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AG Mortgage Investment Trust Inc. (NYSE:MITT)

Q4 2013 Earnings Conference Call

February 27, 2014 10:00 AM ET

Executives

Lisa Yahr – Head-Investor Relations

David Roberts – Chief Executive Officer

Jonathan Lieberman – President and Chief Investment Officer

Brian Sigman – Treasurer, Principal Accounting Officer and Chief Financial Officer

Analysts

Joel J. Houck – Wells Fargo Securities LLC

Andrew N. Wessel – Sterling Capital Management LLC

Trevor J. Cranston – JMP Securities LLC

Mike Widner – Keefe, Bruyette & Woods

Jason M. Stewart – Compass Point Research & Trading LLC

Merrill Ross – Wunderlich Securities, Inc.

Operator

Welcome to the AG Mortgage Investment Trust Fourth Quarter 2013 Earnings Call. My name is Sylvia and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Lisa Yahr. Lisa Yahr, please begin.

Lisa Yahr

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

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

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

Our forward-looking statements included in this conference call and the slide presentations are based on our beliefs and expectations as of today, February 27, 2014. Please note that information reported on today’s call speaks only as of today and therefore you are advised that time-sensitive information may no longer be accessed as of the time of any replay listening or transcript reading. Additional information concerning the factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in the risk factors section of the Company’s periodic reports filed with the Securities and Exchange Commission. Copies of the reports are available on the SEC’s website at www.sec.gov. Finally, we disclaim any obligation to update our forward-looking statements unless it’s required by laws.

With that, I’ll turn the call over to David Roberts.

David Roberts

Thank you, Lisa. Good morning. We are pleased to report that we significantly increased our core earnings per share in this fourth quarter to $0.67 per share, compared to $0.45 per share in the third quarter.

On last quarter’s call we talked about the steps we have taken to rebound the portfolio. At that time, we said we believe these steps will lead to enhanced earnings capacity and they did. As Jonathan and Brian will discuss, we continued to refine the portfolio during fourth quarter and since year-end.

Notably, we have been able to add credit assets we believe are attractive and we have actively managed our interest rates hedging. Both of these initiatives have increased our net interest margins while we maintained what we believe is a well balanced and diversified portfolio.

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

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

Jonathan Lieberman

Good morning and thank you for joining us. Thank you, David. 2013 was a challenging year to navigate the fixed income markets and to monitor mortgage free portfolio. As we discussed in prior quarterly conference calls, we undertook several steps during the middle of last year to stabilize our portfolio from the impact of significant volatility and interest rates in Agency CMBS markets. This included shrinking the size of our portfolio, reducing leverage and actively adjusting the size and composition of our hedges.

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

Now turning to book value, while our book value did decline slightly quarter-over-quarter it is since improved during the first two months of the year. We don’t view the book value decline of approximately $3.4 million on a portfolio in excess of $3.7 billion to be material change in valuation. Book value for the first two months of 2014 has remained in a mid $19 range with December 31 valuation being at the lower end of this range. Now, before turning to the portfolio I would like to spend just a few brief minutes and discussing our thoughts on 2014 outlook which are outlined on Slide 5 of our deck.

Although the unusual harsh winter seems to have negatively impacted some recent economic data. We do accept that to state of course and wind down Q3 related treasury in Agency CMBS purchases by mid-to-late this coming year. So, on a historical basis the pace and strength of U.S. economic recoveries unremarkable.

We do still believe that U.S. economy is formally in recovered mode and we’ll housing probably were not unduly a repeat of its stellar of 2013 gains we do believe home price appreciation will continue, slower in a different pace in different levels across geographies, but generally the direction will be for appreciation.

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

Over the past several months, some of the lingering unknowns hanging over the mortgage market has been resolved. In addition, to the obvious onset for paper, Janet Yellen, has been confirmed as the new Fed Chairman, Chairperson, Mel Watt has been confirmed at the new Head of FHFA and the debt ceiling is no longer an eminent issue. Despite this, the news out of the issue always have some potential to realm the markets and whether it’s a rumor of a new mortgage imitative out of Mel or an unexpected comment from the Fed we therefore will continue to closely monitor the DC landscape.

