AG Mortgage Investment Trust, Inc.
Q3 2013 Earnings Call Transcript

Published: 5 Nov 2013

[Operator:]

Welcome to the AG Mortgage Investment Trust Third Quarter 2013 Earnings call. My name is Adriana, 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 like to turn the call over to Lisa Yahr. Lisa, you may begin.

[Lisa Yahr:]

Thanks, Adriana. Good morning, everyone. We appreciate you joining us for today’s conference call to review AG Mortgage Investment Trust Third 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 yields 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. All forward-looking statements included in this conference call and the slide presentations are based on our beliefs and expectations as of today, November 5, 2013. 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 acted as of the time of any reply 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 required by law. With that, I’ll turn the call over to David Roberts.

[David Roberts:]

Good morning. On our second quarter’s call, we discussed the steps we had taken in order to protect book value in response to heightened volatility in the fixed income markets. These steps included adding a very significant amount of hedges, interest rate hedges toward the end of the second quarter, as well as embarking on portfolio rotation in the later part of the second quarter and into the third quarter, in particular, within Agency RMBS. We told you that this rebalancing would adversely affect our core earnings per share going forward. This did indeed come to pass as AG Mortgage Investment Trust reported $0.45 per share of core earnings in this quarter – this third quarter. As Jonathan Lieberman and Brian Sigman will discuss in detail, we’ve continued to refine and optimize the portfolio during this past third quarter as well as since the third quarter’s end. Our portfolio is well diversified and balanced and we believe that the steps we have taken have enhanced the earnings capacity of the current portfolio. Our declared dividend of $0.60 for the third quarter took into account both our run rate of core earnings, as well as our level of undistributed taxable earnings from past quarters. As we also discussed from last quarter’s call, we are working hard to increase the portion of the portfolio represented by whole loan purchases and originations. This effort requires infrastructure, people and time to execute. We look forward to giving you concrete updates on our progress on this repositioning. Finally, I would like to welcome our new CFO, Brian Sigman, who joined us in September. Brian will be working closely with Frank Stadelmaier, and Frank will remain on the AG Mortgage Investment Trust Board. With that, I’ll turn matters over to our Chief Investment Officer, Jonathan Lieberman.

[Jonathan Lieberman:]

