

As I said before, we sold $120 million in loans late in the third quarter and purchased approximate $58 million late in the fourth quarter, resulting in a net decrease in interest income of approximately $3.4 million related to distressed loans.

Our mortgage securities portfolio CPR speeds overall were 13% for the current quarter versus 15.1% for the previous quarter; with our agency-armed portfolio speeds at16.9%, down from 18.6%; our fixed-rate agency speeds 8.5%, down 10.5%; and our agency IO CPR speeds at 14.6% versus 18% the previous quarter; again down for the quarter.

There is a table included in the press release that includes CPRs by category for the last eight quarters.

For the quarter ended December 31, 2015, we recognized other losses of $2.1 million versus other income of $20.2 million for the quarter ended September 30, 2015.

For the quarter ended December 31, 2015, other expenses, other losses were comprised of: unrealized losses of $4.5 million related to our CMBS multifamily investments; realized losses of $1.6 million and unrealized [needs] of $1 million related to our investment securities and related hedges respectively, primarily related to our agency IO portfolio; other income of $3 million from our investments and unconsolidated entities, including our common and preferred equity ownership in RB multifamily investors or RMI, an entity that invests in commercial real estate and commercial-related debt instruments; and our equity ownership interest in RiverBanc which is one of our external managers.

We had total general administrative and other expenses for the fourth quarter of 2015 of approximately $9.7 million, relatively unchanged as compared to the $9.8 million for the third quarter.

Total expenses included base management incentive fees of $4.5 million, expenses associated with direct operating of our distressed residential mortgage loan portfolio of $2.5 million, and general and administrative expenses of $2.6 million.

On February 20, 2015, the Federal Housing and Finance Agency, or FHFA, came out with an unfavorable ruling removing eligibility for captive insurance participants in the FHLBC systems, which included many REITs, including us.

This ruling required the Company to terminate all [its in-borrowings] within one year.

We had $121 million outstanding at the end of 2015 with the FHLB, all of which has been subsequently repaid.

We will continue to monitor the situation and we're hopeful there will be some ability for mortgage REITs to regain access to the FHLB system.

As I spoke about in the third quarter call, we launched our second lien fixed-term program in September and continue to build momentum.

It has been an uphill battle, with way too many near all-time lows.

Long term, we still believe this to be an excellent mixed adjusted investment that will be accretive to our earnings.

It will take higher rates before we start to see significant traction.

We have purchased approximately $3 million to date and continue to add originators to our program.

We continue to monitor the capital market looking for opportunities to execute a transaction around our multifamily direct investment vehicle RMI, but to date have been unsuccessful.

As we head into 2016, we believe there will be opportunities for the patient, as the markets are still very volatile and credit spreads still widening.

While painful to our existing portfolio, it does give us opportunities to invest at levels not seen for over two years.

We have a strong balance sheet, excellent managers both internal and external, a track record of identifying assets where others don't, which has and will lead to our successful long-term performance.

Thank you for your continued support.

Our 10-K will be filed on or about Monday, February 29, with the SEC and will be available on our website thereafter.

Okay, operator.

Please open it up for questions.

(Operator Instructions)

Our first question comes from Steve DeLaney from JMP Securities.

Your line is open.

Hello, good morning.

Thanks for taking the question.

Steve, the nonperforming loan pool that you delayed in the fourth quarter, can you comment just generally, I know every transaction is somewhat unique, but was the delay due just to pricing issues, or did it have possibly something to do with the buyer being able to line up their financing?

Any color you can give was on that?

And I guess I heard you say that, I believe you said that you still expect it, but I interpreted that to be that that has not yet taken place in the first quarter.

If you could clarify that.

Thanks.

Sure.

Yes, the fourth-quarter sale was almost 100% attributable to factors outside of us.

It was related to issues with the potential buyer, which had to be postponed.

So we are in the process of completing the transaction.

It is not completed.

