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Executives

Alexandra Giladi - Office Manager/Executive Assistant

Stewart Zimmerman – Chairman and CEO

Bill Gorin – President

Steve Yarad - Chief Financial Officer

Ron Freydberg - Executive Vice President

Craig Knutson - Executive Vice President

Tim Korth - Senior Vice President and General Counsel

Teresa Covello - Senior Vice President and Chief Accounting Officer

Kathleen Hanrahan - Senior Vice President

Shira Vinkel - Senior Vice President

[inaudible] - Vice President

Analysts

Steve DeLaney – JMP Securities

Bose George – KBW

Jason Arnold – RBC Capital Markets

Mike Taiano – Sandler O'Neill

Henry Coffey – Sterne Agee

Joe Plevelich - Schneider Capital

Dan Furtado – Jefferies

Matthew Kelly – Morgan Stanley

Jim Ballan – Lazard Capital Markets

Gabe Poggi – FBR Capital Markets

Isador Mostow - Private Investor

Matthew Howlett – Macquarie

Michael Garber - Private Investor

MFA Financial (MFA) Q4 2010 Earnings Call February 14, 2011 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the MFA Financial Inc. Fourth Quarter 2010 Earnings. [Operator Instructions.] I would now like to turn the conference over to our host, Ms. Alexandra Giladi. Please go ahead.

Alexandra Giladi

Good morning. The information discussed on this conference call today may contain or refer to forward-looking statements regarding MFA Financial, Inc. that reflect management’s beliefs, expectations and assumptions at MFA's future performance and operations.

When used, statements which are not historical in nature including those containing words such believe, expect, anticipate, estimate, plan, continue, intend, should, may, or similar expressions are intended to identify forward-looking statements. All forward-looking statements speak only as of the date on which they are made.

These types of statements are subject to various known and unknown risks, uncertainties, assumptions, and other factors including but not limited to those relating to changes in interest rates and the market value of MFA’s investment securities, changes in the prepayment rates on the mortgage loans securing MFA’s investment securities, MFA’s ability to borrow to finance its assets, implementation of, or changes in, government regulations or programs affecting MFA’s business, MFA’s ability to maintain its qualification as a real estate investment trust for federal income tax purposes, MFA’s ability to maintain its exemption from registration under the Investment Company Act of 1940, and risks associated with investing in real estate related assets, including changes in business conditions and the general economy.

These and other risks, uncertainties, and factors, including those described in MFA’s annual report on Form 10-K for the year ended December 31, 2010 and other reports that it may file from time to time with the Securities and Exchange Commission could cause MFA’s actual results, performance, and achievements to differ materially from those projected, expressed, or implied in any forward-looking statement it makes.

For additional information regarding MFA’s use of forward-looking statements, please see the relevant disclosure in MFA’s annual report on Form 10-K for the quarter ended December 31, 2010 and/or the press release announcing MFA’s fourth quarter 2010 financial results.

Thank you for your time. I would now like to turn this call over to Stewart Zimmerman, MFA’s Chief Executive Officer.

Stewart Zimmerman

Good morning, and welcome to MFA's fourth quarter 2010 earnings call. With me this morning are Bill Gorin, president; Steve Yarad, chief financial officer; Ron Freydberg, executive vice president; Craig Knutson, executive vice president; Tim Korth, senior vice president and general counsel; Teresa Covello, senior vice president and chief accounting officer; Kathleen Hanrahan, senior vice president; Shira Vinkel, senior vice president; and [inaudible] vice president.

Today we announced financial results for the fourth quarter ended December 31, 2010. Recent financial results and other significant highlights for MFA include the following: our fourth quarter net income per common share of $0.21 and core earnings per common share of $0.22.

Overall, the value of MFA's assets increased in the fourth quarter. However, due to the fact that, as in prior years, MFA declared two common stock dividends within the fourth quarter totaling $0.46 per share, our book value per common share was $7.68 at the end of the fourth quarter versus $7.83 at the end of the third quarter.

In the fourth quarter, we continued to grow our non-agency MBS portfolio through the purchase of approximately $509.8 million of non-agency mortgage-backed securities, including mortgage-backed securities underlying linked transactions. In the fourth quarter, we allowed the agency mortgage-backed securities portfolio to decline. agency MBS run-off amounted to $496.3 million while we acquired $362.2 million of agency mortgage-backed securities.

