Two Harbors Investment Corp (TWO) 2010 Q4 法說會逐字稿

Good morning. My name is Allie, and I will be your conference facilitator. At this time, I would like to welcome everyone to Two Harbors' Fourth Quarter 2010 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer period.

(Operator Instructions)

I would now like to turn the call over to Anh Huynh, Investor Relations for Two Harbors.

Thank you, Allie, and good morning. Welcome to Two Harbors' fourth quarter 2010 financial results conference call. The press release and financial tables associated with today's call were filed yesterday evening with the SEC. If you do not have a copy, you can find them on the Company's website at www.twoharborsinvestment.com.

The call is also being broadcast live over the internet and may be accessed on our website in the Investor Relations section under the Events and Presentations link. In addition, we wish to encourage you to reference the Company's presentation to this call. This presentation can also be found on our website.

Before management begins the discussion of the fourth quarter results, we wish to remind you that remarks by Two Harbors' management during the conference call and the supporting slide presentation may include forward-looking statements. Forward-looking statements reflect our views regarding future events and are typically associated with the use of words such as anticipate, expect, estimate, believe, assume, project, and should or similar words.

We caution investors not to rely unduly on forward-looking statements. They imply risk and uncertainties, and actual results may differ materially from expectations. We urge you to carefully consider the risks described in our filings with the SEC, which may be obtained on the SEC website at www.sec.gov. We do not undertake any obligation to update or correct any forward-looking statements if later events prove them to be inaccurate.

I would now like to turn the call over to Two Harbors' President and Chief Executive Officer, Tom Siering.

Thank you, Anh. I'd like to welcome everyone to Two Harbors' fourth quarter earnings call. With me this morning to discuss the financial results for the quarter are Jeff Stolt, our Chief Financial Officer, and Bill Roth, our Co-Chief Investment Officer. Additionally, we are joined by Brad Farrell, our Controller.

The management team is very happy with our fourth quarter results. For those of you with access to the slide presentation, please refer to slide three. The fourth quarter of 2010 was an important one in our maturation as a public Company. During the quarter, we announced a secondary offering of 12.5 million shares. That offering, owing to a standard greenshoe provision, resulted in 14.375 million shares being placed. More on the relevance of this in a bit.

During the quarter, total comprehensive income was $23 million, or $0.84 per diluted weighted share, which yet again was the result of robust yields and market value appreciation in both our agency, net of interest rate hedges, and our non-agency portfolios. Book value increased 2.2% on a sequential quarterly basis to $9.44 per share.

On December 8, we declared a $0.40 dividend per share for record holders as of December 17. This dividend was $0.01 higher than the prior quarter and represented a 16.3% yield on an annualized basis, based upon our stock's December 31, 2010, closing price of $9.79. Our dividends for the year were $1.48 per share.

For the fourth quarter, we reported adjusted GAAP earnings of $0.41 per share, representing a 17.1% return on average equity on an annualized basis. The aforementioned stock -- secondary stock offering had the [virtuous] effects of increasing our shareholder base and the liquidity of our shares, while further reducing our operating expense ratio.

On January 11, we announced a dividend reinvestment program, or DRIP, and a direct share purchase plan for our shares. The DRIP will be effective for our next dividend declaration. Both of these facilities allow our shareholders to purchase additional shares in Two Harbors with minimal execution cost. Investors can participate in the DRIP or the share purchase plan by enrolling online with our plan administrator, Mellon Shareholder Services. Contact information for Mellon, as well as the information on how you can obtain a prospectus for these plans, can be found on the investor relation section of our website under DRIP and DSP information.

In addition, we are pleased to announce that we have received authorization to transfer the listing of our common stock from the AMEX to the New York Stock Exchange. We anticipate that trading will begin on or about February 11, 2011, under our current ticker symbol, TWO. For these reasons and our strong operating metrics, we believe we delivered a very positive confluence of events for our shareholders.