Thank you, David, and good morning. As we discussed on our last quarter’s earnings call, our approach to the volatile markets earlier this year was to take steps to prioritize and protect book value over near-term earnings. Volatility in interest rates in Agency MBS did in fact continued during the third quarter. The rates market endured some whipsaw, as market consensus first moved towards September taper, only then to be severely disappointed by the Fed and begin to move to a March 2014 taper. 10-year notes closed the quarter less than 13 basis points higher than the closing level of June 30, but during the quarter, touch 3% over 50 basis points higher than the close of the second quarter. Mortgage prices experienced similar volatility with Fannie 3.5s creating in a range that span close to four points in the month of September alone. Although the delay of taper has laid market peers about the short-term dramatic rise in rates, we are mindful of the fact that the market will potentially face challenges in the coming months, including a new chair person, meaningful rotation in the voting membership of the Fed, a delayed debt ceiling debate or fight, below target inflation and of course the eventual onset of tapering so we believe. As I will discuss in greater detail in a few moments, we repositioned the portfolio during the quarter and made some further refinements during the month of October, especially on the hedge side of the portfolio. While we maintained our focus on minimizing volatility in book, we believe our current portfolio construction permits us to modestly increase our risk profile, thereby also allowing us to focus on enhancing the earnings power of the company’s portfolio going forward. In August, we shared with you the defensive steps we had taken during the second quarter in the month of July in order to navigate through the turbulence in the fixed income market. These steps included tracking the size of our portfolio, taking down leverage and repositioning our agency portfolio into shorter duration assets. Slide 3 shares our top level third quarter metrics, some of which reflect these steps. As of the end of September, we were running approximately $3.9 billion portfolio, split roughly 71% Agency and 29% credit on a gross asset basis and approximately 50-50 on an equity basis. At $3.9 billion, this is approximately 13% smaller than our June 30 portfolio. We’ve further reduced leverage to 4.53 times from roughly 4.7 to 4.8 times range that we were running at the end of July. Within our Agency MBS, portfolio, we sold over $850 million of market value of 30 year and added over $450 million of Hybrid ARMs. This is the largest concentration of Hybrid ARMs we’ve had in the portfolio since the company’s inception over two years ago. As the pie chart on Page 6 of our presentation shows, our Hybrid exposure is skewed towards 10/1s. One of the benefits of owning a shorter amortizing security was our ability to redeploy this capital as rates presumably rise as Fed tapering nears. Although close to 50% of our total Agency book is call protected, the addition of the Hybrid ARMs does introduce a different level of prepayment exposure to the portfolio going forward. Within our credit book, we expect several of our shorter duration positions to roll-off over the coming months and believe we can redeploy this capital of more accretive yields going forward. Our investment team has been active in the credit markets in recent weeks and we have seen some very interesting opportunities which we hope to introduce and incorporate into the portfolio over time as we continue to ship more of our equity capital towards credit going forward. Within the RMBS space, despite the market recovery of December lows and an overall decrease in the size of our portfolio, we have been able to add attractively priced assets and we are encouraged by deal flow that has been coming across our desks over the last several weeks. Trading volumes in whole loans has remained active and we believe our disciplined and patient approach will allow us to identify and add attractive investments in the coming months. As a reflection of our increased tolerance for risk in the book, we did take off over a $1 billion notional of pay-fixed swaps during the quarter. This action resulted in a decrease of our hedge ratio from a 134% of our Agency repo notional as of June 30 to 114% of our Agency repo notional as of September 30, which equates to hedging approximately 84% of our total notional repo book versus 95% at the end of the second quarter. Subsequent to quarter-end and in line with our goals with further optimizing our risk positions, we’ve continued to adjust and refine our hedge positions. Despite this reduction in our hedge ratio, we closed the quarter with a duration gap only 0.03 years, up very slightly from negative 0.05 we reported on June 30. As we discussed last quarter, our short-term goal was to construct a portfolio that would be better able to protect book value under a greater range of interest rate market movements and scenarios. Subsequent to quarter-end and with an eye towards restoring some of the earnings power we sacrificed, we have opened up a slight duration gap. However, given our view that the volatility may pick up towards the later end of this year and the first quarter of next year, I do not anticipate that we will run a material asset liability gap. Before I turn the call over to Brian to review our financial metrics, I want to spend a few moments talking about some of the key hires Angelo, Gordon has made over the last few quarters. We believe these hires, which are detailed on Slide 9 bring the best-in-class resource at Angelo, Gordon that MITT will directly benefit from. They are critically important to our strategic expansion of MITT’s portfolio and the whole loans commercial loan originations, investing in legacy loans and engaging in direct commercial loan originations that are complex businesses and that require not only talented investment professionals but extensive infrastructure and deal management. As you know over the course of 2013, Angelo, Gordon added two investment professionals dedicated to whole loans, including Jason Biegel who has over 20 years of Residential MBS experience. Brian Sigman joined us in September as MITT’s CFO and the company is already benefiting from his expertise in funding and deal management. More recently, Michael Antilety has joined Angelo, Gordon’s residential debt team as an Agency MBS and Interest Rate Trader. His focus and insight in these markets will allow us to further optimize our hedging strategies going forward. In early October, Peter Gordon joined Angelo, Gordon’s commercial real estate debt platform to lead our commercial loan origination platform. We believe Peter is uniquely positioned versus our competitors given his ability to work closely with and leverage not only our CMBS Group, but also Angelo, Gordon’s extensive work in more real estate platform. Angelo, Gordon’s 20 investment professionals are focused on RMBS, CMBS, commercial and residential loans at Angelo, and are engaged across all aspects of the residential and commercial securities and loan market, working with us to identify and source the most compelling assets for MITT. Finally, the RMBS team in Angelo, Gordon now enjoys two full-time dedicated IT professionals in addition to the existing IT professional staff. Over time, we expect these hires will help drive franchise value for MITT’s shareholders. I’d like to wrap up by saying that we believe that the right approach to today’s market is to remain agile. As I’ve discussed, we are more comfortable today than we have been over the last several months with respect to layering risk back into the portfolio in order to begin enhancing the earnings power of the franchise. At the same time, however, we believe market conditions, economic conditions and government policy all remain quite unsettled. We expect to remain nimble, balanced and responsive to market conditions. With that, I’ll turn the call over to Brian to review our financial results.

