American Capital Agency Corp (AGNC)
Company Conference Presentation
March 7, 2012 09:40 a.m. ET
Gary Kain – President & CIO
Thank you all. Why don’t we start with slide 3, and I just want to give you a quick overview of AGNC for anyone who is new to the company. AGNC went public in May of 2008 at a dollar price of $20 per share and I think what’s probably most interesting about, call it, the track record is that since the IPO Agency has paid dividend – paid or declared $20.11 in dividends, in addition book value has grown to $27.71, and the company has grown to a market cap of eventually close to $7 billion at this point.
We feel good about obviously all those results at a high level. Agency invest only in Agency mortgage securities, those backed by Freddie and Fannie mostly and a few by Ginnie Mae. But really what differentiates AGNC from peers is our willingness to play throughout the agency mortgage market both fixed grade and arms and even some structured agency securities, and our asset management which relates to the fact, let’s face it, this is a changing market, interest rate changed, government policies changed, the housing market changes, a position that makes sense a year ago may not make sense today, and our mindset is in order to produce the best risk adjusted returns we’ve got to have a portfolio that makes referring to current environment.
With that let’s turn to the next slide. Here we highlight our 2011 results. I am not going to go walk through all these numbers, I don’t want to focus on something we focused on really for the last couple of years in talking to investors, which is the table in the top right here, where what we show – the bar chart is, we show our economic returns versus those of our peers over the last two years. The way we defined economic returns or the dividends or the cap we paid, plus the mark-to-market of our balance sheet at the end of each quarter and the same for our peers. So this isn’t an accounting number, it’s not affected by – did you tape realized gains or did you leave unrealized gains in your portfolio, this is just a change in your net asset value and cash that you’ve paid out. Also it’s very similar to the way other professionally managed financial vehicles are evaluated and therefore very comparable in the space. And so we feel very good about the aggregate returns, continuously growing book value despite paying a very healthy divided, and we feel good about our outperformance versus the other agency mortgage REITs.
I think what is sort of surprising here to a lot of people is the fact that, okay, all you guys invest in government guaranteed securities, why – I’m surprised of such a big difference in performance, and the reality is, well, from a credit risk perspective these securities are very, very big, the challenges around prepayments and refinancing activity and hedging, those are complicated issues and there are very significant differences on how some mortgage securities perform versus others and we’ll take a quick look at that.
One example on that front is the graph on the bottom which shows kind of the aggregate mortgage prepayments which – and you can see AGNC’s prepayment fees have remained very low despite a drop to record low mortgage rates that we’ve seen, it has been a key driver of that success.
Just quickly, the business economics how does AGNC generates returns. If you look at the far left – the left column what you’ll see is that as of 12/31 our asset yield was 3.07%, so that’s the yield and our advertised cost assuming a prepayment projection on our portfolio going forward of 14 CPR. Then our cost of funds is right below that at 113, it leaves you a net spread of 194 basis points which interestingly is the same as what the net spread was as of 9/30.
And so a lot of concern in the market place about spread compression, and yet if you look back historically or over the last couple of years spreads are tighter than where they had been before. On the other hand, at least with AGNC you’re seeing the quarter end spreads actually still in line with where they were in the prior quarter, and that’s despite the fact that our REPO cost were elevated in Q4 due to the fact that the year-end and, the combination of yearend and the European debt crisis, REPO rates have since moderated some. If you took that out actually you would see higher spreads.
The other thing to keep in mind is we use our yield as calculated using a projected CPR of 14%, our actual CPR was 9. If we used our actual CPRs like many others in the industry, our yield and therefore our spreads would’ve been materially higher. You should keep that in mind as well from a comparability perspective. When you go through this you add leverage, you add the yield on an equity, you’re getting gross ROEs in the mid 18s or net ROEs in the 16.5% to 17% area again that doesn’t give any value to any trading activity or realized gains or it doesn’t put any value on previous undistributed taxable income or anything. Just looking at those numbers, you can build up to a pretty good ROE.
Now, I wanted to give a quick update and kind of change gears from kind of aggregate AGNC’s top two kind of more current stuff, and one thing that gets a lot of discussion out there is HARP 2.0 and the prepayment landscape, and I think everyone is I think used to the fact that interest rates are at record lows, prepayments on relatively generic mortgages have picked up. I think we talked a lot about that on our earnings calls and as have others. I think one thing that’s interesting is HARP 2.0 which is the new HARP program that was instituted at the end of 2011 after much discussion about what to do with GOC [ph] refinancing programs and underwriting.
