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CYS Investments Inc (NYSE:CYS)

Q2 2013 Earnings Conference Call

July 18, 2013 09:00 AM ET

Executives

Kevin E. Grant - President and CEO

Frances Spark - Treasurer and CFO

Richard E. Cleary - COO and Assistant Secretary

William Shean - MD, Investments

Analysts

Steve DeLaney - JMP Securities LLC

Dan Altscher - FBR Capital Markets

Michael Widner - Keefe, Bruyette & Woods

Mark DeVries - Barclays Capital Inc.

Joel Houck - Wells Fargo Securities

Jason Stewart - Compass Point Research & Trading, LLC

Kenneth Bruce - Bank of America Merrill Lynch

Eugene Fox - Cardinal Capital Management

Kevin Casey – Casey Capital

Adam Waldo – Lismore Partners

Operator

Good morning and welcome to the CYS Investments, Inc. 2013 Second Quarter Earnings Conference Call. During management’s presentation, your line will be in a listen-only mode. At the conclusion of management’s remarks, there will be a question-and-answer session. I’ll provide you with instructions to enter the question queue after management’s comments.

Management has requested that I remind you that certain information presented and certain statements made during management’s presentation with respect to future financial or business performance, strategies or expectations may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements indicate or are based on management’s beliefs, assumptions, and expectations of CYS’ future performance, taking into account information currently in the Company’s possession. Beliefs, assumptions, and expectations are subject to change, risk and uncertainty as a result of possible events or factors, not all of which are known to management or within its control. If management’s underlying beliefs, assumptions, and expectations prove incorrect or change, then the Company’s performance and its business, financial condition, liquidity, and results of operations may vary materially from those expressed, anticipated, or contemplated in any of their forward-looking statements.

In any event, actual results may differ. Management invites you to refer to the forward-looking statement disclaimer contained in the Company’s Annual Report on Form 10-K filed with the SEC, which provides a description of some of the factors that could have a material impact on the Company’s performance and could cause actual results to differ from those that may be expressed in forward-looking statements.

The Company has asked me to note that the content of this conference call contains time-sensitive information that is accurate only as of today, Thursday, July 18, 2013. The Company does not intend to and undertakes no duty to update the information to reflect future events or circumstances.

For opening remarks and introductions, I’ll now turn the call over to Rick Cleary, CYS’ Chief Operating Officer. Please go ahead, Mr. Cleary.

Richard E. Cleary

Thanks, Cliff. Good morning and welcome to CYS’ 2013 second quarter earnings conference call. Today’s call is being recorded and access to the recording of the call will be available on the Company’s website at cysinv.com beginning at 3 pm Eastern Time this afternoon.

To better understand our results, it would be helpful to have the press release that we issued last night. As in past releases, the earnings released includes information regarding non-GAAP financial measures, including reconciliation of those measures to GAAP measures, which will be discussed on this call.

I’d now like to turn the call over to our CEO, Kevin Grant.

Kevin E. Grant

Thank you, Rick, and good morning. Welcome everybody to our second quarter 2013 earnings conference call. As usual joining Rick and me this morning is our CFO, Frances Spark and Bill Shean from our investment team. We look forward to your questions, a few comments.

Well the volatility in Q2, 2013 was the highest. It’s been in a very long time in the bond market. This was a repricing event that many had been predicting for the past three or four years and as usual these are unpredictable and they happen fast. The long end of the treasury curve abruptly rose by a 100 basis points over a five or six week period of time. This was nearly a four standard deviation event, which is something that we model in our stress test, we don’t like these events, but we do prepare for them.

This was a shock to the system and a challenge for the MBS market to keep up with. In my view the MBS market really has never provided enough yield premium to compensate investors for a volatility of event of this magnitude and of course the Feds buying activity has squeezed down yields. So, not surprisingly mortgage securities repriced by even more than treasuries and other fixed-income assets.

Of course we mark everything in the market, so our book value is a direct look at the MBS market. At this point, I’d say that the mortgage securities market is looking through the micro details of the timing of taper and is trying to reprice in the Feds return to more normal traditional policy tools.

Throughout the storm during the quarter, we were very disciplined and we shrunk the portfolio generally ahead of the market moves, maintaining discipline around leverage and liquidity is the key to running a levered fixed-income strategy. So we’re very focused. At quarter end our leverage was down and our excess liquidity was about 65% of the net asset to the Company. This liquidity is the life blood that helps the Company get through storms and be in a position to take advantage of better investing environments on the other side.

During the quarter, the mark-to-market on hedges did not correlate well with mortgages. So, here in the short run, the basis risk aggravated the book value impact. They did work however just not as well as we’d have liked. Like everything in bonds, there is an important other side to this. Mortgages are now quite a bit more attractive relative to the costs of hedging and borrowing costs. If history is any guide, one would expect for these relationships to normalize, but it is very difficult to forecast how long this might take.

In my view, the bond market has now changed its pricing regime back to the traditional way. Bond investors no longer see the Fed as the backstop bid for long dated bonds, regardless of the timing of taper. Rather the bond market has to find its own market clearing equilibrium for long dated assets 10 and 30-year bonds, absent the hope that the Fed will be their exit.

When the Fed’s Chairman says they can consider tapering QE, its pretty clear hence the decisive market move. So how does the bond market price long-dated assets? The Wall Street traders practice the art of price discovery, trying to test new market levels and fair it out where long-term holders have interest. The long-term holders will look out three or four years or longer and try to gauge the end-point for Fed funds and the timing of the path that the Feb might take.

This can be observed in forward markets. For example, the September 2015 Eurodollar Contract and if you don’t know what that is, that’s a contract by a three month CD to be priced at September of 2015. So it’s a forward forecast of rates. That contract hit 1.45 a few days ago, implying that the market was priced for about a 125 basis point tightening by mid 2015 and of course this is quite a bit more aggressive than the Chairman Bernanke has messaged. That contract has recovered back to about 110 basis points right now, still a meaningful tightening in 2015.

Further out, the mid 2017 Eurodollar Contract hit 3.5%, suggesting that the market was priced for actual inflation well above the Fed’s 2% target and systemic wage pressures emerging in the next four or five years. The combination of all these forward rates roll-up into the yield on the 10-year portion of the yield curve and long bond investors make their judgments about value against these yardsticks.