[Brian Sigman:]

Thanks, Jonathan. I’m excited to be here and I look forward to continuing to build on the platform that the team has begun to put in place. I look forward to talking and meeting with many of you over the coming quarters. In the third quarter, we reported core earnings of $12.6 million or $0.45 per share versus $23.3 million or $0.83 per share in the prior quarter. The decrease in core earnings is primarily the result of the actions Jonathan has described that were taken in late June and early July. These actions resulted in a decrease in our asset portfolio from a weighted average size of $5.1 billion over the second quarter to $3.9 billion over the third quarter. A decrease in leverage from a weighted average of 5.5 times to 4.8 times and lastly an increase of 43 basis points in our cost of funds which was primarily due to the additional hedges that we had on during the quarter. To be clear, the metrics I just described of weighted averages for the third quarter and at September 30, our cost of funds was already 13 basis points lower, the benefits of which should be realized in Q4. To give you a better sense of our current portfolio, I’d like to highlight a few more statistics. The portfolio at September 30 had a net interest margin of 2.12%. The asset yield was 3.88% which was offset by rebound swap cost at 77.77% and 19.99%. Respectively for total cost of funds of 1.76%. The portfolio leverage at 9/30 was 4.5 times at the end of the quarter. And at September 30, our book value was $19.26 per share. This was a decrease of $0.51 or 2.5% from the last quarter resulting from the net $0.36 loss on our securities and derivatives portfolio, which was primarily driven by realized losses that occurred in early July and another $0.15 by which our common dividend exceeded core earnings. For the quarter, we reported net income available to common stockholders of $2.6 million or $0.09 per fully diluted share. In addition to the $0.45 of core earnings, our net income includes realized and unrealized losses, which was $0.36 per share this quarter. The $0.36 per share of losses was made up of $1.25 and $0.07 of realized losses on our securities and derivatives portfolio respectively. Another $0.28 of realized losses on securities upon recognition of other than temporary impairments and $0.21 of unrealized losses on our derivatives portfolio which was offset by $1.45 of unrealized gains on our securities portfolio during the quarter. Finally, as David mentioned, we declared a $0.60 common dividend to the third quarter and our undistributed earnings stood at $1.59 per share at September 30. That concludes our prepared remarks and we would like to open the call for questions.

[Operator:]

Thank you. We would now begin the question and answer session. (Operator Instructions) And our first question comes from Douglas Harter from Credit Suisse. Mr. Harter, go ahead.

[Douglas Harter:]

Thanks. You talked about seeing more whole loan opportunities today. Can you talk about whether you’re seeing those in commercial or residential, and on the relative attractiveness of those two opportunities?

[Jonathan Lieberman:]

We’re seeing quite a bit of activity on the residential side in NPLs and RPLs. We are also seeing and just beginning the process of seeking out commercial loans. We’ve seen a number of opportunities, but we are at the early stages of building the platform and determining the profile, the risk box associated with those opportunities. In terms of relative yields, we are generally seeing 7% to 10% on levered return risk adjusted with very conservative assumptions on the residential side. And on the commercial side, they are typically slightly lower, but once again it depends upon the risk box around those assets, the LTVs and where you’re in the capital structure.