So now, moving on to our portfolio, let’s start with slide three with details some of our top level metrics from the quarter. As I mentioned, our book value declined slightly from $19.26 as of $9.30 to $19.14 as of December 31. Our portfolio stood at approximately $3.7 billion of which just shy of 35% on a gross asset basis was invested in credit securities. This figure is up from over 22% at the end of 2012 and we do expect the migration of credit with capital into credit to continue.

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

NIM, our net interest margin benefited from a better mix of assets, lower hedging and lower funding costs. Risk-adjusted return on equities before deducting G&A and management fees for the new portfolio acquisitions generally exceeded 13% returns throughout the quarter. Our leverage declined modestly from 4.53 times to 4.42 times predominantly in response to our growing credit allocation. Over the course of the year, our portfolio approached in navigating the challenging markets resulted in a smaller, less levered portfolio towards the end of 2012. The year ago in 2012,, we reported running leverage of 5.26 times with a gross portfolio size of $4.9 billion. In contrast, to our current year end portfolio of $3.7 billion and 4.4 times leverage for the portfolio.

So moving to the next several slides in our risk deck. Additional information on our portfolio is set forth. Focusing first on the Agency book, we reduced the size of our Agency portfolio by roughly $300 million quarter-over-quarter with most of the reduction occurring through the sale of lower coupon 15 and 20-year MBS. As the pie chart on the bottom slide 7 shows, Hybrid Adjustable Rate Mortgages represent approximately 20% of our overall Agency exposure, and close to 60% of our fixed rate pools have some form of co-protective characteristics. From a prepayment perspective, our pools continue to perform in line with our expectations with a Q4 CPR of 6.2% and a December CPR of 6.7%.

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

We are also pleased to report that subsequent quarter end we deployed $10 million of equity into another commercial real estate investment on a hotel property located in New York City. This bears a current interest rate of LIBOR plus over 1,200. As we’ve noted on several calls, we believe Angelo Gordon is well positioned to source and originate attractive investment opportunities in the loan space, both commercial and residential and our investment teams are busy underwriting numerous investments as we speak. We expect the fruits of these efforts to increasingly enter the portfolio in 2014.

Now turning to Slide 9, we provide an update on our financing and our duration gap. We currently have 30 financing counterparties and are continually being approached by others who are interested in sending financing to us. During the quarter, we signed a new 85-day evergreen repo for a portion of our credit book. As Brian will discuss, we continue to explore numerous financing arrangements for both securities and loans. This quarter, we’ve broken out our financing costs for the Agency RMBS and credit piece of the book. As you can see our average Agency cost is 44 basis points and our average credit cost is 181 basis points. Funding conditions for MITT are favorable and we believe cost of funds and financing terms will improve in future quarters.

As a reflection of our increased tolerance for risk and for expanding our earnings capacity, we did open up a duration gap of 0.69 years was roughly a zero gap that we reported in the prior two quarters. Gap would be narrowed if we treated all of our Agency MBS as TBA Agency products. It would narrow the gap by at least a half. So, we’re not overly concerned by the opening of the gap and we think it’s healthy for the company.

On the hedging and interest rate side, we have interest rate in hedging tables, sensitivity tables layout for you. Comments are with opening up a modest gap we did take off $500 million in swaps, at the same time we did maintain the weighted average years to maturity of our swaps by increasing the duration of our overall notional swaps. We will continue to optimize our hedge book for the current portfolio and believe additional expense savings is achievable in future quarters. Given the construct of our assets and the hedges, we believe our portfolio today should be better able to expand a wider range of interest rate market moments than our portfolio was capable of tolerating a year ago.