The real economy is just now – just beginning to show its response to the rise in rates. Mortgage refinancings have dropped 60% from their peak, housing starts and building permits, which are good forward indicator, have noticeably softened, so we may be at the beginning of a down draft in construction related jobs, but it’s too early to really conclude them.

The sequester and tax hikes have produced some interesting mirages. Payrolls may be growing simply because certain unemployment benefits have gotten truncated and the furloughing of certain government workers just a few days per pay period does not hit the payroll number. These are likely a few of the fiscal headwinds Chairman Bernanke seems to recognize.

You're all probably overdosed on commentary about the Fed but I just have a few thoughts to add to the mix. First, given the weakness in GDP growth and inflation, Chairman Bernanke's message was a bit surprising. This suggests to me that the Chairman and the Committee have become more sensitive to the costs versus the benefits of QE and also that they want a smooth transition for the next Chairman.

The next Chairman is going to need some tools in case the economy hits another soft patch or faces a deflationary trap. If this is correct, then taper will happen and the pace does not matter a whole lot so long as the Fed does not do something outside the bounds of market expectations. I think this is a thesis that the market has now adopted.

Looking at today's markets and the outlook for returns, we see a much improved investing environment compared to the prior several quarters. We'll take advantage of the better spreads through our portfolio run-off which currently looks like 600 million to 700 million per quarter of new investment appetite, just from the run-off of the portfolio.

For new investments we see the net interest spread on 30-year mortgages with a hedge of just above 200 basis points which is quite a bit better than it's been, and for the 15-year market just above 1.5% which is a bit better than it's been the past several quarters.

The Hybrid ARM market has cheapened actually a little bit more than the 15-year market but supply remains pretty limited. We'd expect the net interest spreads in Hybrid of around 150 basis points.

With that, we're happy to take questions. I will ask the operator to take a few moments to assemble the queue and this will take a few moments. So, operator, it's all yours.

Question-and-Answer Session

Operator

Thank you. We'll now begin the question-and-answer session. (Operator Instructions). Our first question comes from Steve DeLaney from JMP Securities. You may go ahead.

Steve DeLaney - JMP Securities LLC

Thank you. Good morning, Kevin.

Kevin E. Grant

Good morning.

Steve DeLaney - JMP Securities LLC

So in retrospect the timing of your Series B preferred offering in late April was for fortuitous, I think. I guess at that point there's no way we could have expected the volatility, but it certainly helped you with your liquidity and your leverage in minimizing the shrinkage in the portfolio. So given your comments just now about spreads and the mid-teen ROEs that those spreads imply, the preferred market something that you – CYS will look at for possibly obtaining some additional capital to play offense with these higher spreads, it looks like you're about – your mix is about 13% of total capital currently? Thanks.

Kevin E. Grant

Yeah. Steve, the preferred market has cheapened a little bit here. I think we got very attractive pricing when we did our preferred. We constantly look at all these things. If we can find an accretive capital markets transaction, then we got to look at it seriously. I wouldn't say that it's particularly appealing right now but it could get there.

Steve DeLaney - JMP Securities LLC

So you issued the coupon there was 7.5 but obviously what you're saying is that given that those are long-dated securities and rates are up, what, 80 basis points, 90 basis points or so that you're well up over 8 percentage you see that market today?

Kevin E. Grant

Yeah, I have not talked to a banker about it but I would guess that's probably the zip code.

Steve DeLaney - JMP Securities LLC

Okay. And this is, I guess, just the 60,000 foot level question, Kevin. When I look at your risk management in the quarter, definitely we can see the benefit of the liquidity and the leverage and when how you were operating there. When I look at the portfolio and the hedges, I'd only see a material change. So I'd be curious how you and Bill and the team are thinking about sort of duration risks given this new non-Fed controlled market and where that equilibrium lies, and just looking at it your notional swap ratio to MBS did increase a little bit because of the shrinkage, but on the other hand the 30-year fixed percentage of the portfolio moves up to about 45% from 30%. So I guess just any color you could give us about how you're thinking about duration risks when you're looking at what securities to buy and how to hedge them?

Kevin E. Grant

I have a few thoughts and then Bill might have a few to add to it. But duration in this kind of market, it's a tool but it's not that great of a tool in these high volatility markets because the durations are very unstable.

Steve DeLaney - JMP Securities LLC

Right.

Kevin E. Grant

And it's really just a calculation. And if the market wants to take down the mortgage market more than the treasury market for whatever reason, technical or what have you, then that is simply going to happen. The basis risks, so this is the different between the movement in mortgages and other assets, was really alive and well in Q2. And historically when you have these big basis events, they happen very abruptly, they're very difficult to predict and then they tend to correct over a long extended period of time. So I could envision that period of time over a couple of quarters mortgage prices grind up higher and higher as much as a point without any change in the treasury market. And Bill's shaking his head. Any thoughts Bill?

William Shean

The thing I'd say is, Steve, over our careers there's always been a good backstop to the mortgage market. Fannie and Freddie fulfilled that role and now the Fed has fulfilled that role. And they're still going to be buying some – plenty of bonds over the next period of time, but as Kevin said we got to factor another – sort of the future of the market as well. So we'll be utilizing duration but we'll also be watching all the other demand and supply characteristics that exist right now.

Steve DeLaney - JMP Securities LLC

Okay, I appreciate that color and certainly we understand that the event in the second quarter that the best hedges in the world don't work when you get those basis widening and there's not really any way to hedge that from an interest rate standpoint. So thank you for the comment.

Kevin E. Grant

There really is no hedge. You couldn't have owned enough options.

Steve DeLaney - JMP Securities LLC

Right. Thanks so much for the comments.

Kevin E. Grant

Thanks, Steve.

Operator

Our next question comes from Dan Altscher from FBR. You may go ahead.

Dan Altscher - FBR Capital Markets

Hi. Thanks. Good morning.

Kevin E. Grant

Good morning, Dan.

Dan Altscher - FBR Capital Markets

A question, I think Kevin you mentioned that you started to reallocate the portfolio a little bit earlier on before we saw most of the market moves. Can you give a little bit more detail there? I guess within the 15-year paper, what coupons did you sell and which ones you hold on to? And then maybe in a 30-year paper, what coupons did you start adding to and which ones maybe to avoid?

Kevin E. Grant

Yeah, sure. We started doing this trade in Q1 and sort of continued throughout the first half of the year. And when the spread between 30-year mortgages and 15-year gets to about 100, that was a very compelling relative value opportunity. That spread has actually come in a little bit, but it's still in that internal neighborhood. Bill, is this right? We pretty much got rid of our 15-year 2.5?