One final thought before Jeff discusses our operating results for the quarter in greater detail. I hope that people will take note of our perform -- yield and performance in the third and fourth quarters, which were markedly different in respect of interest rate movements. Rates in the third quarter of 2010 were lower, while in the fourth quarter, they were decidedly higher.

That our portfolio appreciated smartly in both environments is a testimony to how we think about and hedge interest rate exposure. I believe that it is another statement to sophistication and diligence that our team brings to the investment process. I will now turn the call over to Jeff to discuss our financial results for the quarter.

Thank you, Tom. Please refer to slide four of the presentation. The portfolio our investment team constructed continues to perform exceptionally, as is demonstrated by another quarter of strong core earnings. For the fourth quarter, Two Harbors reported core earnings of $9.9 million, or $0.36 per weighted average share. Our portfolio selection process, which facilitated the realization of strong yields, in addition to the competitive funding environment, are the two primary factors that have enabled us to achieve solid core earnings to date.

In addition, we would like to note that starting this quarter, our earnings presentation reflects the inclusion of interest income from inverse interest only bonds as a component of our non-GAAP core earnings measurement. GAAP earnings for the fourth quarter increased $6.6 million to $16.5 million, or $0.60 per weighted average share. The $0.22 quarter over quarter increase is primarily attributable to the impact of our swaps and swaptions, which increased considerably in fair value due to rising interest rates.

Adjusted GAAP earnings for the fourth quarter increased $11.2 million, or $0.41 per weighted average share. In addition to the earnings strength of our portfolio, realized gains on securities and other derivative instruments contributed to the strong adjusted GAAP earnings we reported for the quarter.

Please refer to slide five of the presentation. We continue to believe comprehensive income, which represents our total economic return, is a key measure of our performance, due to our sophisticated portfolio and active hedging strategies. Two Harbors is very pleased to report another strong quarter of comprehensive income.

For the fourth quarter, the Company reported comprehensive income of $23 million, representing a notable 35.2% annualized return on average equity. Our non-agency investment strategy contributed approximately 65% of the total comprehensive income, while our agency strategy contributed approximately 30%, marking back-to-back quarters of strong returns in both portfolios. Finally, our taxable REIT subsidiary trading and risk management strategy contributed approximately 5% of the total comprehensive income for the fourth quarter of 2010.

Through the 2010 fiscal year, Two Harbors delivered to our shareholders attractive quarterly dividends yielding in the mid-teens, totaling 1.48 per -- $1.48 on a year-to-date basis. At the same time, the Company's book value continued to benefit from our overall portfolio value appreciation. Book value increased 2.2% to $9.44 per share during the fourth quarter of 2010.

In 2010, the Company realized operating efficiencies as we successfully grew our capital base. As a result, operating expenses, as a percentage of average equity, improved 130 basis points over the year, from 3.2% in the first quarter to 9 -- 1.9% for the fourth quarter. Looking forward to 2010, we anticipate that the December 2010 capital raise will further benefit our expense ratio by an estimated 20 to 40 basis points.

Before I conclude, please be aware that the appendix of the accompanying earnings presentation contains additional information of our operating performance and quarterly change in stockholders' equity. I would now like to turn the call over to Bill to discuss the portfolio in further detail.

Thanks, Jeff. Please refer to slide six. The second half of 2010 provided Two Harbors the opportunity to demonstrate the strength of our investment strategy. As Tom mentioned, the third and fourth quarters presented two investing periods against a backdrop of contrasting and volatile market environments. Maintaining a balanced portfolio became paramount as the uncertainty of faster prepayments and then, extension risk impacted the agency markets.

Agency portfolio management was certainly tested during the second half of 2010. We are pleased to report that our investment strategy benefited our shareholders in light of the market volatility we experienced during this period. For the second half of 2010, Two Harbors achieved an 8.5% increase in book value, in addition to delivering strong dividends to our shareholders.