After months of discussion, FHFA coupled with Fannie and Freddie came out with a HARP 2.0 and most of the time there is disagreement exactly how effective this program is going to be and I think everyone’s inclination is generally to fade [ph] these programs and say, don’t worry about its not going make much of a difference.
We actually don’t feel that way, and we haven’t felt that way all along. We felt of risk return of being exposed to the HARP changes was not worth it, you weren’t paid for it, it wasn’t that we felt that it was a guarantee or anything that you were – this fee implemented would be dramatically faster, we didn’t like the risk return. We told you that for six months and we have as of the end of both Q3 and Q4 less than 5% of our portfolio is even eligible in terms of its origination date for HARP 2.0. This is less of an AGNC kind of related issue because we don’t have exposure to HARP 2.0, we don’t have much exposure the HARP 2.0 at this point. But what I do want to kind of give people a feel for is that we are starting to get some reports on HARP 2.0 and it seems like it is kind of working. The director of FHFA basically said our largest vendors are seeing tremendous interest, I mean that’s a strong statement when they generally play down this. They don’t want to set high expectations. J.P. Morgan on their investor call came out and said, we’re big fan of HARP 2.0. HARP 2.0 is bigger than we thought. We’ve seen comparable statements from Bank of America and so forth, and interestingly even though we prepared this slide before we actually got a prepayment released last night. While what we say on the bottom is that you are probably going to take months before you’ll start to see any material impact show up in the prepayment release.
Sort of surprisingly last night some of the largest 2007, 2008 cohorts of 5% coupons or 5.5% coupons actually picked up 4% to 5% CPR due to what everyone is attributing to HARP 2.0. This is much earlier than people expected because Fannie and Freddie having they fully implemented these changes and many originators have fully implemented, all these changes are going to build in. So this is earlier than expected and we’re seeing the prepayments fees higher coupons, again nothing its represented in any kind of size in Agency’s portfolio actually above the highs of 4 or 5 months ago, whereas lower coupons that aren’t affected by HARP 2.0 are still below kind of the highest get. Again, this could be very early in the process and I think you could see some more negative surprises in the sector.
Just as a quick update, our mindset is still to view the higher coupons as still more risk than opportunity at this point, hopefully that may change.
What do we own? I mean I’m not going to spend a lot of time on this, just because I think we’ve covered this in earnings presentations and the information out there. But I do want to be clear, I think there is a mindset out there with respect AGNC which is you guys tend to have strong opinions and therefore very concentrated positions. Actually that’s not the case, we do have strong opinions, i.e. like HARP 2.0, like GSE buyouts, we’re going to avoid things that we don’t like. And so, you will see tiny representations of things that scare us. But of the things that we’re comfortable with you’ll generally see a fair amount of diversification there, because in the absence of any other compelling reasons diversification is a net positive.
So, look at the portfolio just at the top level, 30 years make up 47% of the portfolio, 15 years of 37%, 20 year another component or an arms make up of pretty small piece. Look at our actual prepayments, again extremely tame. We told you on our earnings call that both the speeds released in January and February for the portfolio were 8 CPR.
If you look at the breakdown of the 30 year portfolio, going into this quarter 50% of the 30 years were, they had gone through the HARP program once. And so what’s important about this is these are not HARP 2.0 eligible, they are almost the opposite. These are securities, higher LTV securities that we’re able to read finance only because of the HARP program and going forward it’s a one-time program, they’re not eligible to go through the program again, they’re not going to qualify – most of these are not going to qualify under new rate to do a regular refi, and you see that in the prepayments fees, the January one month’s fee was 3CPR.
These continue to be extremely good performing securities, lower loan balance which we’ve talked about, smaller loans have two big advantages, one is the borrower is not incentive to refinance because they would need a large change in rates to make up for the fixed cost of $1000 or $1500. If you have a $100,000 loan that’s not easy to overcome. If you have a $400,000 or $500,000 loan it’s a very different equation, and it can make sense for 30 or 50 basis points, it doesn’t make sense for someone with a smaller loan.
But even more important, no matter how rules changed, no matter how low rates get, if we get a QE3, there is another important factor. The mortgage origination industry is pretty busy, they’ve got record low rates, they’ve got HARP 2.0, they’ve got a lot going on. If you can process a 100 loans what are you going to do, you can do a $100,000 loans if you are a loan officer or you are a Wells Fargo or you are a branch, or you’re going to do a $100,000 and $400,000 loans when you get paid a percentage of the loan and that’s how you are compensated.