William Shean

Yeah, those 15-year 2.5 are gone.

Kevin E. Grant

They're pretty much discount bonds now. They're more like corporate bonds substitutes and there's not a whole lot of yield there. They really fit our corporate bond portfolios not so much a mortgage REIT. My own fidelity day that's how I would have looked at them and that's what I would have used them for. And then in the 30-year markets, our production is really still in the 3.5 coupon although we’re starting to see some 4s being created and at current pricing, 4s are pretty attractive. It's just the question of how much supply there's going to be.

Dan Altscher - FBR Capital Markets

Got it. And so I think you definitely expressed interest in the 30-year market. Do you think that's just more of a – continuous to be temporary type of call or is this a long term, maybe portfolio shift in strategy?

Kevin E. Grant

Well, it's largely driven by the yield curve. And the yield curve is so steep, particularly between 5s and 10s and I'm just talking about treasuries here. This has really cheapened the 30-year market. And one way of thinking about it is to really look at forward rates and sorry to be mathematical on you here, but if you look at forward rates you can see that a pretty aggressive tightening is built into long rates. And you see this very clearly in forward rates and it's expressed in the 10-year. And that tightening is not really reflected in the short end of the yield curve five years and in. Now at some point, we’re going to get to a point where what's assuming that the economy is okay that an actual, it will be on the table that the fed will actually move that fund. And at that point the five-year part of the yield curve is very normal. So that’s the point where the 15-year market were cheapened. And I don’t know whether that’s a year from now or five years from now, it could be 20 years from now, I don’t know. But in the meantime there’s a off a lot of yield and return to be picked up in the 30-year market, so it's hard for me to really forecast whether it's a short-term thing or a long-term.

Dan Altscher - FBR Capital Markets

Got it. And I just have one numbers question, just looking at the balance sheet there was a significant increase in the receivables for securities sold. I know you kind of net that out in your leverage calculation, but did that $4.6 billion, is that all being used to pay down repo in July and subsequent or going further or is that re-deployable capital?

Kevin E. Grant

I am not sure exactly how to answer that, because it all kind of nets out and we work with the repo counterparties to just substitute pulls and so forth so it's …

Frances Spark

Most of it relates to just the deferment on the TBA market.

Dan Altscher - FBR Capital Markets

So, I guess my question going forward is if, when we think about starting in July in third quarter, we should think as your total liabilities, your total repo outstanding is really kind of being that or leverage being that really that a true $15 billion, is that right?

Frances Spark

Well I think that seem to be perhaps the $14 billion, I think that’s probably where you should stay with it, that’s continued to fund using the same – relatively same level of forward purchases.

Dan Altscher - FBR Capital Markets

Okay, maybe I’ll follow-up with you after the call on this.

Frances Spark

Right.

Operator

Our next question comes from Mike Widner from KBW. You may go ahead.

Michael Widner - Keefe, Bruyette & Woods

Good morning, guys.

Kevin E. Grant

Good morning.

Michael Widner - Keefe, Bruyette & Woods

So, I just want to follow-up on what you were talking about or a couple of related topics that you were talking about. So you mentioned spread opportunities that you saw from your view across the different products. And sort of the odd man out there again listening to your numbers, but by my calculations as well is sort of the 15-year market because it's – if you’re getting what you described as a 150 basis point in that spread in 15-year and something every close to that in hybrids it sort of makes me think why doesn’t anyone want to be in 15-year fix if you can get comparable spreads in hybrids, and at the same time obviously what you’re doing with the portfolio is shifting more toward 30-year and implying you think the risk adjusted returns there are better, but obviously you’re still sitting on a portfolio that’s fairly heavily 15-year. So number one, could you just comment, I’m interpreting your comments regarding the spreads properly and is also is that a driver, is that largely a driver of the actions and then related to that so why aren’t we seeing more on the hybrid side in terms of activity I mean why all 30 years as opposed to maybe a more balanced mix?

Kevin E. Grant

Well in hybrids it's all a question of production and what's coming into the market. And going forward refi its pretty much turned off and purchase money is still happening. The scale is much lower for purchase money. I would suspect that the origination mix is going to create some supply of hybrids, but I don’t know Bill we haven't really seen much yet.

William Shean

We haven't seen a lot yet Mike. And then one other note, as Kevin mentioned that spread between the 30-year add and 15-year has compressed a little bit, so being relative value players we’re careful to monitor that. So, if 15 years become more attractive relative and we can’t get added supply in hybrid arms I think we’d probably be a little more active in 15 years.

Kevin E. Grant

And Mike, at the beginning of your question was this notion that implied anyways, that hybrids are less volatile than everything else and in Q2 that was not true. Hybrids were actually down quarter-over-quarter by more than the 15-year market.

Michael Widner - Keefe, Bruyette & Woods

I suppose that is depending on what hybrids you’re looking at and what 15’s you’re looking at but…

Kevin E. Grant

Just generically.

Michael Widner - Keefe, Bruyette & Woods

Yeah, so my math doesn’t connect the same, but that’s okay. I guess related to that question and going back to I think Steve’s question and some of your answers on the hedges, I mean you’re clearly talking about, you’ve talked about that liking the 30-year fixed market better because of how the curve is shaped and better in returns and sort of the north of five-year part of the curve. So clearly you like that place better, that’s where you’re putting the portfolio, but as we look at the compensation of your hedge book you really don’t have, I mean the longest swaps you have are five years and you really – most of it is actually concentrated lower than that. So, just wondering if you could talk a little bit about the clear duration extension in rotating more into longer duration products particularly as prepay is slow, but not really adding much in the way of duration on the hedge book in particular not really having any hedges that are on the long part of the curve as opposed to more -- a lot at the short end of the curve.

Kevin E. Grant

Well, keep in mind that 30-year mortgage’s particular premiums which is where we play. Their durations clearly are longer than the 15-year market but they’re not, it's not like they’re long bonds, so durations are still in the five kind of neighborhood, that’s really number one. I think number two probably most important is that, yes 30-year paper is more volatile in price and therefore we – and the ROE risk adjusted is much higher, we would simply on lots of them, we'd be less levered, we wouldn’t be 8 times, we'd be 7.5 or 7, I don’t know what the number is and be able to produce a better ROE with about the same or less volatility. That’s the goal whether we’ll be able to get there or not that’s what we constantly strive to do. So, you got to take the asset mix in total not just one asset specifically versus another asset.