Our agency portfolio, including hedges, delivered particularly strong returns in both the third and fourth quarters, contributing to our increase in book value each quarter. This can be attributed to our security selection process and hedging strategy.

On the non-agency side, our data driven approach and access to Pine River's proprietary technology enabled us to deliver strong returns in the fourth quarter. This, we believe, is a result of our strategy of targeting bonds with attractive yields and upside optionality.

On the right side of slide six, you will note that the portfolio continued to realize strong yields into the fourth quarter. The annualized yield on average earning assets and funding costs remained relatively consistent quarter over quarter. For the fourth quarter, Two Harbors reported an annualized yield on our average portfolio of security of 5.8%, cost of funds of 1.2%, and a net interest spread of 4.6%. Note that our reported yields include the income from our inverse IOs, and our reported cost of funds is inclusive of net interest rate swap spread expense on our swaps.

Please turn to slide seven. The value of RMBS securities and agency derivatives held in our portfolio at December 31 was $1.4 billion, which compares to $930 million at September 30. This increase can be primarily attributed to the deployment of proceeds from our December capital raise.

The mix between agency and non-agency securities remains consistent on a sequential quarter basis. At December 31, the portfolio consisted of $1 billion agency securities, including inverse IO, and $338 million of non-agency securities for a roughly 75%/25% split. You will note that we continue to focus on prepayment stability, as over 90% of our agency holdings have some degree of protection. In non-agencies, we increased our holdings in option ARM and subprime bonds, due to the opportunities our investment team saw in these sectors.

Please turn to slide eight. There is a lot of information on this slide, but there are a few items I would like to highlight. First, on the bottom left, you will see that we continue to focus on low dollar priced non-agency bonds, as we believe this allows for attractive yields with upside optionality.

Secondly, note that we continue to be diligent in maintaining low interest rate exposure, and our exposure at December 31 was lower than at the end of Q3. This approach has benefited our agency book during 2010's volatile rate environment. The ability to manage prepayment risk in the agency market continues to be an essential component in managing our portfolio. Stable prepayments make hedging easier and help sustain yields.

On the right, you will see that the agency securities we held as of December 31 experienced a three month CPR of 8% during the fourth quarter, which compares to 9.7% for the third quarter. In the non-agency book, the securities experienced a three month CPR of 4%, which compares to 11.9% for the previous quarter. We believe this non-agency [speed] decline was due primarily to slower voluntary speed during the holiday season and from servicers dramatically slowing liquidations as a result of the foreclosure delay.

Please turn to slide nine. Total borrowings to fund our RMBS securities were $970 million -- $971 million at December 31. To enhance liquidity, we continue to ladder our repo maturity, and at year-end, 46% of our maturities were greater than 90 days. I am also pleased to announce that since our last earnings call, we added two new financing counterparties, for a total of 15. Also, due to the increase in our non-agency holdings, we increased our Treasury interest rate swap position from $150 million to $200 million, as a paired hedge to our aggregate funding costs.

Please turn to slide ten. Before turning the call back to Tom, I would like to provide a few highlights regarding the deployment of proceeds from our December capital raise. In mid December, we raised capital during a period which offered terrific opportunities on a risk adjusted basis in both the agency and non-agency markets. We completed acquisition of the target portfolio in late January and are very pleased with the aggregate portfolio we have assembled. I would like to note that all of our purchases will have settled and been funded on or before the middle of February.

One of the benefits of our investment approach is our flexibility in allocating capital among sectors that we believe offer attractive relative value. In December, we saw opportunities in the non-agency market that our investment team was able to take advantage of before year-end. We increased our allocation to option ARM and subprime bonds, due to the attractive values in those sectors.

In contrast, during January, we found particularly good value in the agency market, specifically in the 15 year sector. In keeping with our investment strategy of preferring agency bonds with prepayment stability, purchases were primarily focused on low loan balance pools. Our capital allocation, as of January 31, was approximately 50% agency and 50% non-agency, reflecting a weighting increase toward the agency sector when compared to our portfolio on September 30.