In the fourth quarter, our agency mortgage-backed security portfolio generated unlevered yields of 3.87%. At December 31, 2010, we owned $5.9 billion of agency mortgage-backed securities consisting of $5.3 billion of hybrid and floating-rate MBS and $665 million of 15-year fixed rate MBS. These agency securities had an average cost basis of 101.8% of par.

For the fourth quarter ended December 31, 2010, we generated net income available to common stock of $59 million and $0.21 per share of common stock. Core earnings for the fourth quarter were $61.9 million or $0.22 per share of common stock. On January 31, 2011, we paid our fourth quarter 2010 dividend of $0.235 per share of common stock.

I thank you for your continued interest in MFA Financial, and at this time I would like to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions.] And we'll first go to the line of Steve DeLaney with JMP Securities. Please go ahead.

Steve DeLaney – JMP Securities

I was wondering if you guys could comment a little bit on the agency purchases that you made in January. Could you give us a little color on the types of securities that you purchased, whether they were hybrids or 15-years?

Stewart Zimmerman

Sure, I'm going to turn that over to [inaudible].

Unidentified Company Representative

It was a combination of both hybrids and 15-year fixed mortgages.

Stewart Zimmerman

Okay. Can you give us some idea about maybe the weighting between season hybrids versus 15-years?

Bill Gorin

The majority of the incremental purchases were the 15-year agencies. We're comfortable there with the return for the duration. While it is 15-year fixed, it is amortizing, and they are pre-paying, so -

Stewart Zimmerman

And you're buying those for near-term sort of current settlement, not forward?

Unidentified Company Representative

Correct.

Stewart Zimmerman

Okay, great. And as far as the spread, in just the agency book, it dipped a little bit in the fourth quarter. I mean, obviously we know you let the portfolio run down a little bit, but the spread dropped on the agency to 153 in 4Q from 161. We saw a couple people have a temporary kind of spike in speed in the fourth quarter because of the low mortgage rates in September and October. Can you comment on that trend? Did higher speed in the agency maybe cause some of that, and if so is that something you expect to kind of reverse as we move down to the first quarter.

Unidentified Company Representative

Yes, speed definitely did increase in the fourth quarter. You saw rates reach absolute lows toward the end of the third quarter and early in the fourth quarter. So on the agency side, speed definitely increased. Since then, rates have backed up dramatically, and you look at the [refi index] and also taking into seasonality going forward, you would expect that to trend down into the first quarter and forward.

Stewart Zimmerman

But obviously on your new purchases it's probably going to be incremental to that as to that blended legacy spread as well. Shifting over, one question on the non-agency side if I may. You put a nice table in here reconciling the linked transactions. The tables aren't numbered, but I'm sure you'll know which one. It's the one where on the non-agency RMBS you go from GAAP to non-GAAP. And the linked transactions - it's about $700 and some million, but for the quarter you had an average linked balance I think of $622 million in RMBS. And the spread there on those transactions was 515 versus your GAAP spread I guess on just the RMBS that were not linked was 732. I assume that reflects maybe that some of these linked transactions are newer transactions and that lower spread reflects higher prices in the marketplace. Is that 515, can you comment on how that spread on the linked transaction kind of compares to what's available to you today in the market on the non-agency side?

Craig Knutson

You're right. I think it's probably a function of two things. One, they're newer purchases, and two, in some cases the linked transaction may be higher quality assets, maybe investment-grade rated assets, so they may have slightly lower yields as well. As far as sort of where those spreads are now, I would say the paper that we buy today probably yields anywhere from the low [six handle] yields to the low [seven handle] yields. In financing, rates have continually tightened in, so I would say financing can be as tight as LIBOR plus 100. LIBOR plus 150 these days is starting to look a little bit expensive. So somewhere between plus 100 and plus 150.

Stewart Zimmerman

Okay good. I guess the benefit is too that even though the yield is lower, it looks like you're using, at least on the linked transaction, a little higher leverage multiple there on those transactions versus the others.

Craig Knutson

Yes, and again that goes to the type of the asset. So the better the asset - so for instance investment-grade rated assets will typically have lower haircut. So the haircut could be as low as 10% on investment-grade rated assets.

Operator

And next we will go to the line of Bose George with KBW. Please go ahead.

Bose George – KBW

I know this will be out in your 10-K, but could I get your duration gap numbers?

Unidentified Company Representative

The duration for the entire portfolio was 80 basis points.