Michael Widner - Keefe, Bruyette & Woods

And okay, well I appreciate that. And then just, to be clear following up, I mean you’re -- so you’re suggesting that a 30-year fix 3.5’ish coupon prepay protected or at least modest pay-ups, you would consider the asset durations on those in the vicinity of five years, is that – that’s kind of what you’re thinking?

William Shean

That 4.5 to 5.

Kevin E. Grant

4.5 to 5, Bill?

William Shean

Yes.

Michael Widner - Keefe, Bruyette & Woods

Okay – and considering the fact that they’re paying it single-digit kind of 10’ish CTRs that still jives with your 4.5’ish, 5?

Kevin E. Grant

Well, that’s how they behave in the market place, so they behave like a 4.5, 5 duration that’s how the market price moves around.

Michael Widner - Keefe, Bruyette & Woods

That’s except last quarter?

Kevin E. Grant

Yeah, well duration didn’t really work last quarter.

Michael Widner - Keefe, Bruyette & Woods

Yeah, okay so that’s sort of my point. And the question I guess, this relates to is from a cash flow duration standpoint no one is going to argue I don’t think from a cash flow duration standpoint that that’s a 4.5-year bond with cash flow duration, and so everyone is talking about the basis having widened this quarter and that’s why the hedges didn’t work. And I guess I am just wrestling a little bit with, well maybe the problem was that the basis was too tight before because mortgages were overbid and what we’re seeing is everyone’s models that are telling you, they’re supposed to behave as a 4.5-year duration were clearly wrong and maybe they’re supposed to behave more like the cash flow duration which I think would be quite a bit longer, no? Or I mean maybe you answered the questions, I guess the question is do you see a difference between that cash flow duration in the 4.5-year behavior duration that we’re supposed to expect?

Kevin E. Grant

Well, I’ve been wrestling with this for 30 years, Mike. What I can only suggest to you is that over the long haul leading many quarters cash flows matter and the ROE is drive off the cash flows, but that takes -- you have to be a long-term investor. And in a quarter like Q2 it really rattles peoples cage and I recognize that if you got short-term performance measures and all that kind of stuff it's really challenging to be a long-term investor. But ultimately the cash flows rule it just takes many, many quarters for the ROE to come through. So, the key for the business is to make sure that we’re running our leverage conservatively and we’re running plenty of liquidity to get through these periods with no trouble.

Michael Widner - Keefe, Bruyette & Woods

Well, so sorry to give you a little bit of a hard time, but I do appreciate that it was probably the most volatile quarter and the toughest quarter in a couple decades, so I do appreciate that. And certainly your guys view on liquidity and your ability to make it through all of that is solid. So that's why we [adjoin], appreciate and obviously the duration question is just a tough question with rates being as well as they are these days. So thanks for the comments and color, I appreciate it.

Kevin E. Grant

Okay, thanks Mike.

Operator

Our next question comes from Mark DeVries from Barclays. You may go ahead.

Mark DeVries - Barclays Capital Inc.

Yeah, thanks. Just wanted to get your reflections on kind of the intermediate term outlook if we continue to see a rate sell-off, kind of your thoughts on how much more risk there is for additional spread widening? And also how much more extension risks you actually think you have here at this point in the risk cycle and therefore kind of what your appetite would be for additional delta hedging if we see rates continue to sell-off?

Kevin E. Grant

Thanks for the question, Mark. The portfolio is smaller, so obviously there's less price sensitivity to a basis re-pricing, if you will. So that's kind of good news. I don't think there's a whole lot of extension risks left. There's always extension risk in the mortgage market, but relative to what we had in Q2, mortgage has really extended quite a bit. And when things go from high to low, I mean we saw seven handles so $106 prices to $99 dollar prices in the quarter, that's a pretty volatile quarter. To have two quarters in a row like that would be pretty unusual. You'd have to go back to hyperinflation environment like in the '70s when you had a very, very different kind of set environment to get that kind of back-to-back volatility. So I don't know whether I'm answering your question, Mark. Bill, do you have any thoughts you want to add to that?

William Shean

Yeah, I think the market has been – as Kevin mentioned them, the market has priced in most of the taper while we thought might take three months or a year, basically in about six weeks or less. So we think most of that has been taken care of going forward. So, I think from our point of view it's a low probability event for them to behave like this again, given where they are priced now. As Kevin said, we were buying $105 and $106 priced securities and now we're buying $101, $102, $103 priced securities. They're pretty fully extended by the mortgage market right now.

Mark DeVries - Barclays Capital Inc.

Okay. And what kind of events or market triggers you think we need to get a little more volatility in the short end of the curve and roughly benefit some of the swaps you have in place?

Kevin E. Grant

We're going to need an inflation event. We're going to need to see genuine threatening inflation and markets going to need to see it and the Fed's going to need to see it where LIBOR is going to be put in play. And that seems to be nowhere in sight.

Mark DeVries - Barclays Capital Inc.

Got it. Okay. And just lastly I'd like to drill down a little bit on kind of where returns are? Understanding that mortgages cheapened even more since the end of the quarter, are the yields and spreads net of hedging that you disclosed as of the end of the quarter, is it somewhat indicative of where incremental dollars can be put to work today? I'd say 227 yield and 136 hedge adjusted spread.

Kevin E. Grant

I'm not sure what numbers that you're pointing at. I can give you where we see the market as of – well, two days ago but the market hasn't changed that much. We see the 30-year market providing a yield of 3.4% to 3.5% and the 15-year market at about 2.5%. Financing costs – when you get those big sell-off in any asset class, that money goes to cash, so there's just tons of cash around. So financing costs are around 40 basis points. Hedging costs are higher than they were but they're not as we've been discussing. They haven't gone up by as much, so hedging costs are not as high. So this is how we get to that net interest spread that I described earlier.

Mark DeVries - Barclays Capital Inc.

Okay, I'm sorry but what was that spread?

Kevin E. Grant

So in the 30-year market we see net interest spread for new money and just above about 200 basis points.

Mark DeVries - Barclays Capital Inc.

Okay.

Kevin E. Grant

And in the 15-year idea, just above 1.5%.

Mark DeVries - Barclays Capital Inc.

Okay.

Kevin E. Grant

And to the extent that we can find hybrids, it's probably around 1.5% too but once again they're tough to fair it out.

Mark DeVries - Barclays Capital Inc.