We do anticipate it being done in the first quarter.

It was because of market factors, actually outside of pricing and rates, it was really more operational in nature.

Got it.

Obviously these are shifting markets and a lot of fluid things going on.

But if you just step back for a minute and look at that opportunity, I mean that was clearly, once the K-Series got really rich a couple of years ago, this is been your, the RPL, MPL has been your main focus for I guess the last 12 or 18 months.

Just curious since your last call, with all the disruption in the market, what are you generally seeing both in terms of flow, number of deals, pricing, how does that opportunity look in terms of the attractiveness and availability of investments there versus maybe where we were three to six months ago?

It's interesting.

If you go back 12 to 18 months, I would say the typical RPL seller was a hedge fund/smaller bank/$25 million to $150 million in size portfolio.

As we got into 2015, you started to see larger bank sellers, larger portfolios, so now it's not uncommon to see $500 million to $750 million in pulls offered out.

Those pools are typically highly competitive and difficult to win.

And so we've now sort of seen a transition back to, this year has been a co-mingle mix of a couple packages of about $500 million and several packages below $50 million to $100 million.

So we still think from the actual size of the market that there's significant amounts of distressed loans still available to buy and sell in the marketplace.

Pricing has increased substantially over the last three years, but we do think there's access to better ways to finance the loans, to securitization, that gives you better leverage and you can get three year to go, so while the dynamics has probably shifted more away from 60% carry to 40% capital gains, it's probably more of an 80% carry to 10% to 15% capital gains trade, so the velocity of your turnover's got to be increased.

And so those are the things that we're dealing with and trying to get a process in place.

We have $600 million, a little over $600 million in loans.

That's over 6,000 units.

And so when you imagine you sell a $50 million pool, you're dealing with 500 loans.

It requires due diligence from the buyer, it requires us, the seller, to deliver documents to them.

So this process takes anywhere from 45 to 75 days to close.

And you want to make sure -- the hardest part about these transactions is you want to deal with buyers and sellers of pools that give you the correct information, and when you sell somebody a pool of $50 million you want them to take down a pool of $50 million, and not bid aggressively and then kick out 30% of the pool and end up with a sale that's not really as attractive as you started.

There's a lot of nuances to transacting, and that's the downside of the delays in getting these transactions completed.

But I do think the upside of these trades is that, if you look at the $146 million in loans we sold for the year that generated $29 million in capital gains, it's well worth the effort.

The average coupon in the portfolio is just under 6% and the cash coupon, I know the yields changed because of some accounting triangulations, but by and large, we still like this on a risk-reward basis better than some of the other avenues.

I would say that loan pricing has held in better than some of the other pricing.

I think you've got a lot of question in the CMBS market because of the private-label conduits, and I think we just have buyer's remorse in a AAA sector, which puts pressure on these conduits because they know they have to come to market and the buy-side guys -- it's a marketplace, and then they leak out.

And so that's -- you're seeing spreads continue to leak out as these conduits come through with their inventory.

And I don't see that changing in the first quarter

That's helpful color on the NPLs, I appreciate that.

Steve, one final thing for me.

Your stock is held up -- You have me?

Yes, sir.

Okay, great.

So your shares really for most of last year held up better than a lot of peers, obviously some weakness later in the year.

But given last night's report and kind of where the stock is indicated this morning, it now looks like you could be down 70% of book or lower.

Just curious how you and the Board feel about share buybacks and sort of balancing share repurchases when the discount becomes extremely large, how do you kind of weigh that versus say maybe dividends in so far as what's the best way to return capital to your shareholders?

Thank you.

Steve, we discussed this.

We discussed it as we were going through and approving our earnings release with the Board and we contemplated making some announcement around a repurchasing program.

It's something that we do look at.

I think historically I have spoken publicly about the repurchases, my feelings about repurchases.

There is some level where it absolutely makes sense to buy your stock back.

I do think that it's not a means to an end.