Bose George – KBW

And just the way you break out the net assets versus liabilities and the net GAAP? If your K is out today, I can obviously wait for it too.

Stewart Zimmerman

I know it's in the K. Why don't we do this, we'll look it up as we go along, but it's in the K and we'll try and answer the question as we go along.

Bose George – KBW

No problem. And actually let me just switch to an accounting question on the re-REMIC, but briefly talked to you guys about it earlier too. Just to clarify, so on day one, when you guys did the re-REMIC, all the assets show up in that transfer to a VIE line and there's no liability. As you start selling the AAAs and liability shows up as securitized debt liability, just wanted to make sure what happens on the asset side. Is there any change on the asset side?

Unidentified Company Representative

What happens when we do the re-REMIC transactions, we obviously transfer the assets into a trust, a VIE, which we consolidate. And simultaneously the A1 portion is sold off into the marketplace to third party investors. So when we consolidate that trust, we reflect the assets, that $700 million that you referred to, in the MBS that's transferred to consolidated VIE, and that's on the asset side of our balance sheet. And the liabilities that are sold to the third-party investors, approximately $220 million, [inaudible] to the A1, that's what's showing up in the securitized debt line on our liability side of our balance sheet. And the underlying assets, it's as if they never really were sold. So as they continue to pay down and they change in value, that's reflected in our financial statements on the asset side of our balance sheet and through our income statement for the interest income and the change in value goes through equity, through other comprehensive income.

Bose George – KBW

I'm just wondering, if you sell, say you decide to sell further down in that securitization, how does that show up on the balance sheet?

Unidentified Company Representative

To the extent that if there was in the future a sale of another class of securities by the trust, and we continued to consolidate that trust, then you would see an increase in our securitized debt liability.

Bose George – KBW

Okay, so that's the only change.

Unidentified Company Representative

But Bose, absent that, that 221 securitized debt number, that number will decline as that A1 class gets prepayments. And remember the A1 class gets all the prepayments from the entire transaction.

Operator

And next we will go to the line of Jason Arnold with RBC Capital Markets. Please go ahead.

Jason Arnold – RBC Capital Markets

Just had a quick question on the $540 million of agency MBS purchase in January. It certainly seems well-timed given where prices have gone. But curious if prices have gone down enough on this side for you to refocus capital deployment to the agency side of the portfolio? Or is this more just simply opportunistic purchases?

Bill Gorin

Let me answer that. Basically, we used to have a $10 billion agency portfolio, and we allowed that to decline to below $6 billion. I would say due to the fact that the absolute prices and the absolute yields are more attractive now than they were late last year, we probably will be growing the agency book closer to $6.5 billion.

Jason Arnold – RBC Capital Markets

For the quarter, I guess? Or just in general as you balance that out with the non-agency?

Bill Gorin

Over the course of the quarter. So that's growth from about $6 billion to about $6.5 over the course of the quarter.

Jason Arnold – RBC Capital Markets

And then I guess just one other quick one. If you could briefly remind us of the notional value of swap maturities that are coming up here in 2011?

Bill Gorin

About $800 million. That's about $200 million a quarter.

Jason Arnold – RBC Capital Markets

Okay. And then I'd assume that the pay fixed rates are all north of 4% on that?

Bill Gorin

Probably high in the threes or some fours. By the way, that will be in the K which will go out later today.

Operator

And next we'll go to the line of Mike Taiano with Sandler O'Neill. Please go ahead.

Mike Taiano – Sandler O'Neill

Just had a question on the table where you guys break out the spreads for both the agency and non-agency portfolios. Just trying to reconcile. It looks like overall your spread remained relatively flat at 2.74%, but you had a fair amount of compression in the pieces, so I was just curious as to how do I reconcile those two?

Bill Gorin

I'm not sure - what is your question?

Mike Taiano – Sandler O'Neill

So the spread for, say, the agency book, went to 1.53% - I think it was 161, and the non-agency was 6.77, then I think it was close to 7.5 last quarter?

Unidentified Company Representative

Right. And then the agency portfolio was obviously much larger than the non-agency portfolio.

Mike Taiano – Sandler O'Neill

Correct. Right, okay. So that's [inaudible]. You're still only down a basis point or so. But that's what the reason is? It's more -

Bill Gorin

Yes.