At Two Harbors, we continue to view IO -- inverse IO swap and swaptions to be integral components of the aggregate portfolio, as they provide benefits to performance and support our risk management strategy. These instruments certainly added to the fruitful results during the volatile third and fourth quarters.

As of December 31, swaps and swaptions totaled roughly 77% of repo borrowings, which does not include borrowings for pools that had not yet settled. We estimate that as of January 31, including settlements and funding of agency pools in February, our swap and swaption total notional position, as a percent of outstanding repos, is approximately 65%. This overall increase from Q3 percentage of 35% reflects our purchase of low coupon 15 year pools, which carry a longer duration than many of our other agency positions and to the hedging of the LIBOR component of inverse IO.

In terms of leverage, I would like to note that due to the allocation currently -- higher allocation currently to agency securities, we would anticipate a slight increase in overall leverage from the 3% to 3.5% range to 3.5% to 4%. In addition, as discussed earlier, we continue to maintain low interest rate exposure.

As many of you know, the non-agency market staged a strong rally in January. According to a Bloomberg article published on February 2, as well as various street research reports, non-agency bonds rallied between 1% to 10% in January, with option ARM seniors leading the way. Two Harbors' non-agency portfolio has performed well during this period, contributing significantly to an increase in book value in 2011. We would like to note, however, that while our non-agency portfolio and book value rose in January, it is still very early in both the quarter and the year.

That said, we are still constructive on the non-agency market, as yields are still attractive relative to many other fixed income sectors. Also, we are particularly pleased with the composition of our non-agency portfolio, specifically the upside optionality that we could continue to realize over time. Lastly, I would like to note that it is not our intent to provide specific weekly or monthly updates on the portfolio and its valuation. I would now like to turn the call over to Tom for his closing remarks.

Thank you, Bill. As I said earlier, we are quite pleased with our -- all the developments for Two Harbors in the fourth quarter. We remain enthusiastic about the market opportunities in both the agency and non-agency sectors, and we hope we have given you an ample understanding on how we hope to capture them.

Tomorrow Bill and I will be speaking at the Credit Suisse Annual Financial Services Forum in Miami. If any of our listeners are attending, we hope you will stop in and say hello. With that, I will open the call to questions. Allie?

(Operator Instructions). Our first question comes from Bose George of KBW. Please, go ahead.

Hey, good morning. Nice quarter.

Hey, Bose.

Had a couple of things. One, just wanted to go back to the point you made about the strong run-up in non-agency prices. I'm just curious what -- where incremental yields -- loss adjusted yields are now versus a couple of months ago?

Yes, good morning, Bose. Thanks a lot. Yes, the market, as you know, has rallied in 2011. There are definitely still bonds out there that have attractive yields with upside optionality. Base yields of the bonds that we like are more in the 7% plus or minus range right now, but note that we continue to be cautious on our base view -- our base case view on defaults, losses, and prepayments. Keep in mind also that bonds like this typically fund at less than 2%, so there still remains a nice spread there.

Okay. And the run-up doesn't change your -- we can assume the asset allocation -- or the capital allocation remains fairly similar, or that it's not going to be influenced by the recent run-up in prices here?

Yes. Well, as I noted on the call, our allocation as of January 31 was roughly 50% agency and non-agency. And as you know, we said before, we are opportunistic allocators of capital, so on a go forward basis, you can expect us to continue to take that approach. So the portfolio, as it has over 2010, could change as valuations change in the different markets.

Okay. And then, just one last thing on the non-agency CPR. Obviously, that number was down a lot. Do you think that goes back up, just with the foreclosures starting to pick up, or is there -- the voluntary prepayment -- the rate component of it, is that still going to stay somewhat low, just given the increase we had in rates?