I think it is a short-term fix to a book value in earnings per share erosion problem.

But as a REIT who's required to pay out almost at least 90% of your earnings, at least 90% of your excess learning, right?

It's very difficult to generate liquidity.

So if we use our excess liquidity that we think we now we can step into the market and make investments that are going to generate more income from us going forward, I think the repurchase is a backward-looking exercise and not a forward-looking opportunistic exercise.

There is points where you I think you need to go into the market and buy back your stock.

I mean clearly if you start getting down to 60% of book, I think it absolutely makes sense to do it.

But I think we think long-term, we're going to better defend our stock price over the long-term with buying investments that are going to deliver outside returns, which has been the case over the previous three years, the last six months have been very difficult for our stock and our stockholders.

We recognize that.

But up until July of 2015, we were one of the few stocks trading at a premium to book in all of 2014 -- in the second half of 2013 and all of 2014 and at the first half of 2015.

It's a little frustrating I know, when we set up the second lien program and really the excess liquidity initially was put aside to absorb the production that we thought was going to come based on the originators that we were working with, we were anticipating having a much larger portfolio coming into this year-end, and being a new product and not having at the time a warehouse line in place, we wanted to make sure that we could absorb that inventory.

Subsequent to starting that program, we now have an 18-month committed line to finance second lien mortgages.

We have the capacity, the financing and the skill set to now get this program up and running, but a sub 2% tenure and a sub 3.5% to 3.75% 30-year mortgage rate makes it difficult for a second lien to be attractive to most people.

(multiple speakers)

Thanks, Steve.

Our next question comes from Douglas Harter from Credit Suisse.

Your line is open.

Thanks.

Can you talk about how you think about the gains and how you and the Board get comfortable in setting the dividend, given the variability around that line item?

That's right, from the outside looking in it looks like we don't have a plan, but I think when we talk about setting our dividend rate, it's really what do we think our existing portfolio can generate in terms of a net margin and realized gains.

And where do we think those realized gains are going to occur, and what are our opportunities when we do sell these loans of replacing those assets, and at what yields are those assets?

So we did have an adjustment last year in our dividend from $0.24 to $0.20 and that really was an evaluation of our stance in going into the second half of the year in terms of investments and timing and when we're going to make those investments.

But I think, you know, one of the things I wanted to point out on the call is, we have averaged $1.07 per share over the last three years.

We did do $1.48 per share in 2014.

We could have pushed the fourth-quarter sale into the first quarter; however, the person that was buying our investment wanted to settle that trade in 2014 and we wanted to accommodate that person.

And so, we opted for getting him the best execution in a period as opposed to trying to balance our income between years or between quarters.

It is frustrating I know from an analyst standpoint, but rest assured when we look at our dividend policy, it is taken into consideration with all those, recognizing that we're not going to be able to smooth out exactly every quarter with every dividend payment.

If we were to stay around, -- if spreads don't improve, can you generate a higher -- a level of gains consistent with the average of the past couple years?

Yes, I think long term if spreads don't improve I don't think anybody in our industry can say they can maintain their dividend, right?

You can make the statement, but I don't know if that's a true statement.

I think where we sit today, this second, and we look at our portfolio, $600 million in loans that have been accumulated through 2012, 2013, 2014, and 2015 which we don't mark to market, we think we still have ample opportunity to generate gains in that portfolio.

And we think there's other asset classes that we are looking at that will give us some opportunity.

But to your point, if the ten-year trades lower and the curve gets flatter, and credit spreads widen out, yes it will be difficult to generate those kind of returns on a capital gains.

But on the other hand, the reason we are under-levered and under-invested is because there is now asset classes that we think we can get into, or getting close to get into, that will start to generate more net margin back to the levels that we were seeing back in 2013 and 2014 and rely less on capital gains.

So the whole strategy of our portfolio is being able to transition from asset classes to asset class, and it's not that we are bent on capital gains as a means of generating our dividend, it's the asset classes that we are in today are generating those dividends.