Mike Taiano – Sandler O'Neill

Okay. And then just secondly on just where you guys feel, how you feel about leverage at this stage and you know, a number of your competitors have been out raising capital over the last several months, and just curious - you seem like you're underlevered, at least on the agency side relative to peers. Just curious as to what your thoughts are there.

Bill Gorin

That would be a fair statement as of December 31.

Stewart Zimmerman

I will tell you, though, in terms of the leverage, and again I think we're comfortable where we are. However, as Bill said a few moments ago, we've seen some value on the agency side and we continue to see some value on the non-agency side. So we'll continue to look at the leverage. We basically do that every day anyway. But again, the fact is that as these opportunities continue to present themselves we will take advantage of them.

Bill Gorin

And incrementally, we're increasing the leverage on both the agency and non-agency portion of the portfolio. But it's incrementally.

Operator

And next we will go to the line of Henry Coffey with Sterne Agee. Please go ahead.

Henry Coffey – Sterne Agee

Looking at page 3, which I found very helpful, about 35% of your agency assets have less than two years to reset. As you start to lay on more agency assets, are you likely to keep the swap book right where it is given then relative sort of short duration of the existing portfolio? Or how are you thinking about what level your swaps need to be at as you put on new assets?

Bill Gorin

Part of our swap book, which is preexisting, was based on a much larger agency portfolio. As we mentioned in our last phone call, we're probably over hedged, which is to the detriment of our spread on the agency.

Henry Coffey – Sterne Agee

Right. I agree.

Bill Gorin

Incrementally, we are adding more agencies than we are adding swaps. So the swap ratio will go down.

Henry Coffey – Sterne Agee

Are you also likely to shorten the duration of those swaps as well?

Bill Gorin

No. To the extent we've been adding 15-years, no.

Henry Coffey – Sterne Agee

And you made some fairly encouraging comments about the pending March quarter. Everything you've said so far says we should look at modestly stronger numbers. Do you want to add anything to that?

Stewart Zimmerman

Again, based on where we are today, I would think that the next quarter should continue to be a positive quarter, but to give you any further guidance would be very difficult, and we would prefer not to do that.

Bill Gorin

The big wildcard is pre-pays.

Stewart Zimmerman

Pre-payments. I mean, that's really where we are, and it's kind of difficult to forecast those.

Bill Gorin

So based on what we've seen, there should be a benefit from the incremental assets we've been adding.

Bill Gorin

Are you comfortable talking about your January and February speeds, or would you rather pass on that?

Unidentified Company Representative

We do expect in general that speeds should come down going forward, but you know, I don't feel comfortable giving the specific number.

Operator

And next we will go to the line of Joe Plevelich with Schneider Capital. Please go ahead.

Joe Plevelich - Schneider Capital

I guess a question on new non-agency purchases. How much leverage do you plan to put on new purchases and is it more attractive doing repo or re-REMIC at this point?

Bill Gorin

As far as leverage on new purchases, again it really depends on the asset, so the better quality assets have lower haircuts and therefore we could have higher leverage than the lesser quality, which might still have 30% haircuts or so. And as far as repo versus re-REMIC, they're all sort of interrelated, and as Steve Yarad said earlier, the re-REMIC transaction is really just a financing. So we look at the two of them and we use repo on retained securities from the re-REMIC that we did. We have more counterparties - I think we have 11 counterparties right now. We've seen some longer-term repo on the non-agencies. So the financing is really very liquid right now, and we have increasingly more attractive and longer options.

Operator

And next we will go to the line of Daniel Furtado with Jefferies. Please go ahead.

Dan Furtado – Jefferies

First question is the non-agency purchases in the quarter, are those kind of fairway with what you've been doing in the past, senior cash flow type stuff, or are you starting to move farther down the stack in those purchases?

Bill Gorin

They're generally the same stuff, the senior most security in their respective deal structures.

Dan Furtado – Jefferies

And help me understand what would trigger your decision to sell further down in that re-REMIC. Is it kind of absolute yield on the next slice of securities, or - you know, when you're thinking about the gameplan of when or what would cause you to sell further down in that deal, what's the primary driver there?

Bill Gorin

I would say it's purely economics, right? So as the A1 piece continues to pay down, the A2 piece gets shorter. So the shorter it gets obviously the tighter the execution. So right now we're very happy repoing those. The A2 tranche is also AAA rated. So we're very happy to repo that. It would obviously be more expensive if we were to sell that. But at some point - we continue to look at sort of where that might trade as it gets to be a shorter and shorter security.