Okay, got it. Okay, so that gets to a mid-teens ROE roughly on new money put to work. I guess at least in your current portfolio as of the end of the quarter, I was calculating something closer to 11% ROE which kind of supported about a $0.30 dividend. Given kind of where you can put money to work today, can you just comment on that relative to the current dividend policy?

Kevin E. Grant

Yeah, so I our portfolio run-off is 600 million to 700 million per quarter, so that's our investment appetite to take advantage of the current spread environment. So, the ROE should be grinding its way higher. But it takes time to [write] over $17 billion portfolio, 700 million a quarter; it takes some time to refresh the portfolio.

Mark DeVries - Barclays Capital Inc.

Good. Finally, could you just comment on kind of where you see the dollar roll trading today? Is it still special? Are you still getting meaningful ROE pickup on that relative to just settling today?

Kevin E. Grant

That continues to be a great story and a great value add for us. In the 15-year market the drop over two months is about 17, 30 seconds and then the 30-year market it's 18 to 19, 30 seconds over two months. So that's a significant pick up for us each and every month that we're able to roll bonds.

Mark DeVries - Barclays Capital Inc.

Got it. Thank you.

Kevin E. Grant

You're welcome.

Operator

Our next question comes from Joel Houck from Wells Fargo. You may go ahead.

Joel Houck - Wells Fargo Securities

Thanks. Good morning, guys. One of the other fallouts from the Fed tapering talk was the collapse in premiums specified pool collateral. I'm wondering now that those premiums have collapsed, does it make sense or perhaps in the quarter to shift more towards that because it's essentially a free option if rates come down and people start to get worried about prepayment risks, because essentially as long as their securities are eligible for TBA delivery, they have the same duration extension risks as a TBA. Does that makes sense and did you guy’s kind of move toward that approach as you saw premiums collapse in the quarter?

Kevin E. Grant

Well, as you know, we sold most of our specified pools a couple of quarters ago when the premiums were so high. We did that for exactly this reason not that we're forecasting a big backup in rates, but we just knew the premiums were too high. And when people are less concerned about prepayment activity, obviously those premiums just disappear. In today's market, there are plenty of things that can be done to get them call protection and to the extent that those trades are available to us, we'll absolutely take advantage.

Joel Houck - Wells Fargo Securities

I guess do you see it – am I missing something or it seemed to me like the call protection is very cheap right now and it's essentially a free option unless there's – I mean our understanding, Kevin, is that for HARP securities, the LTV is 105 below or eligible for TBA delivery. Is that – you see it the same way or am I missing something?

Kevin E. Grant

No, we see it the same way. I'd rather not tell all the mortgage traders on the call what we're in the market for.

Joel Houck - Wells Fargo Securities

No, I understand. I understand. But at the same point, I mean if there's – I think several years ago, people didn't talk as much in public about specified market and I don't think it's a bigger secret today, but I appreciate the sensitivity. I guess the last question is, and maybe I think somebody touched on it, was there any change in the distribution of coupons in the quarter? Obviously the lower coupons underperformed and you made some comments about the 15-year 2.5 being in a discount now. Did you guys make any changes in making coupon distribution during the quarter?

Kevin E. Grant

Well, it's hard to do because the coupon distribution of what's been created and what's trading in the market is just so tight. So in the 15-year market there are two securities and in the 30-year market, there are basically two securities. Even if you wanted to, it'd be pretty tough to execute.

Joel Houck - Wells Fargo Securities

Well, I guess you can always buy season paper, right? It's higher coupons or sell them if you don't think there results a value there?

Kevin E. Grant

Well most of the seasoned securities are on the Fed's balance sheet.

Joel Houck - Wells Fargo Securities

Okay, got it. All right, thank you very much.

Operator

Our next question comes from Jason Stewart from Compass Point. You may go ahead.

Jason Stewart - Compass Point Research & Trading, LLC

Thank you. In terms of the 30-year, if it stays as attractive as it is today, 30-year MBS. Is there a limit to how much of the portfolio you would put into it?

Kevin E. Grant

There is no limit, but it really boils down to risk versus reward and if we – this is a hypothetical conversation, but if we wanted to go to a 100%, 30 years which is very unlikely. I think we’d be operating with much lower leverage. It’s by definition it’s a more volatile asset class, so therefore we use less of them.

Jason Stewart - Compass Point Research & Trading, LLC

Okay. That’s helpful. And then, a very strategic question, if we’re in a environment where rates continue to turn to higher quarter in and quarter out, is there any – would you change the way you look at drop income or your dividend policy?

Kevin E. Grant

Well, if we’re in a ongoing chronic sustained multi-year bear market in bonds, then we want to retain as much as possible. So, the Board thinks about this all the time and if the ROE is there, and we can retain some of the earnings, we’d obviously like to. And having said that, it is a REIT, people are expecting distributions and we need to distribute taxable income and that’s just the nature of the beast. So – but these are all hypothetical conversations.

Jason Stewart - Compass Point Research & Trading, LLC

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

Kevin E. Grant

Yes.

Operator

Our next question comes from Ken Bruce from Bank of America Merrill Lynch. You may go ahead.

Kenneth Bruce - Bank of America Merrill Lynch

Thank you. Good morning. So, you highlighted the volatility that was witnessed in the quarter and obviously taking a more conservative position certainly makes sense. I’m interested in knowing what you would need to see in order to I guess reengage the market a little bit more aggressively, obviously volatility has come down a bit since May and June, but obviously there is still the whole potential for tapering in the like. So I’m just kind of trying to understand how you look at the world and what you need to see in order to be into, I think that you’ve got a better playing field just in terms of putting money to work?

Kevin E. Grant

Well, that you know the Fed is engaged in a giant experiment and we’re in the middle of a [Petri dish] test here and there has been a pretty significant rise in rates and there will be and there is a response in the real economy. And the question is and this is the [Petri dish] at the moment is can the economy, specifically payrolls, just continue that confidence and continue to grow despite this rate rise. And it’s really too early to say what it means for us is we should expect higher volatility and less visibility than we’ve had in the past several quarters. So for now I think it – you’re supposed to be more cautious, more defensive and got to be on you’re A-game.

Kenneth Bruce - Bank of America Merrill Lynch

Right, you can do that because spreads and wide enough that when – what capital you’re recycling into the market is effectively it has a relatively high return attached to it and to read that volatility begins to come down, that obviously changes and I don’t know, if that by itself is sufficient to want to again reengage the market or if there is something else that you would be looking for?