But that doesn't mean tomorrow.

And the second, lien financing is a perfect example.

We don't anticipate any capital gains on that but we do anticipate a very nice net interest margin on those assets.

Just to your point about being close on some asset classes to getting attractiveness to put some of your excess liquidity to work, what is it that you are looking for that would get you to put that liquidity to work?

Look, I think some of the credit level security investments on assets that we're comfortable on managing, be it residential or multifamily.

I think some of the CMBS securities are starting to look attractive in here.

And I think there's going to be opportunities to get back into that market, our last investment in a K deal was almost two years ago.

We still like those asset classes, we just thought that yields were getting more toward a seller's market than a buyer's market, and they came in much higher than we thought they would go, and we took advantage in selling a couple bonds into that.

But we think that's an asset class that's looking more attractive today and we'll continue to monitor that.

Great, thank you.

Our next question comes from Stephen Laws from Deutsche Bank.

Your line is open.

All of my questions have been addressed with your answers for Steve and Doug.

Thank you.

Thanks, Steve.

Our next question comes from Robert Beranig from Art Wood Incorporated.

Your line is open.

Thanks for taking my call.

During the last past year, have you sold any stock personally?

And what is your buyback amount on your personal account?

I don't have a buyback amount.

I have not sold any shares.

The only shares that have left my possession were for tax purposes on some of the vesting in my restricted stock, but I have not sold a share since I started with the Company in 2004.

Could you give us an idea of what your estimate might be for the next quarter ending in March?

As the Company's policy, we don't project forward-looking earnings and/or dividend policies.

Okay.

And I'm a little confused under the -- you had mentioned $156 million in loans that you currently own that the Federal Government has imposed some kind of restrictions?

Could you elaborate?

No, we borrow money.

I think you're speaking to the $121 million in loan borrowings that we have with the federal home loan bank system.

We had set up a captive insurance company to get into the federal loan banking system.

We're borrowing money to fund our securities and there was a regulatory ruling that was issued in February of this year that was going to disallow captive insurance company membership.

So we payed back our financings and are no longer -- we actually are a member of the FHLB system but are not currently borrowing from the FHLB system.

Thank you.

My questions are ended.

Thank you.

Our next question comes from Bos George from KBW.

Your line is open.

Thanks.

Good morning, Steve, it's Eric on for Bos.

A few of my questions have been answered.

But I guess one follow up, I think in your opening remarks you may have alluded to some other long-term financing vehicles that you could pursue down the road.

Is there any detail on what you could see in that category, in that line of business?

We are constantly looking and talking with partners who invest in our securitizations in the past and are always looking at better ways to securitize the assets that we have on our balance sheet.

And that includes all assets, whether it be CMBS securities, or loans, or a group of assets, we're always looking at ways to put some kind of longer term financing that takes mark-to-market risk away from the Company and give us stable financing that allows us to better run our business.

But nothing in particular, we are always looking at securitzation markets.

Got it.

That's helpful, and then I guess some profile question on some of these CMBS, any weighted average LTV on the porfolio there?

Yes, it's public information.

If you look at the Freddie Mac website, and we own many of the K-Series bonds, if you look at the typical LTV across that portfolio.

So we own the first log piece of seven securitizations I believe, which totals about a little over $7 billion in lendings to multifamily properties.

That typical LTV is just slightly below 70 CLTV, so we're monitoring that.

When we invest in this product and we've always done this, we are looking at, we have a group of individuals that monitor the collateral by deal, and as the owner of the first lost piece we get the right to oversee any properties that have -- go into distress.

I think historically in the program, we've had two properties that have gone in distress that we are a part of in ownership of the securities, both of which we've got involved with and working out and both of which we've minimized the loss back to that property by bringing in investors and rehabilitating the property, which was part of our strategy of getting into securities in the first place.