Yes, to both. The better borrowers of -- like, the prime type borrowers, which, as you know, we don't own very much of that paper, those speeds have started to come down, and we would expect, continue to come down. Most of the bonds we own, as the lower dollar price, the option ARM, and subprime, a lot of the CPR is actually from liquidations, so when we look at those, we basically have modeled in this delay. So it's not that surprising to us, but as liquidations start to pick up again over the next three to six months, you should expect to see that those numbers will drift back higher.

Okay, great. Thanks a lot.

Thank you.

Thanks, Bose.

Our next question comes from Trevor Cranston of JMP Securities. Please, go ahead.

Hey. Good morning. Back on the non-agency portfolio, I was wondering if you could talk about what was behind the increase in the yields, sequentially, from the third to the fourth quarter.

Yes, the -- just bear with me for one second.

Sure

Yes, the yield increase had to do partly with the mix. The senior bonds -- some of the senior bonds had some better performance. Some of the mezzanine bonds, particularly, performed better, and as you can see, over the course of 2010, the yields in general have remained relatively stable, but they do tend to bounce around, depending on how things perform in any given quarter.

Okay. And then, also, you just mentioned that you were seeing yields around 7% in that market today. Is that about -- is that a safe assumption for where the assets you purchased in December and January -- is that about the yield you'd book those at, or is it slightly higher because the prices were still a bit lower?

Yes, that's where we see the market sort of currently. We don't really -- we haven't disclosed our booked yields, but clearly, given the run-up in January, to the extent that we bought bonds beforehand, you might be able to imply that those were bought at lower prices and higher yields. But we don't make any specific comments on yields on specific securities.

Yes, Trevor, as a broad statement, yields are lower today than they were in December, and that's why we made the remarks about the non-agency performance in January.

Yes. Okay. And then, last thing, on the repo side of non-agency, have you guys seen any changes in the rates or the ability to use slightly higher leverage to offset the drop in yields that was seen recently?

Yes, --

So, are the (inaudible) available still similar?

Financing has become continuously more available over time. There are more firms that are offering financing on non-agencies than there were, say, three months ago or six months ago or 12 months ago.

Rates in haircuts have drifted down somewhat, but I would say it's still fair to assume that you're looking at haircuts in the 25% to 50%, with maybe an average around 35%, plus of minus, and LIBOR, plus 125 to 200, with an average somewhere in the 150 to 175, for the types of bonds that we're looking at.

Other bonds -- bonds that have explicit triple a ratings today, that there's no chance of there being any loss, would finance better, but that's not part of our mix at this point.

Trevor, we should also note that, obviously, financing in the agency space is available at much lower rates than that, and we continue to use a mix of funding options to optimize our financing rates.

Yes. Understood. Okay. Thank you.

Thanks, Trevor.

Thank you, Trevor.

(Operator Instructions). Our next question comes from Gabe Poggi of FBR Capital Markets. Please, go ahead.

Hi. Good morning, guys.

Hey, Gabe.

Hey, Gabe.

Two quick questions. On the agency side, where are you guys seeing new money spreads today? And then, can you talk about your duration of your swap book, relative to your agency holdings?

Sure. So, yes, the market -- obviously, the curve has steepened out dramatically. If you look on slide six, you'll sort of see what the realized yields have been on our agency book. And keep in mind that because we use IO and inverse IO, that sort of helps control the duration, as well as enhance our yield. So, you can see what our returns have been, and we believe that our returns on the money that we put to work will not differ dramatically.

But I will tell you, on the duration side, if you looked at the bottom of slide eight, you'll see that our overall exposure for a 200 basis point swing in rates, as of 12/31, was roughly 2%. So, we don't necessarily think of hedging duration in terms of how many swaps we have as a percent of repos. It's really sort of what is the duration of our assets, and how are we going to be able to manage that. It just so happens that the combination of IOs and interest rate swaps add up to something that keeps our duration quite low.

Okay. That's helpful. So you would say -- I mean, I'm just backing into the numbers you have in the deck. Looks like 260 odd basis points of spread on your agency, 3.8% is your yield, 1.2%, cost of financing. That's where could put money to work, ballpark, today? On the agency side of things? From a hedge perspective. I'm trying to get a gauge from --

Yes, I understand. I understand.