With that, I would like to wrap up by saying, we believe our portfolio is appropriately sized and positioned for today’s market environment. We are excited by the flow of investment opportunities we’ve seen both in the bond and in the loan markets. We thought we’ve accomplished quite a bit in 2013. we’ve added Personnel, and the Agency, Commercial and Financing side, we strengthened the overall platform and we believe this will provide future dividends for the company.

With that, I would like to turn the call over to Brian to review a financial result.

Brian Sigman

Thanks, Jonathan. In the fourth quarter we reported core earnings of $19.1 million or $0.67 per share, versus $12.6 million of $0.45 per share in the prior quarter. As we mentioned, the commercial loan we originated in early 2013 paid off in December in addition to the principal we received $3.2 million fee in connection with the payoff. The fee we received resulted in an additional $0.11 per share of core earnings in the quarter. Stripping out this fee, we still had a large increase from the third quarter which was a result of the two main drivers, the first was an increase in the yield we earned in our assets due to the rotation and the credit investment and better underlying asset performances. Additionally, as a result of taking of swap that Jonathan detailed, our overall swap cost decreased significantly in Q4. These factors were the primary drivers of the $0.22 increase to core earnings quarter-over-quarter. Overall for the quarter, we reported net income available to common stockholders of $13.5 million or $0.48 per fully diluted share.

In addition to the $0.67 of core earnings, our net income included realized and unrealized losses of $0.19 per share; the $0.19 of net loss was due to $0.09 of realized losses on our securities and derivatives portfolio, $0.18 of realized losses upon recognition of other than temporary impairment and unlinking of linked transaction, offset by $0.08 of a net unrealized gain on our securities and derivatives portfolio.

To give you a better sense of our current $3.7 billion portfolio, I would like to highlight a few more statistics. As described on Page 4 of our presentation, the portfolio at December 31, 2013 had a net interest margin of 2.46%; this was comprised of an asset yield of 4.13%, offset by repo and swap costs of 0.89% and 7.78% respectively for a total cost of funds of 1.7%.

We are pleased that our net interest margin at year-end was 34 basis points higher than the prior quarter end; the increase was driven by an increase in our weighted average yield with the rotation into higher-yielding credit investments from lower yielding agency securities as well as improved underlying performance of our securities; this increase in yield was partially offset by a higher weighted average funding cost, which is a natural result of the shift to credit investments, which come with higher funding cost than Agency securities.

The last contributor to our increased net interest margin was the significant decline in our swap costs as I previously mentioned. At December 31, our book value was $19.14, a small decrease of $0.12 from last quarter. This decrease is resulted from the net $0.19 loss on our securities and derivatives portfolio as described above but was offset by our core earnings exceeding our common dividend by $0.07 per share.

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

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

On the funding side, we have been seeing repo costs decrease post year-end, specifically in relation to our credit portfolio and we continue to explore ways to extend our maturities as seen with 85-day evergreen financing we entered into fourth quarter.

We’re pleased to announced that we recently entered into a $100 million facility with a two-year term to facilitate investing in non-performing/re-performing residential loans and are on discussions with other banks about additional facilities if needed.

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

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And we have Joel Houck from Wells Fargo.

Joel J. Houck – Wells Fargo Securities LLC

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

David Roberts

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

Joel J. Houck – Wells Fargo Securities LLC

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

Brian Sigman

The capital allocation is little bit higher than 50% to credit I’d say, probably about 55% to credit and about or maybe just 52.5% of credit and 47.5% to Agency and I think that’s changed from last quarter where we had about were about 50-50.

Joel J. Houck – Wells Fargo Securities LLC

Okay, that’s helpful. And then my last one I guess I, there has been obviously, now that the taper has started, we have seen spreads tighten this year and that has been helpful, I guess, particularly on the Agency complex, but for the most part, managers remain, I guess mortgage rate managers remain cautious as the year plays out, because if the taper actually goes to zero, there is questions about who that marginal buyer of, particularly, the 30-year complex, which is very, has a high degree of negative convexity.