Dan Furtado – Jefferies

Gotcha. And then finally a question on agency leverage. Can you help me understand how you think as a management team - are you more comfortable taking leverage up as you see opportunities in the market from a spread perspective? Or are you kind of more focused on prepays and the cash drain there from a leverage perspective? I guess in other words, are you more likely to take leverage up if speeds slow, or yields widen, all things equal?

Stewart Zimmerman

You have to have a view on interest rates, obviously, what you think might or might not happen. So in terms of us wanting to purchase additional agency assets, in terms of the leverage it's really those opportunities. So if the opportunity is there, it's yes. And as I think Bill said a few moments ago, incrementally we're going to increase the leverage on both the agency and non-agency side. But it's a matter of the particular securities that you buy, the niche within the agency part, that you're going to acquire, and where you think rates are going to go. So again, you can expect that on an incremental basis that our leverage will continue to go up, but again, that will be on an asset by asset type basis.

Bill Gorin

By the way, you talked about two variables. You talked about the variable of your expectation of prepayments, and spreads, there really is a third variable, which we say consistently, the absolute price and the absolute yield. Because hedges tend not to be perfect.

Operator

And next we will go to the line of Matthew Kelly with Morgan Stanley. Please go ahead.

Matthew Kelly – Morgan Stanley

I'm just hoping you can give us a little color on the competitive space within buying non-agency RMBS now. How are you seeing that kind of trend over the last couple months versus end of last year?

Bill Gorin

I would say that prices have continued to sort of grind higher there, but that being said, there's still a lot of paper for sale every week. So from a supply standpoint, I think we still have plenty of paper to look at. That's the good news. The bad news is that prices are incrementally higher.

Matthew Kelly – Morgan Stanley

And within that space, then, have you shifted any of your strategy from one type of paper to another?

Bill Gorin

Not really. I would say if you look at the average composition of what we own, it really hasn't changed that much over time.

Matthew Kelly – Morgan Stanley

And then just one followup from me. Any reaction from you guys at first glance from the GSE whitepaper on Friday, how that kind of impacts you or what you think next steps are there?

Stewart Zimmerman

You know, I've been asked that question before the whitepaper, and it basically had the same answer. It seemed to me to be somewhat clear. In terms of G fees going up, and the risk parameters of both Fannie Mae, Freddie Mac, whatever the new entities may be, in terms of privatization and where that's going to stand, what I see going down the road for MFA relative to the various changes that will probably occur over time. And that's the key, it's over time.

I was fortunate enough to be down in Washington about a month or so ago, and the question was is this change going to occur over three months, three years, and then one of the congresspeople said maybe 10 years. Well, I don't think it will be 10 years, but it will probably be anywhere from a two to four year period of time that we'll see some of the changes.

And for MFA, I think these are all positive, whether they're agency, or agencies as we understand them today, if they're non-agencies. And as you know the conforming loan limit looks like it's going down as of October. Again, we are certainly in a position to be able to do the underlying analysis of agency securities non-agency securities. So no matter what form they come in, I think these are opportunities for us. And again, in my career whenever there's been some confusion or changes, that always brings opportunity.

Operator

And next we will go to the line of Jim Ballan with Lazard Capital Markets. Please go ahead.

Jim Ballan – Lazard Capital Markets

I was wondering if you could help me out a little bit with understanding the net interest spread with the MBS, including the linked transactions. My thought is that on the net yield side, you're including the incremental assets from the forward purchases, or the linked transactions. So that causes the yield to be higher there. But maybe if you could help me out with that calc. And also just on the cost of fund side, just maybe how you get to the differential there between the number, including the linked and not including the linked transactions.

Bill Gorin

[inaudible]'s going to answer that question, but before we do it, a little housekeeping, because we've repeatedly gotten questions about linked transactions. Let me repeat the explanation. It simply is if we acquire a non-agency, and repo it at the same time with the same counterparty, rather than counting the non-agency MBS as an asset and the repo as a liability, they're netted. Economically, they're separate. Businesswise, they're separate. This is an accounting convention we've been told is necessary. It does cause some confusion. We're basically just saying some of the newer non-agencies we've bought have to be shown as linked. So I don't know if that helps you or not. Hopefully it helps somebody, but [inaudible] will answer your question.