Got it.

I think a lot of folks who explore the portfolio are naturally concerned or curious about energy exposure, collateral exposure with the energy markets in areas of the country that are --

That's right.

And so we track all the geographical locations actually of 6,000 loans, and another 1,000 multifamily property locations across the country, we are very aware of where we think there's a step in the marketplace.

We have very little exposure.

I think we have one house in North Dakota, a couple houses in South Dakota, our largest exposure is probably in Texas from a multifamily standpoint, but again on a multifamily property level which we are monitoring, we're looking at the cash flows and so for today, we don't really see -- right now there's not that many units that we have under credit watch in terms of operational.

But going forward, as oil continues to stay below $30, yes, there's definitely hotspots around the country, Midland Texas, parts of Houston, parts of Midland, they're probably all areas that we'll have additional focus on.

But today, we have not seen any significant -- you see there, and it's a percentage of the total portfolio in multifamily, Texas is in the top five but it's probably less.

I don't know the exact number of the top of my head.

12.3% is our exposure.

But not all of that is in exposed oil.

I understand, that's very helpful, Steve.

Thanks a lot.

Sure.

Our next question comes from Ivan Zwick.

Your line is open.

Thank you, but my questions have been answered.

Great, thanks Ivan.

And our next question comes from David Schawel from New River Investments.

Your line is open.

Thanks, Steve.

How you doing?

Good, David, how are you?

Thanks for calling.

So within the distressed revenue loan, whole loan space, how have you seen prices adjust at any sales over the last couple months?

Just wanted to see how much things had widened out?

Yes, the distressed residential loan portfolios, from a pricing standpoint, I don't think there's been a huge amount of price widening.

I think the difference is the composition of the portfolio.

So I think, when you have large bank sellers, they're probably selling you a cleaner pool of loans relative to the last 12 months ago.

So while the price may not have changed in terms of dollars, the actual underlying collateral is probably a little bit better nature.

Which means the LTVs are little bit lower, the coupons are a little higher, the payment histories are little better, it's really comes around the composition of the portfolio as opposed to the actual price.

I think the dollar price of a loan that we have today is down slightly but not down significant, and I think it's really more attributable to the way these things are traded.

I think one of the reasons, and one of the difficulties you're seeing in other markets, especially in the CMBS conduit market, is you don't have -- you have a very limited buyer, these AAA space, and you have a production that has to go out on the other side and the buy side knows this, and that's why these spreads continue to widen.

I think when you get a better balance of supply and demand, you'll see those spreads tighten.

I don't think the spreads have widened in the last two quarter because of asset performance, it's more of a function of supply and demand.

(multiple speakers) -- with 100% asset performance.

And then, obviously you guys have the sale, and just from like a go-forward basis, would you kind of view 4Q for the full loan segment as kind of indicative of the type of income going forward?

I think if I recall it was kind of 5.75% to 6%.

Would you kind of view that as typical of what's remaining in that portfolio for income?

You mean from a yield standpoint?

From a coupon standpoint?

Yes, I think that's right.

We try to target -- when we buy loans, we try to target coupons that are in the low fives to high fives, and again keeping in mind the other parameters to go around that.

It gives us a little bit more flexibility to deal with the borrower to improve their situation.

And it gives us a little bit better cash flow.

But yes, we try to maintain a little bit higher dividend, for sure.

Sorry.

That's great.

And then form a Freddy K perspective, obviously I've seen a lot of the runs, and the Freddy Ds have widened out a lot.

I didn't know if you have said whether you had put anything to work so far in this quarter, but obviously I would think that it could be, like you're saying, a good opportunity because they're a lot cheaper than they've been in many years now?

That's correct.

That is absolutely correct.

I think they're back to levels that they were in early 2013.

We do think there's opportunities there and we are reviewing that.

We are very knowledgeable in the space.