What are your thoughts in terms of how the year plays out with respect to basis risk and spread widening, particularly on the Agency side? I know you guys have said you are going to increase capital to the Non-Agency side, but certainly you still have to obviously focus on protecting book value on the Agency side. What are your thoughts as the year plays out?

Jonathan Lieberman

So I would say that we do agree that there is a question of the marginal buyer often, buy you have seen a dramatic curtailment of origination of Agency MBS with the decline of refinancing. So you are seeing supply of over 50% so that factor, given the fact that many money managers are under allocated to the sector, we would say that there is a credit spread right now is or the basis is on the tighter side and we would not be surprised later in the year, it was to drift wider. But I don't think it is going to drip dramatically wider.

In response to that, we have repositioned the portfolio over the last six months to increase our allocation to Hybrid. We have kept lower yield in 15-year as such which will be not as materially impacted by the taper with the curtailment of taper and then we may and have in the past engaged in some basis hedging where we think it might be achievable, up in coupon Agency assets will be less affected by a bases widening than current-coupon, or 2.5 or 3s. So we took steps to really reduce our overall exposure to that sector.

Joel J. Houck – Wells Fargo Securities LLC

All right, thanks for the color guys.

Operator

And we have Andrew Wessel from Sterling Capital.

Andrew N. Wessel – Sterling Capital Management LLC

Hey, guys. Just had a question about – during the fourth quarter your stock, as well as most of your competitors were pretty heavily pressured and kind of bottoming out then. And a lot of your peers have reported now, and we’ve seen pretty healthy buybacks at the majority of them of common equity. And despite the fact that your stock was trading on the 15 handle in December, and you knew that your book value was going to probably end the year in a 19 space, there was no effort – there was no buyback authorization made.

There's not one present, and there was no stock repurchased, obviously. So can you help me square that up with kind of not taking an opportunity for immediate 20% return on equity versus kind of a 4 to 5 times levered 10%, 12% return on equity? Can you help me with that decision process?

David Roberts

Hi, it’s David Roberts. I mean we always think about everything to increase stockholder value over the long-term. And I think the key is over the long-term there is a certain critical map in terms of size that will allow us over – again over the long-term to deploy what we consider to be the optimal portfolio and that is something we always take into account as well. So I think that that was a factor in terms of our thought process.

Andrew N. Wessel – Sterling Capital Management LLC

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

David Roberts

No it’s not what I said. What I said was that when we think about the shareholder value we consider the overall size of our equity which impacts both our ability to over the long-term create the portfolio that we think is going to consistently generate good returns and we also think about the liquidity of our stock, which is also another factor. So I think you and I are talking about different time frames. I think that would as you put it square the difference between the way you’re approaching it and the way we’re approaching it.

Andrew N. Wessel – Sterling Capital Management LLC

Yes, no, I mean I’m thinking as a shareholder with a two, three-year horizon, where the opportunity would be to generate a better than 20% return, especially with no risk in the leverage, right? I mean you are applying 4 to 5 times leverage to generate a return that is inferior to a 20% buyback – 20% return buyback opportunity that’s kind of bird in hand, and I just think especially as your peers, some larger, some smaller, were stepping out and buying back stuff in size, but you guys didn’t do it.

I worry longer term that when investors think about management team's willingness to defend their stock even with an externally managed structure, where obviously, equity goes down and senior management fees go down. They’re going to step up and do that whereas you all weren't, it’s concerning from a fiduciary standpoint. That’s kind of my point of the question so, I mean I understand liquidity, you’re $500 million market cap company, it's not like you are $50 million or $100 million. And you have been more than willing to issue equity at 10% premium to book. So I guess I have a hard term understanding why you are not worrying about that 20% discount. And I think liquidity alone doesn’t doesn't really square it up.

David Roberts

Hi, which is why I mentioned is one of two factors and I’d also point out that, it sounds like you are team follower of our stock in our …

Andrew N. Wessel – Sterling Capital Management LLC

Well, you’re like, number 3 or 4 shareholder.