Unidentified Company Representative

Are you looking at the table on page 8 of the press release?

Jim Ballan – Lazard Capital Markets

I was just looking at the text of the - I think my pages are different than what some of the other people have been talking about - but just the paragraph that starts, During the fourth quarter of 2010 MFA's interest-earning asset portfolio net yield was 478, etc.

Unidentified Company Representative

Got it. So here's the difference. The difference is if we're using GAAP, we're excluding the MBS that are linked. So therefore you're excluding non-agency assets and non-agency assets yield more than agency assets. So by cutting out a component of the non-agency, that's why the overall GAAP yield is lower than the yield if you're including all the non-agencies. Did that help you, Jim?

Jim Ballan – Lazard Capital Markets

Yeah, but I guess the one question I still would have is shouldn't the net number be the same? What's the difference in the net number then?

Unidentified Company Representative

Because it doesn't show up as a spread component. The income from the linked transaction -

Unidentified Company Representative

If you look at our income statement, and you look at our interest income and interest expense on our unlinked transactions, if you like, the agencies. So the non-agencies that are not accounted for as linked transactions. That excludes the spread on the non-agencies that are accounted for as linked. And if you look further down our income statement, you'll see the gain on linked transactions - it's a different line - that does include the underlying spread on those transactions that are accounted for as linked, in that presentation. If you look in the text, we show both. We show it on a non-GAAP basis as well. So if you just look at our income statement, the spread is actually on two lines. On the linked transactions it's in the gain. On linked transactions and on the rest of it, just in the normal sort of net interest expense line.

Jim Ballan – Lazard Capital Markets

Okay, I've got it. That's helpful. And just one other thing. Just could you give us the net accretion and amortization number for the quarter?

Unidentified Company Representative

It's $373,000. So it's basically break-even. The premiums, amortization, and discount and accretion, about the same.

Operator

And next we'll go to the line of Gabe Poggi with FBR Capital Markets. Please go ahead.

Gabe Poggi – FBR Capital Markets

A quick question in regards to the price appreciation on the non-agency side. Do you guys think this - or how do you think about it? Is this indicative of a chase for yield? Or you're seeing better underlying credit quality? And if it's the latter, how do you guys think about what you guys own and then the potential for a reversal of the reserve you guys have? Thanks.

Unidentified Company Representative

It's probably a function of several things. One is that you're right, to some degree it's a chase for yield. We have seen some slight improvement, or at least leveling off, in 60-plus, but I think the jury's really still out as to ultimately what the credit component of that bet is. It's good to see, but I think there's a lot of wood still to chop there. We did - and this will be in our K - we did reverse about $17 million in the fourth quarter from our credit reserve. So we continue to look at all those securities security by security. The other thing to keep in mind, and I think this has also contributed to some of the price run -up, is the availability of leverage. Leverage just gets more and more available and in some cases for longer terms. So I think that also has to have some effect on the market pricing.

Operator

And next we'll go to the line of Isador Mostow, a private investor. Please go ahead.

Isador Mostow

I'm calling in regards to a question I had. The earnings for the last quarter and the dividend that's going to be paid. I must have missed it in regard to what you all said earlier.

Unidentified Company Representative

You're talking about the fourth quarter earnings?

Isador Mostow

Yes, fourth quarter. Is the fourth quarter ending 12-31?

Unidentified Company Representative

Yes it is.

Isador Mostow

And the earnings for the fourth quarter? Net earnings?

Unidentified Company Representative

The quarter earnings were $0.22.

Isador Mostow

$0.22. That's what I wrote down. The dividend will be paid, of $0.23?

Unidentified Company Representative

I'm sorry. The dividend was paid at the end of January, January 31.

Isador Mostow

Oh, the end of January. And that was $0.23?

Unidentified Company Representative

$0.235.

Isador Mostow

$0.235? [inaudible] Does that vary on each quarter as a general rule?

Unidentified Company Representative

You're asking does the dividend vary? Is that your question?

Isador Mostow

Yes.

Unidentified Company Representative

The dividend will vary. It's based on the taxable income of the company. That's what it's based on. That's what dividends are based on.

Unidentified Company Representative

By the way, thanks for the question. And one thing I'd like to add so everyone knows, we're going to look to declare our dividend during the quarter rather than after the quarter. It's sort of become the industry norm. So going forward we'll be announcing first quarter dividend within the first quarter, rather than right after the first quarter.