The faster things get – the more negative surprises we have on the prepayment front the more the capacity situation benefits you in lower loan balance. We view that as sort of, to some degree sort of a hedge against faster prepayments, the worse things were to get the more of that capacity constrain and the fact that lenders are going to push more loans to the back of line because they care about their profitability.
I think that’s a key thing to keep in mind. On the 15 year front, maintain the situations where 85% of our portfolio was lower loan balance going to that those themes that we just talked about. It’s critical on 15 year, because face it, what everyone likes about 15 year mortgages is they are shorter and therefore easier to hedge. But these are very high quality borrowers. With high quality borrowers that can handle big monthly payments very good credit and can easily refinance, and so the balance of having shorter durations but controllable prepayments comes from going to lower loan balance.
Let’s turn to the next slide for a second. Because the question I always get is, look, it’s a big market, it’s a huge market $5 trillion. I understand the benefit, clearly low loan balance and the HARP securities are prepaying really well. So you must have to pay a fortune and like – it isn’t that you just get what you pay for and, you know, look these things have to get arbitraged away. That’s probably true over longer run, but I mean these are just – this charge really sums up, the fact that things aren’t necessarily that efficient.
If you are willing to react quickly to changing market conditions, and if you run your portfolio to be able to perform overall range of situations or scenarios, then there are times when you can add these benefits at basically very minimal costs. So, forget the kind of commentary, let’s look at what we call the facts, right? Go to March of 2011. What was going on in March of 2011? Interest rates were higher, prepayments were a non-event, and so what happened? No one cared about prepayment protection.
You could actually buy one of the highest LTV HARP securities that are prepaid the slowest and have been great performers at a lower price than a TBA mortgage because it’s not as liquid, and no one cared about the prepayments. So, we traded at a discount to the generic mortgage. The loan balance which also shared the liquidity of a TBA had a very small payout. Now what's happened is now that we’ve had a massive rally in interest rates, mortgage rates are at record lows, everyone’s seeing the risks to owning more generic products, what's happened to those prices of those securities.
Well, apart from trading at a lower price to most recently toward the end of February at almost a three point premium to generic mortgages. So now that point of, if you want to buy that security today you got to pay a lot for it because everyone under – seeing the actual prepayments or seeing it hurt their returns, and they are willing to pay for it because it’s a now, it’s a here and now issue, all right. When it was positioning in the future, and even when rates – and this is important, even in the third quarter when rates started to fall and actually had fallen most of the way, the market was adjusting to a new mindset, even though the prices, as you can see on the graph were going up for these other securities, they weren’t going up very quickly, and you’ve seen most of that acceleration really over the last three or four months as we have kind of solidified in a faster prepayment environment at least for now and that could change. That’s where you have seen the real kind of – the market really bidding up these securities.
So, we want to be very clear that the equation is different now, okay. I mean the equation that led us at the end of September to have whatever, almost 90% or 85% of our portfolio and lower loan balance than HARP, it’s not as clear now that these pay ups are where they are. We understand that and that’s what you get with an active manager is that kind of mindset.
Quickly, why are those pay ups where they are and why are prepayments everything. Well, this chart very quickly sum it up. We think that a 30 year 4.5% mortgage, we look at the yield across going from 10 CPR up to 40 CPR. So, and look what happens to the yield on the mortgage it goes from 3.38 to the 10 CPR, to 92 basis points at a 40 CPR. Now, we try to kind of create a theoretical REIT with eight times leverage or theoretical portfolio and look what the levered returns look like on this mortgage purchase depending on the prepayments bid. 24.8 at a 10 CPR and at a 40 CPR 2.7, this is gross return, okay. At 30 it’s 11. Prepayments make a huge difference in your returns.
So it’s not stupid for the market to care a ton in those pay ups to be where they are because prepayment fees are critical to your returns, all right and they’ve always been and they always will be in this kind of environment. And so you have to have a portfolio that you can count on if you want to perform in this environment. On the other hand, the reality is that over time, six months down the road, prices do reflect the importance of prepayments on returns. But these numbers are pretty striking, right. Everyone knows that passive prepayments are not good and they hurt your margin and so forth.