David Roberts

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

Andrew N. Wessel – Sterling Capital Management LLC

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

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

David Roberts

Appreciate the comments, and we’ll definitely take it into consideration and thank you.

Andrew N. Wessel – Sterling Capital Management LLC

Thanks.

David Roberts

We will discuss it. I appreciate it.

Operator

Okay. We have Trevor Cranston from JMP Securities.

Trevor J. Cranston – JMP Securities LLC

All right thanks. On the commercial loan side, obviously you guys had a nice result on the loan that paid off in the fourth quarter. I was wondering if you could just expand a little bit on kind of the profile of the loans you guys are looking to make in the near-term and also talk a little bit about kind of the markets you are focused in. It sounds like the two you’ve made so far in the New York market. Is that where you are going to be primarily focused? Or is there a chance that you will be expanding into other parts of the country, as well?

David Roberts

Hi, it’s David Roberts. We certainly will look at opportunities outside of part of the New York area, but we will tend to focus on markets where as a firm, we have a long history of expertise in terms of borrowing properties and really understanding markets very, very well, and that is certainly one of the advantages. And we are typically looking for situations where you need that type of market knowledge and confidence and experience to be able to make an assessment of a loan.

So and typically I would think a lot of the properties that we would be lending against would have some amount of transition. The one that paid off for example, was going through a transition where one of the tenants was in bankruptcy. There was an opportunity to buy that tenant out, to redo the building. It went very well, and then the owner decided to do an overall refinancing.

So that type of profile where there is some element of transition which is also the area that we as a firm tend to focus on our property investment. So I would think that will be in major markets which is where we have that most expertise. And again, some element of transition which allows us to use or experience the expertise to make loans where we think the rest of order is attractive and we can generate good yields.

Trevor J. Cranston – JMP Securities LLC

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

Brian Sigman

It is and that’s why we’ve shown it, it’s really related to the net amortization the premium discounts between our Agency and credit. And it’s within a $0.01 or $0.02 that’s kind of the number we expect to see the next year.

Trevor J. Cranston – JMP Securities LLC

Okay, perfect. Thank you.

Operator

And we have Mike Widner from KBW.

Mike Widner – Keefe, Bruyette & Woods

Good morning, guys. First just a simple question with the prepayments dropping pretty significantly on the Agency portfolio, I didn’t see any one-time benefits in results, but several of your peers have had kind of one-time as in there, which I’d like to check in and make sure that there wasn’t some other premium amortization catch-up or something that that’s sort of with one-time in nature in the quarter?

Brian Sigman

We had a one-time catch-up and it’s only about a pending so it’s pretty insignificant that’s why I didn’t highlight it in my remarks. We, really the retrospective was after at full stake it’s really more kind of projections versus actual and I think it was in the second or third quarter we had a pretty big ones because that’s why the interest rates starts rising, everyone projected that our CPR would decrease. So even though it was lower quarter-over-quarter it wasn’t that much lower versus the projection. So, the fourth quarter didn’t really have it, a big problem coming.

Mike Widner – Keefe, Bruyette & Woods

Okay, got it. Thanks, appreciate that. So if I – going back to your comments, during the opening discussion I thought I heard you say new investments we’re getting to a pretty expensive ROE levels around 13% for recent investments was that the right number?

Jonathan Lieberman

Yes it is with, with leverage.

Mike Widner – Keefe, Bruyette & Woods

Yes. Okay. So I guess what I’m thinking about is, if we look at your performance in the quarter after pulling out the one-time or just looking at your net spreads and leverage on the portfolio I suggest pretty expensive ROE levels around 15% on the current book of business.

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

Brian Sigman

I mean I can take the beginning of that. I think in the quarter off of the yields were a little skewed because of payoff the $0.11 actually translated into higher weighted average yield for the quarter. So I think going forward it’s kind of more in line with where we expect and I think putting its work at plus 13s is pretty consistent with the rest of the portfolio, I think it ranges between 13% to 14ish percent ROEs. So I don’t see there being much of a kind of decrease from what I described is kind of the core part or core earnings this quarter. I think that’s what we expect going forward.