Isador Mostow

Right. You're on a yearly basis then. In March and June?

Unidentified Company Representative

Yes, that's correct.

Operator

And last we will go to the line of Matthew Howlett with Macquarie. Please go ahead.

Matthew Howlett – Macquarie

Could you tell us the lock-out feature on the re-REMIC you did, on the subs. How long until they start receiving cash?

Craig Knutson

I guess the lock-out, if you will, the A1 tranche, which is the one that was issued to the investors, it gets all the principal until it's paid down. So I think when we first issued it, I think it was $248 million. And it was down to $221 million at the end of the year. So that's 3 months of paydowns. But all the principal will go to that A1 until it's completely paid down. After that, then all the principal will go to the A2 until that's paid down. And so on and so forth.

Unidentified Company Representative

What was the average life of the A1, Craig?

Craig Knutson

The average life was 1.3 years.

Matthew Howlett – Macquarie

Gotcha. Okay. Everything goes down sequential subject to just standard triggers, is that typically how it works?

Unidentified Company Representative

Yeah.

Matthew Howlett – Macquarie

And then just on - as leverage goes up on the non-agency side, and you do more either financial leverage or these re-REMIC, do you hedge duration risk within that portfolio? How do you look at that going forward?

Unidentified Company Representative

Well, you probably noticed. We added a table in the press release where we look at - on page 3 - where we break out agency and non-agency. So it's a good question. It's something that we talk about all the time. I think to this point we view the pricing on non-agencies as much, much more sensitive to credit than it is to interest rates. But we do, obviously, keep a keen eye on which of those assets are longer assets. So the short assets, if it's less than 2 years, and I think that's 57% of the market value of the non-agencies. So those are fairly short assets and the coupons on those assets will reset. So those we wouldn't worry so much about. It's the longer stuff. So we keep a keen eye on it. Again, up to now we really think those assets have much more sensitivity to credit. And in fact look at what's happened to interest rates in the last two months or so. And look at the pricing on non-agencies.

Matthew Howlett – Macquarie

Right, so it offset, it sort of offset that risk of the forward curve. The tightening has offset any risk to the forward curve?

Unidentified Company Representative

I guess you could say that. I think they sort of move in opposite directions, right? So I'm not sure that we expect them to always move in opposite directions, but it's certainly what we've seen in the past.

Unidentified Company Representative

And we've been saying this for two years. We think there's a negative correlation between these very high yielding assets and interest rates.

Matthew Howlett – Macquarie

Gotcha. No, it looks like a great [inaudible]. Just didn't know what you'd consider - as the requirement for leverage increases, with these new non-agencies, would you look to go to floaters? Would you look to buy fixed rate with swaps? Just to lock things in, sort of that credit discount dissipates as spreads tighten on that side. Would you have to go to hedging in order to get the ROEs that you want -

Unidentified Company Representative

I don't think it's unreasonable to expect at some point in the future that we might begin to hedge those liabilities. Again, on the longer assets to reset, or the fixed rate assets.

Matthew Howlett – Macquarie

But you're not there. Right now you're not there yet.

Unidentified Company Representative

Correct.

Matthew Howlett – Macquarie

Great. And then just last question, just on the G&A run rate. Anything you can tell us on what we can expect in 2011?

Unidentified Company Representative

The run rate going forward for the G&A?

Matthew Howlett – Macquarie

Right.

Unidentified Company Representative

Well, you know, I think you've seen our disclosures. For the fourth quarter the G&A has been ticking up slightly as we've expanded our analytic capability on the non-agency portfolio, and we've taken on some new hires. And we did have a couple of hires late in the year in the fourth quarter, and we'll get the full year of those next year. So I wouldn't want to throw a number out at you, but it may incrementally go up as you add the full-year effect coming into that.

Operator

And next we'll go to the line of Michael Garber, a private investor. Please go ahead.

Michael Garber - Private Investor

Yes, I appreciate your time. I was going to ask you on your longer-term ARMs and your fixed-rates, what is your exposure compared to the market as far as subprime assets?

Unidentified Company Representative

Well, on the non-agency side, we don't own any subprime assets.

Stewart Zimmerman

And on the agency side, as you know, it's Fannie and Freddie.

Operator

And there are no further questions at this time. Please go ahead.

Stewart Zimmerman

Well, I want to thank everybody for joining our call. We look forward to speaking with you next quarter.

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