The difference between 10 and 30 CPR is a gross ROV of close to 25 versus 11 with the same leverage and the same security, right. That’s a massive difference and both of those prepayment speeds are reasonable possibilities given the types of mortgages that are out there. One of the things that, and this is probably the least kind of understood in the space so to speak, by investors, which is slower prepayments not only help your book value and not only help your returns, but they are actually important to your ability to lever which obviously is something that's critical to our returns.
There are three things that kind of affect your ability to prudently use leverage. First is the hair cut, right. We are in this graph table assuming a 5% haircut, so simply at eight times leverage if you have a 5% haircut that’s going to use up 40% of your available equity, and that’s what you see you know in the middle to you know see the eight times five on the middle two bars.
Another thing is that the prepayment speed that a mortgage that you get also impacts your ability to borrow, and this is kind of subtle, but what happens is – happened last night, Fannie and Freddie release your prepayment speeds. So a security that was a $100 million that prepays at a 24 CPR 24/12 that’s roughly 2% a month, well that security went from a 100 million to 98 million, well what does your repo lender do when they pull up the security the next day, they say, wait a minute I lend you 95 million I only have 98 million in collateral, forget price this is just the factor, you got to give me 2 million bucks to get my haircut back to 5%. So, and we do, and so we get a margin call to put up the prepaid cash. Now we’re going to get that money from Fannie but we don’t get it until the 25th. So for almost three weeks we are – that pay down, okay, the prepayment is the equivalent of an incremental haircut.
That’s what you see in kind of the middle blue – I should have used something better – different than all kinds of blues, because it’s harder to describe, but you could see that in the middle.
The difference between the 12 CPR and the 30 CPR is massive, right? And so it’s the difference of adding a 1% haircut essentially the other prepayment or a 3. And compare 3, if you’re getting 36% CPRs to your initial haircut of 5 that’s like a 60% increase in your haircut if you have faster pulls, right? It’s a big deal.
Now, let’s look at it in aggregate, right, and how it impacts things. So, people worry is eight times leverage high, what kind of risk is that, the space typically over the longer run was more like 10 to 12 and this kind of – I think there’s – graph kind of shows why, which is look at a 10 times leverage if you have a slow prepayment if you slow prepayment fee, right? Even setting aside 2.5 points for the third issue which is price risk, unfortunately we have to be very well prepared if our securities underperform our hedges. So think of that 2.5 point it’s not the change of the bond, the bond lose by more than 2.5 points versus our swaps, versus our short treasury hedges, if all that stuff – if mortgage securities underperform by 2.5 points we fill that cushion in. And even on top of that at 10 times leverage with a 12 CPR you’ve still got a pretty healthy cushion of cash left over which is why – whereas if you’re getting a 36 CPR you have no question you actually don’t even have the full 2.5 points in cushion.
Interestingly, the difference between 12 and 36 CPRs is pretty close to the difference in having the same cash resources at two times lower leverage. If you’re going to get faster speeds and you wanted to have the same amount of cash reserves, your leverage has to be 1.5 to 2 times lower, if you don’t have the confidence on the prepayment front. So really important, right, prepayments. Look we invest in mortgage securities that’s what we do. Mortgage securities differ from other securities because of prepayments. How does that show up? We looked at the graph, book value, it shows up in yields and it also actually shows up and allow in making the same leverage levels more approved into allowing higher leverage levels and it allows you – and that all allows you to hedge more to protect against the one other risk you have which is an increase in interest rates.
To conclude by saying, what do you think going forward? And you know what we are thinking going forward, we feel really good about the market right now. The reason is we kind of are thinking about three scenarios. We think that this is kind of at the – these are the kind of key things that are driving decision-making at AGNC at this point.
First scenario which is probably the highest probability, right now is that interest rates, that the economy continues to recover, do okay, nothing earth shattering, but surprises to the upside, we keep deployment gains, we see the Fed not implement the QE3, remain on hold, in the scenario what likely happens is the 10 year, the backend of the treasury curve maybe goes up 50 basis points but remains very contained, it’s in some ways for – the other things that would happen in that scenario is prepayments will not disappear and actually they’ll still be fast on HARP 2.0 securities but outside of those prepayment risk in general will come down, and the yield curve will steepen a little bit which will improve spreads somewhat, not a lot, but we would call this somewhat of goldilocks scenario. It’s slower prepayments, steeper yield, still reasonably attractive returns on mortgages, nothing to worry about in that scenario, okay, economy doing okay and liquidity reasonably well.