Yes. Yes.

Yes, we don't actually make specific predictions on the agency spread. Frankly, it comes down to what we find, in terms of whether we like fixed, 30, or 15 year adjustable and then, what the hedge is that goes with it. Lower risk -- a lower risk combination should, by definition, have somewhat lower spread, and so, we don't actually look at it in terms of we're buying this, and therefore, it's this spread.

Got you. Okay. Fair enough. Thanks, guys.

Thanks, Gabe. We appreciate it.

Thanks, Gabe.

Our next question comes from David Jackson of Penn Capital. Please, go ahead.

Good morning, guys.

Good morning.

Good morning.

Nice quarter. Just had a couple quick questions for you. Going back and coming at this non-agency component of your portfolio from a different angle, you're looking at loss adjusted yields today at -- in the 7% context. Using your forward default loss and prepay expectations in those pools, where do you see fair value for that paper? And, to maybe ask it again, differently, how much spread compression do you think is left in that market?

That's a great question. I wish I had the answer to that. The -- it's a little bit of evolution, because if the performance is as we expect, then the returns we get will be what we expect when we purchase a bond. One of the things that we try to do is purchase bonds where we think we have upside to a variety of different metrics, including credit burnout, any government programs that help borrowers, modifications that reduce defaults.

So it's frankly difficult to predict where the prices of securities might go. We just happen to like bonds that -- we're covering our downside risk by having such a big discount, but where we have some upside possibilities to a variety of these things I just mentioned.

In terms of fair value, it's kind of hard to make an assessment on that, but I think if you look at where Treasuries are trading, where corporate bonds are trading, where other alternative fixed income assets are trading, in terms of yield, it's our belief that at least certain parts of the non-agency market are still really very attractive on a loss adjusted basis. So, could those compress more? They certainly could, if you compare yields. On mortgage assets, such as these, there are obviously some uncertainties, which is why they trade at such a discount.

Yes, additionally, I would add that we make pretty draconian assumptions in -- when we arrive at that 7% yield. Certainly, certain market participants will tell you the yield is higher than that, perhaps on the magnitude of a few hundred basis points, and therefore, we still think there's, given other alternatives, headroom left in non-agency bonds.

Okay. Can you give us an update on the accretable yields on the non-agency book? When that balances (inaudible).

I'm sorry. Repeat the question.

Yes, the accretable yield on the non-agency book. Can you give us an update on where that is today?

This is Brad Farrell. I'm a little bit -- trying to understand the question a bit more in detail. Are you trying to project the yields that we'd be recognizing in Q1, based on our current portfolio?

No, that you're -- when you book this non-agency paper, there's obviously loss expectations factored into the carrying balance of that pool. The accretable yield -- the discount from and the cash flows you expect to realize through accretion over the life of that book. You guys typically break it out in the queue. Maybe you call it something else, but the accretable yield is how I think about it.

So, the split between the credit reserve and the accretable yield as of 12/31?

What is that accretable yield? Yes. Today.

Yes, we don't have that for disclosure at this point. We will have significant transparency on that in our 10-K, which we'll be releasing here in a few weeks. I think that's probably the best answer at this stage.

Okay.

The relationship is fairly consistent, though, with our prior portfolio book.

Okay. Just one last question. You guys made a comment before, and I didn't catch the whole thing about your operating expenses relative to your equity base. You think that you guys can continue to make some improvement there. What are you targeting, and what is the timeframe over which you expect to achieve that?

Sure. We're going to -- our -- we're going to try to achieve, in first quarter already, to try to get the expense ratio to be between 1.5% and 1.7%, annualized.

Okay.

So, in the fourth quarter, it was 1.9%, and our target is 1.5% to 1.7% in short order.

Got it. Thank you very much, guys.

Thanks, David.