We were the largest owner of that space in terms of the number pieces coming out of 2013, we like the program, we think the program is well underwritten, and we think the way they do it is the right way to do it.

And we have worked with them and will work with them, and look forward to getting back into those investments.

And I guess this last question before I get off, have you guys found any -- (audio difficulties) or just kind of change the mix?

What are you guys kind of seeing in that space?

David, do you mind repeating the question?

I think you stepped away from the mic a little bit when you were asking it.

Yes, apologize.

But just in terms of your repo funding, with the reality of rates, have you found any opportunities to kind of reprice any of that, any of that borrowing?

Or just kind of some general color on how that market's holding in right now?

Well unfortunately for most of us who borrow in the repo market, if you're inside a year, and most of it's inside 30 days, your repo rate's actually gone up (audio difficulties) So while you've have seen a rally in the10-year the curve is flattened in here.

Clearly, one of the things we're trying to do is get some longer-term financing in place to take advantage of the lower rates.

And that's what we're trying to do, but from a short-term basis, the short end of curve has actually become more expensive for us.

We've really tried to extend the liabilities and get some more permanent financing in place.

You probably wouldn't expect the -- I think borrowing quarter-over-quarter was flat, in terms of cost of funds, so I would expect given that you're focused on the longer end and rates of reality, but that would probably be stable, or probably stable-ish going forward?

You have to always contemplate where the Federal Reserve is.

And so they raised rates in December.

So keep in mind the fourth quarter had two months of no rate increase, and then December with the rate increase.

Now November was a little bland because the anticipation was there was going to be an increase, but I would say just -- everything else being equal, the cost of fund in our repo book will probably be slightly higher in the first quarter as compared to the fourth quarter because of the Fed move in December, but not significantly higher, but higher.

I think we will have advantage of lowering the rate on some of the longer -- as we re-secure ties or do other securitization, I think we will have an opportunity to get better financing there a little bit further up the curve in the three-to-five year sector.

Okay.

And then have you guys, just given -- swap spreads went negative for a while, due to some technicals and things like that, but from a hedging perspective have you guys thought that it becomes more attractive to participate in the swaps or swaptions market, given what's happened there?

Yes.

We do a combination of swaptions and swaps.

It clearly comes down to the types of assets that are in our portfolio, how we're financing those assets, and how we think the hedges of those assets will react with various market changes.

We have elected most recently over the last two years to really be more in swaptions instead of swaps, because our feeling has been that the Federal Reserve is probably less likely to raise late rates as opposed to more likely.

They did raise in December.

It's unclear what's going to happen right now.

I think the world is pretty murky right now.

So it is unclear to me when the Fed is going to do the next move.

It'll be interesting to hear the language in March.

Okay, well thank you guys.

I appreciate the time.

Thanks, David.

Our next question come from Ben Zucker for JMP Securities.

Your line is open.

Thanks, Steve.

Thanks for taking my question.

It's really just more housekeeping.

I was looking over the income statement, and looking at the expenses related to the distressed loan sales.

Would it be fair to say that expecting that sale to originally occur in fourth quarter, a lot of the expenses were recognized in that quarter and now if a sale is to occur in Q1 2016, we might not see the usual expense load because a portion of that was already picked up here in the fourth quarter?

That's right, but keep in mind too, any time we're buying and/or selling a loan package, you're incurring costs around doing a BPO.

Typically if you're buying a loan, there's probably a due diligence cost also associated with it.

So there is a cost associated with being in this business.

And yes, you are correct.

There is some expenses related to the sale that did not -- that were incurred in the quarter but will be -- not be picked up again in the first quarter of this year.

Great, that's it for me.

Thanks, Steve.

And I'm showing no further questions at this time.

I would like to turn call back over to Steve Mumma for closing remarks.

Think you, operator, thank you again for being on the call.

We're working diligently to build up the best portfolio for our shareholders and look forward to talking about that portfolio in early May.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program.

You may now disconnect.

Everyone have a great day.