[Douglas Harter:]

And I guess on the residential side, would you be interested in both the reperforming and the nonperforming?

[Jonathan Lieberman:]

Yes.

[Douglas Harter:]

Great. And you talked a lot about the duration if – you’re also seeing sort of some year-end volatility, what would you see a kind of a more normalized duration for your company going forward, if and when, you thought the environment and volatility kind of had normalized a little bit?

[Jonathan Lieberman:]

Yes, more normal – I’ll further to it in two kind of different veins. We would anticipate that basically a more normalized gap for us is somewhere between a half a year and year between the assets and our interest rate swaps or liability structure. If we had a great deal of confidence, we would potentially go over that year demarcation line. In terms of assets, we’re always happy to put on longer duration assets if they are attractively priced. And so, there is more flexibility to push out from 15s to 30s on the Agency side and to take longer duration credit assets anywhere from four to eight year maturity profiles if the asset has a compelling value.

[Douglas Harter:]

Great. Thank you.

[Operator:]

And our next question comes from Trevor Cranston from JMP Securities. Go right ahead.

[Trevor Cranston:]

All right, thanks. Just couple of things on some of the portfolio moves in the quarter. I guess the one thing that looks a little surprising on the surface given that you’ve been trying to transition more to credit that the non-Agency RMBS portfolio seems to have had a decent amount of sales in the third quarter. So I was wondering if you could just kind of talk about what types of assets you were selling in that portfolio and kind of where you’re seeing opportunities in the kind of legacy non-Agency MBS space right now?

[Jonathan Lieberman:]

Generally, the asset sales were concentrated in our higher dollar price securities on the non-Agency. So typically anything that was $90 and above was targeted for basically sale. So I believe and I don’t have the number in front of me, but we can probably get that to you that the average dollar price of the non-Agency book has declined quarter-over-quarter. We were seeking to basically reduce interest rate exposure on our non-Agency securities and potentially replace non-Agency at lower dollar prices should taper occur and there’d be a more generalized credit sell-off.

[Trevor Cranston:]

Okay, that’s helpful. And in terms of the changes you’ve made to the hedge book since the end of the quarter. Can you disclose what the maturity of the $1 billion or so swaps that you’ve taken off the books at the end of the quarter?

[Jonathan Lieberman:]

We’ve mostly taken off in the five year sector, the belly of the curve.

[Trevor Cranston:]

Okay. And then just a last thing, if you can comment at all on kind of what you’ve seen in terms of asset price changes since the end of the quarter, and if you’re willing to say how that reflects on kind of the trend in your book value?

[Jonathan Lieberman:]

Generally speaking credit assets have performed very, very well since quarter-end. Prices are relatively stable to slightly higher. You’ve seen very good performance in credit assets over the last three months in terms of Agency securities, the basis has performed very well. It’s been directionally very favorable for the book. And that’s going to translate into modestly higher book value.

[Trevor Cranston:]

Okay. One thing we’ve heard from some other companies is that the Hybrid ARMs in particular have seem a decent amount of spread tightening, is that kind of what you guys are seeing as well?

[Jonathan Lieberman:]

We would concur.

[Trevor Cranston:]

Okay. Thank you.

[Operator:]

And our next question comes from Mike Widner from KBW. Go right ahead sir.

[Mike Widner:]

Thanks. Just let me follow-up on those question, I’ll just make sure I got the numbers right. It’s about $1 billion in roughly in the five year vicinity that you were saying you sold off in the swaps since quarter-end. Is that right?

[Jonathan Lieberman:]

No, I believe the $1 billion was during the quarter, we took off.

[Mike Widner:]

Yes.

[Jonathan Lieberman:]

Subsequent to quarter in October we’ve taken off, I would say couple of hundred million at most.

[Mike Widner:]

Okay.

[Jonathan Lieberman:]

$400 million or $500 million of additional swaps.