Kevin E. Grant

Well, this thesis that I’m working with, if the Fed is looking at the cost versus benefits of asset purchases, its having more cost than in prior periods. It is important because if that thesis is right, that means they’re going to taper regardless and they’re going to go back to forward rate guidance and Fed funds, traditional policy tools. And the Chairman had said this. So he hasn’t commented on cost versus benefit, but he has basically said that where the Feds going. So, that means even if the economy weakens a little bit, its still going to taper. It probably just taper more slowly.

Kenneth Bruce - Bank of America Merrill Lynch

Yeah, now it feels like it's in the -- it’s basically in the pipe now.

Kevin E. Grant

Yes.

Kenneth Bruce - Bank of America Merrill Lynch

My other question is in – this is probably a bit harder to answer, but given there has been discussion around leverage ratios for banks, what – there are some within the policy making community that want to target the wholesale funding markets more aggressively from a capital perspective and a regulatory perspective. And talking to repo desk its kind of clear that, that does change kind of the nature of what balance sheet is willing to be out there in the like and I guess, I’m interested in how you view that conversation, what you would do in order to, I guess, essentially protect yourself against what might be some participants leaving the market and how you work through situation that seem to be building in the repo market?

Kevin E. Grant

Well on repo, the cash is out there. In fact the cash is growing. So, globally the cash is – it’s not like the cash – it doesn’t exist, the cash is out there. It’s just a question of finding an intermediary. So this is why we’ve so many repo of counterparties and we continue to add repo counterparties and it’s a major internal effort within the Company to add repo counterparties, because we just need an intermediary to access the cash. Whether, analysts on the street they tend to talk to one repo desk, their own repo desk and their view is often colored by whatever they get from that repo desk. But that’s not a reflection of the system, because the system still have to accommodate all their cash. So from our perspective it’s really just a question of having more repo counterparties. And if we end up having a 100, that would be wonderful.

Kenneth Bruce - Bank of America Merrill Lynch

Yeah, I guess -- I guess I didn’t know that you were directing that necessarily at me but you’re having kind of …

Kevin E. Grant

[Some part] read it that way, but no I think in general that’s – you got to look at the cash and count the cash that's sloshing around the global system and it’s …

Kenneth Bruce - Bank of America Merrill Lynch

Right. Now, I appreciate that point and I agree with that I guess the problem is that all the intermediaries are being called that from a balance sheet standpoint it being engaged in these markets, its going to be more expenses, so that’s what you’re talking about possibly margins changing around, to the degree that companies or just the banks or other intermediaries are just not willing to be in the business, you may see – you may not see enough repo counterparties to necessarily rely on that and may be there is ways that you can get around that, I’m just interested in how you think through that, because its very clear that there is some within the Fed that want to target wholesale funding markets and its unclear to me how that works out.

Kevin E. Grant

Yeah, I’m sure there are some that want to target wholesale funding markets, but the question is what’s the alternative? What’s the alternative for all the cash and what’s the alternative for the systems liquidity? And until an alternative infrastructure is built, its repo all the way and that’s just the way the system works. So, if regulators want to create a new vehicle to help global liquidity I am all for it, but I have not seen that effort at all. You can’t tear down the building with no place for all the people to go.

Kenneth Bruce - Bank of America Merrill Lynch

Yeah, I know it reminds me somewhat and now I guess to Fannie Mae -- Fannie and Freddie right that you -- how do you transition from the old system to something that’s new?

Kevin E. Grant

Yes, doing better.

Kenneth Bruce - Bank of America Merrill Lynch

Right.

Kevin E. Grant

That everybody believes in it.

Kenneth Bruce - Bank of America Merrill Lynch

Exactly. If that has liquidity and like so, great. Well, thank you very much for you comments. I appreciate it.

Kevin E. Grant

Yeah.

Operator

Our next question comes from Eugene Fox from Cardinal Capital Management. You may go ahead.

Eugene Fox - Cardinal Capital Management

Hi, Kevin.

Kevin E. Grant

Hi, Eugene.

Eugene Fox - Cardinal Capital Management

With respect to your head strategy, I know that you have a fair amount of swaps that come off later this year and some that come off next year. And in thinking through that probably have helped you very much given the steepening of the yield curve. But given your comments would be and very important should short rates start to go up. How are you thinking about hedging your shorter exposure and that sort of plays into what you would expect to do when those roll-off?

Kevin E. Grant

Yeah, I think we’re constantly looking for an opportunity to replace those. We can replace them before they roll-off. We could sort of add to it any time, but if – that’s more of an opportunistic kind of decision. Any hedges is – hedges are not free, so any decision really is the cost benefit analysis that we go through.

Eugene Fox - Cardinal Capital Management

Based on your early comments, Kevin, I guess for you to put on 15 to 16 paper year, you'd be paying equivalent kinds of rates that what would be rolling off and I guess your view is to how much insurance you want in that part of the yield curve?

Kevin E. Grant

Yeah, I think that's right. Does that sound right, Bill?

William Shean

Well, probably a little cheaper, Gene. We can put it on a little cheaper even out there than what's rolling off. So we're going to benefit from that.

Eugene Fox - Cardinal Capital Management

Okay, that was my question. But you would still – given where short rates are now, you would want to keep insurance there given what might happen if you actually saw the Fed talking about moving up short rates?

Kevin E. Grant

Yeah, the current forward rate guidance is mid 2015 at the earliest. And I think given what happened in Q2, I would guess that there would be very hesitant not touching that guidance.

Eugene Fox - Cardinal Capital Management

Got it. Other question really and this sort of plays off your earlier comment, Kevin, I would assume of the basis widening that you saw relative to your expectations, could you comment on sort of which of three pools ARMs 15 years and 30 where you would have seen basis widening that you might not have anticipated given the relative duration of the securities?

Kevin E. Grant

Yeah, I would say, this is my opinion and maybe Bill has a different opinion. The sector that surprised me the most was the Hybrid ARMs.

Eugene Fox - Cardinal Capital Management

In terms of the 15 years and 30 years, that would have been more at least consistent with what you have expected given their duration?

Kevin E. Grant

Yeah, I think that's right. And also given their proximity to the Fed, because the Fed was principally buying 30-year mortgages, so if the market thinks that they're going to taper off that activity then the 30-year market would bear the brunt of that which it did.