Go to scenario two. The strength in the economy that we’ve seen over last three or four months or three months is headache. We’ve seen this a couple of other times. Something happens in Europe, something happens with Iran, something happens with the oil and what we see is the interest rates fall, the economy weakens, the Fed pushes the QE3 button, all right. So we think – while it’s not a 50% likelihood, maybe it’s a 35% likelihood, you cannot ignore that.
So what are the things that are going to allow you to perform in a scenario like that. Well the Fed is going to buy hundreds of billions of dollars worth of Agency mortgages, which is what we own. So we’re going to get a big pop to book value if we have the right mortgages. What’s the right mortgages? Lower coupons that you can sell into the Fed or prepayment protected mortgages that will be able to still go up in price because they won't all pay off with the new record low mortgage rates that we would see.
Interestingly about QE3, really good for book value. Actually not very good for actual cash flow returns, right, because our new purchases are going to stink. We have to compete with the Fed, they are going to drive prices to very high levels, and prepayments on our existing portfolios will pickup, none of those are good from a returns perspective but what you will see a very good pop in book value.
So how do you position for that scenario? You don’t want low leverage, because low leverage says I am going to buy later. Well I don’t want to buy it later if the Fed is going to buy, and actually in scenario one I didn’t really want to buy later. So in both of those scenarios low leverage is unaware. So what you then need is, you need prepayment protection so that your securities can – or low enough coupons so you can sell them into the fed and then you’re going to want to probably into the fed reduced leverage afterward, and that’s the way you can monetize some of those book value gains and get some of the benefits over a longer period of time without just essentially competing with the fed and just taking the negatives of prepayments and lower returns.
Now, going through scenario three which is the one that keeps you up at night and keeps me up at night even though most people sit here and say, look, the Fed told you major trades aren’t going anywhere through the end of 2014. We actually believe them. But the reality is that the pain trade or the scenario that scares us from the perspective of maintaining book value and protecting your investment, is a much stronger economy or a big pickup in inflation or a dollar crisis, something that drives the back-end of the treasury curve to much higher rates.
Do I see this happening? No. Is the fed doing everything it can to avoid that? Yes. The economy have got problems like housing and so forth, so many reasons why it shouldn’t happen but I am not going to be able to know when that surprise could come, and it will happen quickly. How do we protect, we’re protecting our portfolio again by buying out of the money, pay our swaps or basically put options on interest rates. If rates don’t go up we lose that premium, that's fine. We have the extra returns from running reasonable leverage, from having good returns on our assets because of prepayments. We’re going to spend some of that money for on protection for that disaster scenario.
We’re hedging our portfolio more and running less of a duration gap right now because interest rates are on the low end and given where swap rates are you can afford, you can afford to hedge more. So when you put that together, right, when you look at those scenarios in aggregate there are things you can do to improve your odds in scenario for you to kind of mitigate any losses, mitigate some of the losses to book value. But in the other two scenarios there is actually a plan that makes sense for both of them. So when you look at that, we feel good about those tradeoffs. We feel good about that landscape because it’s something that we can look at a wide range of scenarios and feel that there is a specific portfolio composition that can work.
So with that let me stop and open up the floor to any questions.
Thanks Gary. I just have a question. To varying, like you said in your third scenario, because you mentioned that the low balance loans and the value of your portfolio really increased a lot in the last quarter for good book value gains. What happens without necessarily a huge 10 year increase but if it’s less concerned about prepayments in more generic mortgages and then the value, there is a movement out of the kind of loans in your security, in your portfolio, how do you protect against that for impact that might have on book value?
That’s a great question, and it’s something we have to think about quite a bit. Again, it’s why you have to be actively manage, because the environment that we saw which was prepayment fears were going to be picking up these securities were undervalued for the obvious reasons. As it gets fully valued, they should – we don’t want to have 80% of our portfolio in these securities, because it’s actually – I think you’re more describing scenario one, okay, and I want to be able to perform – that’s my highest likelihood scenario want to be able to perform well in that scenario.
And so what that means is taking some of the chips off the table in higher pay up securities and being willing to replace them with other securities where you can get – you can still perform reasonably well in scenario two where you can mitigate some of that exposure. The other think you can do is you can hedge them a little more but realistically when you get to, when the market moves kind of in big chunks as it moves to the upside, I think we don’t want to give back all of those book value gains that we achieved, okay?