[Mike Widner:]

Okay, great. Thanks. And I guess one of the things we’ve seen sort of across the board and in mortgage REITs reporting so far is a lot of activity in the quarter, either adding hedges or taking of assets or combination of both. You guys have talked a lot both in this quarter and last quarter and probably really since your inception about being nimble. And there is different ways of being nimble. And what we’ve seen from some is sort of conviction on where they think rates are places where assets and rates are moving and then when things kind of move against them eventual capitulation which turns into sort of buying assets when yields are low and adding hedges when yields are high, which is sort of the opposite of what you’d like to do. But at the same time it’s probably a reality that we’re in for a volatile rate environment. So I guess I am just wondering if you could talk maybe a little philosophically about your view on what it means to be nimble in this environment and maybe what your view of – what are the kind of things that you’re going to look at and take advantage of should they happen again? I mean is a rate spike an advantage or an opportunity for you guys, or is it something you’re afraid of and sort of defensively positioned for? I guess that’s a broad question, but just kind of looking for how you guys think about the opportunities out there and the risks.

[Jonathan Lieberman:]

Right. I would start with philosophically I think we are as we’ve stressed on the call, we’re comfortable with how the portfolio is positioned today and how it’s hedged today, that even if there was a spike in rates, greater volatility on the credit assets on credit spreads, great volatility on the bases, we believe that we would have to react less than we’ve had to react in the past that we could basically – I wouldn’t say we wouldn’t react, but I would say that basically we believe that the necessity to change the portfolio composition in the phase of greater volatility and whether its credit spreads basis or rates, is diminished significantly from the May, June, early July period of time. And that we would be in a position to be offensive in those periods of volatility and to either redeploy capital into opportunities and weakness or just to outright take capital from liquidity and add assets in that environment. And so that’s what we mean by being agile and nimble, but at this point in time, we believe that we can withstand materially more volatility than we could in that earlier period, and that we could capitalize on other folks’ weakness.

[Mike Widner:]

So related to that, I guess let me just ask, as you stand – as you sit there today knowing what we all know today, do you expect rates to be materially higher from spring and a year from now or sort of about the same area or modestly higher, and how would you characterize your expectation for rates and use that to shape your views on what you see as opportunity versus catching the falling knife so to speak.

[Jonathan Lieberman:]

I would characterize first of all that we’ve tried to move away from a directional viewpoint in the portfolio and to basically move towards a more neutral balanced approach to raise up-down, left to right. And that basically we want to be able to capitalize in any of those environments like there is – we’ve seen way too much whipsaw with people setting up for September taper being very severely disappointed. We’ve seen – the market now has started to chatter about maybe December taper, maybe a March taper. And what we’ve tried to move away from is basically getting drawn into setting up a portfolio for any of those discussions instead basically go back to focusing on value. And really basically making sure that we are basically moving capital to where we see the best value and assets that can withstand the volatility. And having a portfolio of composition which is shorter in nature with more hedges, little less earnings capacity at this moment, and then basically once the markets eventually figure this out, as well as maybe once Washington figures it out what it would like to do, then we can basically be more directional in our thinking.

[Mike Widner:]

Great. That makes a lot of sense. And then actually just one final one if I can. You talked about sort of being more comfortable layering risk back into the business right now, which should benefit earnings power. Just wondering, if you could elaborate maybe a little bit more on, I guess a couple of mechanisms to do that. One is you add assets, or second is you take off hedges, but in the context of overall portfolio leveraged and then the amount of hedges that you have or maybe it’s an allocation shift but I mean for modeling purposes obviously there is you guys – we’re running a lot more a couple of quarters ago and you can get back there if you want to take on more risk which is – for modeling purposes it would be helpful to know how you’re thinking about that statement you made about now getting more comfortable layering on more risk as it pertains to leverage or total assets or total hedges or whatever.