Eugene Fox - Cardinal Capital Management

Sure. Last question. Given the declines that you expected in incremental refis and production in the market, how do you see the Fed adjusting to sort of the lack of supply given even if paper's quite conceivable, they can be buying more than the incremental production in the market?

Kevin E. Grant

Gene, that's a really good question. With refi really kind of falling off the face of the earth here, the supply picture is going to get tighter and tighter and tighter. And the Fed could certainly pretty significantly taper off their asset purchases and still be creating a worst situation from a supply picture perspective. We're just going to have to see what they do in the next couple of months.

Eugene Fox - Cardinal Capital Management

In terms of their behavior to-date, Kevin, what have we seen?

Kevin E. Grant

Really it's pretty transparent. They announced what they're going to do and they pretty much do it and you get the settlement day and the Street has a shortage of bonds and the Street is scrambling to fill their trades to sell bonds, and this is why the rolls get so good just because of the shortage that's being created.

Eugene Fox - Cardinal Capital Management

Okay. Thanks, guys.

Operator

Our next question comes from Kevin Barry from Claxton. You may go ahead.

Kevin Barry - Claxton

Good morning. If we assumed the current portfolio of MBS and hedges and we assumed then in the third quarter rates rise and the MBS basis widens by [indiscernible] as in the second quarter, what would be the change in book value?

Kevin E. Grant

Well, I haven't done that exact scenario, but keep in mind that the portfolio is now smaller. And we really haven't shrunk the size of the hedges, so I think if that's an analysis that you want to if you're that bearish on bonds, you can look at the assets and pretty quickly calculate it out if you're really that bearish on bonds.

Kevin Barry - Claxton

But the book value – the portfolio is smaller but the book value is smaller too, yes?

Kevin E. Grant

Correct.

Kevin Barry - Claxton

And given what we can see from your hedges which is obviously just what you show us, is it fair to assume that you don't think the yield curve will be steepening anymore? In other words the mortgages have gotten into more 30-year mortgages and they have a lot more cash flow on the intermediate part of the curve, but the hedge ratios don't look like they've changed that much, they seem to be more focused on the intermediate part of the curve. So will it be assumed that you think that if rates rose, we'll get more of a flattening sort of $0.02?

Kevin E. Grant

I'm thinking about this question. A couple of comments, because there's a lot of conjecture here. If the bond market gets really bearish, it would probably be a steepener. The 10-year part of the curve would exhibit the most significant backup. Mortgages would of course follow that but the re-pricing of mortgages to operation taper just kind of happens, so it's possible and this is not a prediction, but it's possible and something to consider that mortgages would outperform treasuries in that environment. And I think you really have to be able to point to a real inflation event because you would be often to territory where the steepness of the curve would be outside the bounds of anything we've seen.

Kevin Barry - Claxton

I guess the question comes from, if I look at the portfolio and again, we don't see everything, but we see a greater mix of 30-year securities. Those 30-year securities have lower dollar prices and longer durations than they had three months ago, but the hedges don't seem to have gotten a lot longer or have been increased much in a longer part of the curve. Is that fair to say?

Kevin E. Grant

Yes, that's fair.

Kevin Barry - Claxton

Okay. Then it would seem like a steepener would be more hurtful than a flattening.

Kevin E. Grant

To the book value of the company, a very aggressive high volatility steepener hurts the book value of the company and it significantly improves the reinvestment opportunity going forward. The constant balancing act that we go through is how much exposure do we want to that spending event on the book value to put us in the position for longer term earnings power of the company. And it used to be, this is years ago, some of these companies were levered 13, 14 times and that's just way too much. And at the 7, 8 times kind of leverage in a quarter like Q2, it feels like too much. But I think through the cycle that's probably the right place.

Kevin Barry - Claxton

Thank you.

Operator

Our next question comes from David Van Dorn from Vanco]. You may go ahead.

David Van Dorn - Vanco

Good morning. At the present time dividends are exceeding earnings and a situation like that cannot be sustained naturally. What are your plans on rectifying the situation in the near term?

Kevin E. Grant

In Q2 the core earnings plus drop was $0.37 and we declared $0.34. So we're actually slightly out earning our dividend. And I think going forward, well continue to do that and retain a few pennies to the extent that we can give the re-rolls.

David Van Dorn from Vanco

Okay. That will look like that'd be a safe plan for the near future?

Kevin E. Grant

I think in general my view and the Board's view is that this is an environment where you probably want to keep a few pennies every quarter because that's your cheapest capital; it's the cheapest way to build book value within the company. So I think the directors, the Board's view and my view is that we actually would like to retain as much as possible within the confines of the re-rolls and what our investors are expecting. We don't intent to over distribute.

David Van Dorn - Vanco

Okay, so you don't think that the present policy is going to make things worse.

Kevin E. Grant

No, we want to do our best to retain, just strike a balance, have a reasonable distribution but retain as much as possible given the environment.

David Van Dorn - Vanco

Okay, thank you.

Kevin E. Grant

Okay, thank you.

Operator

Our next question comes from [Robert Fowler]. You may go ahead.

Unidentified Analyst

Yes. Thank you for taking my question here, just one. I see that on March 31, 2013 on the 10-Q filing considering the duration of hedges and whatever else on the duration of mortgage assets. I believe the net duration was 1.9 years. Do you have it for the second quarter?

Frances Spark

The 10-Q will be -- being distributed at the end of this week probably tomorrow, and so you’ll be able to find all that comparative data in the Q tomorrow.

Unidentified Analyst

So, it should be available by the end of this week then?

Frances Spark

Yes.

Unidentified Analyst

Thank you.

Operator

(Operator Instructions) We do have a question from Stephen Laws. You may go ahead.

Kevin E. Grant

Steven, you’re there?

Stephen Laws – Deutsche Bank

Yes. Can you hear me okay, Kevin?

Kevin E. Grant

Yes, there you go.

Stephen Laws – Deutsche Bank

Kevin, sorry about that. Two questions. A lots already been covered but, and you’ve touched in a lot about the swaps and the interest rate caps, but maybe spend a minute talking about the pros and cons of each, why you prefer caps for a good portion of the hedging book. And then secondly, you did repurchase a little bit of stock during the second quarter, at the time of those repurchases can you talk about what the ROE was or discounts to where your book value was at that time, I definitely understand willing to protect liquidity in the volatility especially that we saw at the end of the quarter. And then as far as, Bill, forward repurchases should we really think about the returns available versus ROEs you provided for new money spreads or new money investments in the current environment?