We get that, all right. Book value is really critical, we put the charts out, we like having good returns. So we get that, and so, we are willing to exchange and look for other ways to perform okay in scenario two, to not give back all the money we made so to speak in scenario one or three.
I’ll just jump in. I know last year the SEC said they were seeking comments on the exemption of mortgage REITs from Investment Act of 1940. Maybe you could just tell me about your views on that and the potential risk to the company?
Look, the SEC CR from – I guess it was August 31st or September 1st, we believe was a request for information and generally wanted to – just was a way for the SEC to kind of make it clearer or get better guidance as to how they should react to different types of scenarios going forward. The intention for the REIT has been in place for long time. The business model is so important to capital formation and efficiencies in markets and it’s necessary to replace government involvement which are all huge issues for the country and for the government and the regulator and the SEC is forced to consider those. It’s really difficult to see an environment where when it’s so important now the capital formation and efficiency where somehow the rules would be different than they have been for the last 20 or 30 years when you had GSEs, when you had all these other participants and where it wasn’t that important to capital formation.
Big picture, look, we feel like all the indications where you don’t know and no one really gets kind of updates, but all the indications are that our business margin will be negligible or no changes to business model going forward and that’s certainly how we are operating. Again it seems to be kind of where the market has coalesced on the issue.
The other question on your reporting earnings on a projected CPR rate, not your actual CPR rate. So is there a point where you have to make an adjustment, but what happens if the CPR rates which you just said was 8 in last two months? How does that work going forward? Is there I think some big earnings take back or at some point?
The reality is that it – first off the prepayment estimate, and this is one of the things that I just want to be very clear with people. I mean there are estimates going forward. We have a defined process to come up with them. What I want to – the first thing is the actual income, okay, the true value to the company is the actual speeds that come in not whatever you project. The projection is just a geography issue. So, right now, essentially the difference between 8 and 14 is showing up in book value, and it’s why there has been a – one of the factors that has given book value sort of a tailwind because that difference doesn’t show up in accounting core earnings, but you are not actually having a 14% amortization of your premium, right, you are getting an eight.
So, what you are seeing is that value is supporting book value, it’s coming in a sensitive ROCI [ph] it’s not coming in through net income. But if we were to adjust our speeds, either because interest rates go up or let’s say for a product like HARP securities we decide that over time that the history and the model are not lining up then you will get that back where you will get a portion of that back – that will come in through net interest income and so we have had and talked about catch a Bam [ph] which is when you increase your prepayment speed essentially you actually have to take a retroactive kid to get your amortization back to a level yield which is sort of like a onetime adjustment. You can actually get exactly those same effects in the other direction when you are lowering prepayment estimates.
You would actually see that – the quickest and in bigger ways just the interest rates where to go up, clearly our prepayment projections will slow down at that point. That will be the quicker thing. In addition, we and our auditors and so forth review our estimates for our sub products and to the extent that we over time feel that we are misestimating, where new information and there are better estimates to be made then you could see some changes on that front.
Sure. I guess, can you just talk a little bit about the undistributed earnings that you have, about $0.80 a share. I guess the first question is being a REIT you have to pay out 90% of your income. How are you able to collect that and how do you use that going forward?
No. The way you have to pay out 90% of your income in a calendar year, but remember that your first distribution in any year is deemed to come out of whatever your prior year was. You very quickly or basically almost immediately the first dividend will use up your undistributed. So you can continue to meet that rule. Well, the real issue is the you pay an excise tax if you carry over and it’s broken out by both – there is a difference it’s 95% of realized gains and then 85% of ordinary taxable income. If you hold back more than that you pay a 4% excise tax which is pretty small and we paid an excise tax in prior years to carry over more income and mindset there is we’re earning very, very good returns for our shareholders. All in when you about the returns the capital is better reinvested for a year, okay, and the returns dwarfed the excise tax. Plus you could even look at it from a perspective of – the stock is generally trading at a premium to book, in other words leaving it in – whereas a dividend obviously is cash and is therefore one-to-one. So there is even shorter term value investors to kind of leaving it there.
So, everything we do is completely consistent with all the referrals. I think we have both E&Y and Schatten [ph] and reviewing all of those decisions, they are obviously all public information. It’s just the idea that you have to pay every cent out exactly when you earn it, it’s not the case. I think that it’s not from the perspective of both giving investor some comfort around to your kind of future ability to pay dividends and just not providing unnecessary volatility to the dividend based on whether you sold something on that quarter is the right way ago.