[Jonathan Lieberman:]

Right. I think I’ll start with a global theme [ph] that will be, we’re cautious in giving you too much guidance on how much additional risk we would like to layer into the book. We have levers whether we execute and pull those levers, will be a decision that is ongoing and will be adjusted from time to time. So for modeling purposes I think we were trying to guide you to a typical conservative approach that we would take, but we have shorter duration Agency ARMs, we have shorter duration credit pieces. We have commercial loans that have created up materially. Those give us the ability to basically exit those positions, redeploying higher yielding assets. We have taken off or can basically take off some belly of the curve swaps, push those swaps further out reducing basically roll-down costs. So those are all among leverage that we have. The degree we execute on those will really be subject to the opportunity set and our comfort level around volatility in the markets.

[Mike Widner:]

Great. So then if I could just follow-up with one last one then, taking the risk profile down and sort of all the stuff you said in the last couple of quarters was translated into as earnings this quarter, core earnings power around $0.45. The dividend you took down to $0.60 and there is a sizable gap between those two and I think before if I recall correctly when you talked about that dividend, it was commensurate with your expectations of rough earnings power obviously $0.45 is materially below that. I mean how should we think about those two things?

[David Roberts:]

This is David Roberts speaking. As we said – as I said earlier in last call, we have to take into account not only our core earnings run rate but what our undistributed earnings are. So those are the two factors that go into our dividend decisions.

[Mike Widner:]

Okay. Fair enough. Thank you much for the comments.

[Operator:]

And our next question comes from Joel Houck from Wells Fargo. Go ahead sir.

[Joel Houck:]

Thank you. Just if we could maybe stay on this topic. I guess one of the challenges and you guys aren’t alone in this is that as the Fed talk about the taper, heats up – the redder [ph] heats up, you start to see to rates rise ahead of the natural taper. So as a mortgage REIT, how do you extend the book if you will or actually put on more risk when you see that happening, because you don’t know whether the taper is actually going to occur or not and we saw this in September. In other words, if you take on that risk and the taper happens and spreads go out even wider, you’re obviously going to lose lot of book value. So the only other option is to actually wait for the taper to happen. And even then, it’s not like the taper goes from 85 to zero, it’s a process if you will. How do – I mean you just have to stay at this kind of small duration gap until the Fed actually gets out of the market which could be two, three, four years. I mean how do you guys look at the running this book over the next couple of years or when you say you want to be nimble, are you just going to at some point say, look, we think the taper has priced in and therefore we’re going to take on more risk at the right price, because after all if you’re going to run a portfolio and again you guys aren’t alone in this, if you’re going to run it at a fairly neutral duration, it’s going to produce some standard returns in the mortgage REIT. And that I think is the essence of why this space is trading at 80% to 85% price to book, because investors don’t have a confidence that the companies will generate the alpha that they are supposed to generate.

[Jonathan Lieberman:]

I think your question is a very insightful one and very astute at the challenges and what we’re trying to wrestle with and balance. I would say that we can nuance it in a couple of different ways. There is a core book with the appropriate hedges for pre and post-taper. And we’re comfortable with the book as it’s kind of is constructed for this pre-taper or the periodic of bouts of taper fear. There are nuances to some of the assets that we are willing to tolerate periodic bouts of volatility or temporary impairment of value for assets. So for example, we are willing to put on shorter duration credit assets that may decline temporarily in value, still generate attractive ROEs and will go decline, but then we’ll reset their value as they basically amortize on a monthly basis or the markets basically settle down and the asset values come back to a more normalized level. And so we saw assets that we had put on in March – February and March of this year decline two and three points on paper. So they are paper mark-to-market losses and today they have fully recovered that value decline these assets would have matured very rapidly due to amortization. And we are prepared to tolerate some amount of volatility with respect to book value on those types of assets. Other assets in particular well concentrate, let’s say on whole loans may be less susceptible to volatility and taper risk and affectively are more immune to book value deterioration. They are obviously affected by interest rates, but it does not translate into a change in price in the marketplace. Other assets, 30-year Agency are going to be among the most susceptible, but then again you can also engage in, up in coupon trade to basically once again reduce the volatility associated with those relative to maybe at-the-money type of coupon. And we have done that as well. So you’ve seen us basically move the Agency fixed rate paper, the longer duration paper up in coupon and we believe that those assets performed better in a taper volatility period of time.