Jonathan Lieberman

I will just say that I also generalized with the 13%. We are generally trying not to add any asset or any investment that is generating less spend at 13% gross.

There are many of the investments we have been making are above 13% gross, but I wanted to peculiarly kind of towards the bottom end and I am generalizing to there, maybe some assets, lets like the new hotel loan where the yield, the ongoing yield is about 12%, 12.25% but that we ultimately expect the ultimate ROE to be higher once we get other payoffs, prepayments whatever we would come about that will ultimately payoff like the property that paid off in December where it jumped us up to 20%.

We do have several assets in a portfolio that are below 13% that have to run off and we expect them to run off in the course of 2013 or 2014 and there are other reasons why we are just not liquidating because they have optionality where they could jump up their return from lets say 2011 or 2012 to something higher and so we really would prefer to hold on to those assets.

Mike Widner – Keefe, Bruyette & Woods

Okay, I appreciate that. And I guess the reason for the question is that, you guys are running expense levels of a little over 300 basis points, all-in and you're paying a $0.60 dividend; once you strip out some of the one-timers, you earned kind of mid-$0.50s, $0.55, $0.56, depending on what you want to pull out and if I run 13% ROE minus 300 basis points of expenses, that suggests given where your book value is, that suggests an ongoing earnings power slightly below $0.50 versus a $0.60 dividend. That is obviously where I am heading. I guess any more clarity on how you are thinking about that I guess?

And again, the reason is you have a headline number of $0.67, which looks like a nice beat. Certainly there are some one-timers in there, but I'm just trying to get a sense for where you guys feel directionally investors should set their expectations.

Brian Sigman

I think the, the numbers seem right. The fourth quarter was little bit high on the expense side due to some kind of extra cost towards the end sort of you could probably strip that out a little bit. I think it’s more or like Jonathan said, it especially have some of these lower yielding assets putting them to work at higher returns and maybe optimizing some the financing structure we have that we can actually invest in extra cash that we have on that we hold our unlevered securities. We think there are other ways to optimize going forward as well.

Mike Widner – Keefe, Bruyette & Woods

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

Operator

And we have Jason Stewart from Compass Point.

Jason M. Stewart – Compass Point Research & Trading LLC

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

Brian Sigman

The ROE has not changed due to timing and considerations of when certain sellers were in the market and what capital we had available at a distinct moment in time. It just didn’t come together in the fourth quarter, but we expect that residential home loans will be a larger portion of the portfolio in 2014, but securities are much, much easier to add to the portfolio that is predictable when you can execute and loans have their own kind of life and operational issues that go on with them, sellers are who may have other considerations and issues, they have to delay that timing.

Jason M. Stewart – Compass Point Research & Trading LLC

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

David Roberts

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

Jason M. Stewart – Compass Point Research & Trading LLC

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

Jonathan Lieberman

Yes I would say, you actually did a very good job of summarizing where we added credit. We added credit with probably average durations of two years and we added Hybrid or floating rate, RMBs, non-agency. So either Hybrid or HELOCA type of product and then we added some CMBS which is generally legacy CMBS that’s inside of three year and then we will be adding in the first quarter additional CMBS loan.

Jason M. Stewart – Compass Point Research & Trading LLC

Okay. So on the CMBS side, you haven't done any investments in B-notes or anything like that off of new conduit programs?

Jonathan Lieberman

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

Jason M. Stewart – Compass Point Research & Trading LLC

Thanks for taking the questions, I appreciate it.

Operator

We have Merrill Ross from Wunderlich.

Merrill Ross – Wunderlich Securities, Inc.

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

David Roberts

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

Merrill Ross – Wunderlich Securities, Inc.

Thank you.

Operator

And we have no further questions at this time.

David Roberts

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

Operator

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

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