Kevin E. Grant

Steven, you hit my limit, I’m good for two questions; three I already forgot the first question. On the stock buyback question, we look at it every day and we look at where the assets are, we look at our liquidity, we look at where the stock is, we look at the trading limits and so forth and so on. And if we think it's a good use of some of our liquidity then we get serious about it. Beyond that, I don’t really want to provide any incremental guidance.

Stephen Laws – Deutsche Bank

Fair enough. The first question really relating to swaps versus caps kind of what the pros and cons are of each and kind of why do you have the hedge book positioned the way it is?

Kevin E. Grant

Well, when we put the caps on, we put them on because implied volatility in the caps market was very, very low. So they were a cheap alternative to swaps. Generically, we prefer just generic interest rate swaps. We’d love to get them with some optionality to them, but you got to pay up for the optionality, whether that’s swaptions or caps or what have you. The caps we like, because we bought them cheap and effectively you’re buying long dated puts, the bond market expressed through the cap which is on short the trigger there is on short rates. But since are long dated they have a lot of duration. So it's more of an opportunistic thing and vol got so low that the caps get very, very cheap. In today's market I don’t think we buy cap, I think they’re too expensive and vol is high and the curve is steep, so caps are pretty expensive in today's market.

Stephen Laws – Deutsche Bank

Great. Thanks for taking my questions, Kevin.

Kevin E. Grant

Yes.

Operator

Our next question comes from Kevin Casey from Casey Capital. You may go ahead.

Kevin Casey – Casey Capital

Actually he just asked my question. And I was wondering what are the thought process go into buying taper at a premium versus buying a great asset at, I guess 20% discount right now or 15% discount?

Kevin E. Grant

Kevin, you’re talking about the stock buyback?

Kevin Casey – Casey Capital

Yes.

Kevin E. Grant

Yes, it's -- we got a liquidity, don’t forget we’ve got a bunch of lenders we care to keep happy.

Kevin Casey – Casey Capital

Are there restrictions in any of the…?

Kevin E. Grant

No, there’s no meaningful restrictions, it's sort of normal repo comments that are -- I wouldn’t even describe them as restrictions. But liquidity is the key and we want to be the most lender friendly company around because it's the borrower that makes this thing go.

Kevin Casey – Casey Capital

So probably lack of volatility is probably the big driver?

Kevin E. Grant

Lack of volatility and lots of liquidity, the lenders love liquidity. We like the liquidity, that’s for sure.

Kevin Casey – Casey Capital

Yes, and you guys managed liquidity great during the quarter; congratulations on that. That’s it for me, thanks.

Kevin E. Grant

Okay. Thanks.

Operator

Our next question comes from Arren Cyganovich from Evercore. You may go ahead.

Arren Cyganovich - Evercore

Sorry, my questions have been asked and answered. Thanks.

Kevin E. Grant

Okay. Thanks.

Operator

Our next question comes from Adam Waldo from Lismore Partners. You may go ahead.

Adam Wellabo – Lesmore Partners

Yes, good day. A question around book value. You said here obviously we start to see spreads tighten back in a bit since quarter end, and I wonder if you haven't had your fingertips where an asset value for common share might have been say a July 15th or they’re about as compared with the $10.20 out of the quarterly dividend that you reported at quarter end.

Kevin E. Grant

Well, we don’t provide a day-to-day book value number, but the mortgage market, Bill would you say is roughly unchanged since the end of the …

William Shean

Just about unchanged.

Kevin E. Grant

Just about unchanged.

William Shean

15 year particularly and the 30 year down a little bit, but just fractionally now from quarter end.

Adam Wellabo – Lesmore Partners

Okay, okay. I do want to flush out a little bit more on the share repurchase issue though; can you give us a little bit more specificity around the criteria that drive timing and magnitude of share repurchase given the already covered large discount NAV in which the stocks are trading?

Kevin E. Grant

I appreciate the question. We look at the stock every day. We look at the underlying assets every day. We look at our liquidity in our liquidity forecast every day. We look at our forecasted pay-downs and so forth every day. And if it's meaningfully accretive to book value then we seriously consider it. Beyond that we really don’t want to provide any additional guidance.

Adam Wellabo – Lesmore Partners

Okay. Thank you.

Operator

Our next question comes from Jim DeLisle from Moosilauke Partners. You may go ahead.

Jim DeLisle - Moosilauke Partners

Hi, Kevin.

Kevin E. Grant

Hi,

Jim DeLisle - Moosilauke Partners

I’ve always been a little bit unclear about the intersection between tax and GAAP, obviously GAAP accounting is very, very helpful and I’m figuring out what's going on and what to do going forward in taxes basically are inscrutable. Am I wrong in assuming that REIT taxation or I’m sorry REIT is based on tax as opposed to GAAP, and that being the case how are capital losses treated for taxable income and the requirement to payout 95% of taxable income for REIT dividends? And if I’m totally wrong, please tell me.

Frances Spark

The taxable income is driven by capital gains and it’s not reduced by capital losses. So you look at the earnings, taxable earnings in the portfolio plus the capital gains which add together to make the full amount of taxable income, which then is subject to the REIT distribution rules. You don’t reduce the income by the amount of capital losses.

Jim DeLisle - Moosilauke Partners

And is capital gains taken in one corner nettable against capital losses in the quarter or is there any look back available?

Frances Spark

You look at it for the period overall the whole year, but there are also capital loss carry forward issues that might come into play and if should there be a capital loss in one-year, it would then become -- remain available to offset capital gains in subsequent years. But until the end of the year and you tally up everything and you see where you’re, you don’t -- you have an eye on this during the quarter, but it’s really the end of the year where you weigh out all the components of the taxable income. And that’s what we provide to in our distribution categorization analysis which we’ll give you an estimate out in December.

Jim DeLisle - Moosilauke Partners

Thank you. You made that about as clear as anyone has ever made it to me, thanks.

Kevin E. Grant

It’s pretty murky. Thanks for the question.

Jim DeLisle - Moosilauke Partners

Thanks.

Operator

(Operator Instructions) And we’ve no further questions at this time. I’ll now turn the call back to Mr. Cleary for closing remarks.

Richard E. Cleary

Thank you. And on behalf of Kevin, Frances, Bill and the entire CYS management team, I’d like to thank you for taking the time to participate this morning, and have a good day. Thank you.

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