[Joel Houck:]

And so does that mean, Jonathan, that for the most volatile assets you kind of have to wait until the taper is substantially underway, because how can you ever be sure that it’s fully priced in, because it strikes me as nobody wants to own the most negatively convex 30-year MBS. And if the Fed starts to back rating that market, you would probably see spreads really widen after that asset class, perhaps even further than what fundamental value would suggest those assets should be priced at?

[Jonathan Lieberman:]

Yes, that’s a fair statement. I would agree and that’s what we’ve tried to take or minimize our exposure to those assets and hold the assets that we could potentially trade out of, once we believe most of taper had been priced in.

[Joel Houck:]

Okay, thank you very much. I appreciate it.

[Operator:]

And our next question comes from Jason Stewart from Compass Point. Go ahead.

[Jason Stewart:]

Thank you. If you could just remind us what your longer term capital allocation is to the various asset classes including the difference between whole loans and securities as we think further through time and then perhaps in the next couple of quarters?

[Brian Sigman:]

It’s Brian. I can start up with where we’re at today and maybe Jonathan or David can talk about in the future. But right now we’re at about 50-50 credit to Agency. And as I’ve mentioned, we expect to continue to increase to the credit side.

[Jonathan Lieberman:]

I would say we don’t have a clear game plan for how much capital will be allocated to credit. It’s really a function asset by asset of moving that capital over as we see alpha and as we see opportunities we were much more definitive early in the life of the REIT and at this point it’s really a function of where do we see strong relative value and intrinsic value. Today, the non-Agency side and the Agency side are running pretty much similar ROEs, very comparable, give or take 50 to 100 basis points. And if we see one side materially cheap and we will move more capital over to that side of the balance sheet.

[David Roberts:]

This is David speaking, maybe just as to wrap up some of the things that we’ve talked about. Someone asked what the definition of nimble is. Part of our answer to that and Jonathan has gone through that is the ability to look at a wide range of asset classes for the portfolio. And that’s really behind our building the infrastructure and platforms and hiring the people that we have done to enable us to move into whole loans and NPLs and RPLs and the commercial side as well. We don’t know where the best value opportunities are going to be, but we do know that the wider our playing field is so to speak, the more nimble we can be, particularly in light of what a number you have talked about which is the interest rate uncertainty and volatility. So we think that’s very important, but as I said at the beginning, we as a firm have a lot of experience in building these efforts and we know that it takes infrastructure, very talented people and also takes time.

[Jason Stewart:]

Okay. That’s fair. And then on the Agency IO portfolio, it looks like you made some changes there as you did to other parts of the portfolio during the quarter. I was hoping if you could give us some color on the composition of that Agency IO portfolio, maybe how it performed in terms of liquidity during the third quarter?

[Jonathan Lieberman:]

Yes, I would say that – look, it was only some minor changes I think to the IO book. We sold some lower yielding inverse IO, some inverse IO to strengthen the marketplace on some cuspy kind of coupons where people were pricing the asset for a slowdown in prepayment speeds and we took advantage of that. The assets continued to perform very, very well to cash, and cash yields are very high. We have a nice allocation to straight up regular IO and that’s performed very, very well, typically 20-year IO of 20 years mortgages. And generally speaking liquidity up until maybe the last two weeks has been very good in that sector. It’s with a slowdown in a trading, liquidity has been reduced, but generally speaking, we’re pleased with the assets.

[Jason Stewart:]

Okay. Thanks for taking the questions and congratulations on the new position, Brian.

[Brian Sigman:]

Thanks, Jason.

[Operator:]

And we have no further questions at this time.

[David Roberts:]

Thank you everybody. And we’ll be speaking to you next quarter.

[Operator:]

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