Thank you.

Our next question comes from Daniel Fisher with Wells Fargo Advisors. Please, go ahead.

Hi, guys. Great quarter. I had a couple questions. One is you mentioned that the yields are lower on -- across the board, I guess, primarily on the non-agencies. How does that affect your hedges? Are your hedges -- Treasury rates and so forth have been higher, as of late. Were you -- did you make money on your hedges and also make money on your portfolio?

Hey, Dan, how are you?

Good.

Thanks for calling in. The -- so, on the non-agency bonds, given that they're roughly $60 price bonds and have a big credit component to them, generally, we don't assign much interest rate exposure to those. It's actually our belief that if the economy is better, and employment picture is better, that those bonds will actually perform better. So, if rates happen to go up as a result of the economy being better, those bonds, actually, we feel pretty comfortable with not having, really, exposure to rates.

The rate hedging that we use is primarily on our agency book, and as I noted before, we use a combination of IO and inverse IO bonds, as well as swap and swaptions, to control the duration of our agencies.

Okay.

So, basically, that strategy, as I mentioned earlier, and as Jeff noted, in both the third and the fourth quarter, when rates fell by, I guess, roughly 50 basis points in the third quarter, and then, they went up to 75 in the fourth quarter, the agency book, including the hedges, made money -- or contributed to the increase in book value in both quarters. So, by keeping a low duration, as you see on the bottom of slide eight, that sort of protects us, sort of, in different rate environments.

Right. Okay, and I -- this is a little bit for my own education, but in the tax-free -- the tax-free market has been hit pretty hard, and there's quite a bit of housing finance agency bonds out there that look a little bit like mortgage backed securities. Is there much of a crossover buyer there with those bonds getting hit with the (inaudible) market?

Yes, Dan, it's Tom. Sure, there's always going to be crossover buyers. What shape that takes -- obviously, it's -- is difficult for us to predict.

You're not one of them?

No, we are sticking to our knitting. We buy RMBS securities, and that's what we do.

Right. And then, the -- as far as -- is there any guidance you're giving, as far as future capital raises?

No is the short answer. We view it as a very simple process. If it's a good deal for our shareholders, we'll consider it. If it's not, we're not going to consider it. That's how we think of it.

Right. And as far as the warrants goes, the plan in place is not to -- just to -- I mean, just to leave the warrants out there as they are?

At this time, we really have nothing to say about the warrants. They're obviously out there, but at this time, we have nothing to say about them.

Okay. Thank you. Great quarter.

Thanks, Dan.

Thanks very much, Dan.

Our next question comes from Bruce Harting of Barclays Capital. Please, go ahead.

Good morning. I'm sorry. I joined the call a little late.

Bruce.

Morning, Bruce.

Good morning. So you might have covered it already. But how -- the -- how much -- of the amortization of the discount, how much of that is included in the income in the quarter? And then, that -- the good news is you're realizing gains there. Is there ever a cash flow issue, in terms of the dividend from that? Thanks.

We're just looking that up right now. Hang on one second.

Thanks. And if you want to do offline, that's fine, too.

Yes, the number is actually disclosed in our press release on page four.

Okay.

The discount accretion in the fourth quarter was $4.2 million.

Okay. And so, from a cash flow perspective, that's not -- that's never going to be an issue?

No -- Bruce, keep in mind that we get monthly cash flow from all of our mortgage investments. And so, in terms of actually having the cash to pay the dividend, if we -- to the extent that we retain some instead of reinvesting it, that's -- we have plenty of cash.

Okay.

And you've seen on our prior quarters that we maintain a pretty healthy cash balance, in any event.

Right.

Yes, we don't anticipate that's an issue, in any regard, Bruce.

Thank you.

I'm showing no further questions at this time, and I'd like to turn the call back over to Mr. Tom Siering.

Thanks, Allie. I'd like to thank everyone for joining us today. We look forward to speaking to you soon. Have a great day.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have a wonderful day.