AGNC Investment Corp. (AGNC) Q4 2018 Earnings Report, Transcript and Summary

Good morning and welcome to the AGNC Investment Corp. Fourth Quarter 2018 Shareholder Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would like to turn the conference over to Katie Wisecarver in Investor Relations. Please go ahead.

Thank you, Keith, and thank you all for joining AGNC Investment Corp.'s fourth quarter 2018 earnings call. Before we begin, I'd like to review the Safe Harbor statement. This conference call and corresponding slide presentation contain statements that to the extent they are not recitations of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain 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 AGNC's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at www.sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law. An archive of this presentation will be available on our website and the telephone recording can be accessed through February 14th by dialing 877-344-7529 or 412-317-0088, and the conference ID number is 10127312. To view the slide presentation, turn to our website, agnc.com, and click on the Q4 2018 Earnings Presentation link in the lower right corner. Select the webcast option for both slides and audio or click on the link in the conference call section to view the streaming slide presentation during the call. Participants on the call today include Gary Kain, Chief Executive Officer; Bernie Bell, Senior Vice President and Chief Financial Officer; Chris Kuehl, Executive Vice President; Peter Federico, President and Chief Operating Officer; and Aaron Pas, Senior Vice President. With that, I'll turn the call over to Gary Kain.

Thanks, Katie. And thanks to all of you for your interest in AGNC. Volatility increased significant during the fourth quarter as concerns around trade, weaker global growth, Fed policy and growing political dysfunction in many regions of the world fueled to dramatic risk off move in global financial markets. U.S. equity suffered their worse quarter since 2009 and credit spreads widen materially. Interest rates initially rose during the first half of the fourth quarter, before dropping significantly in December. The tenure treasury hit an inter-quarter high of 3.24% in early November before rallying 55 basis points to close the year at 2.69%. The risk off sentiment in financial markets and the substantial pickup in interest rate volatility pushed agency MBS spreads significantly wider during the quarter. Nominal spread to the swap curve widened between 20 and 30 basis points on three year, 3.5 to 4.5 As Chris will discuss in a few minutes, some of the spread widening was expected given the decline in interest rates. However, the bulk of it was due to a combination of larger risk premiums and the increase in implied volatility, which elevated the prices of all options, including those embedded in MBS. This spread widening more than offset the modest benefit we realized from the decline in rates and led to the 8% reduction in book value for the quarter. Although, the wider spreads on agency MBS hurt our book value in the short run, it also significantly enhances the expected returns on our MBS investments. Against this backdrop, we raised approximately $1 billion of new capital during the quarter that we patiently deployed at very attractive valuations. Since quarter end, the S&P 500 has recovered more than half of the losses experienced during Q4 and yet interest rates are largely unchanged. Implied volatility and credit spreads have also retraced a good portion of the moves from the fourth quarter. Given the modest recovery and agency MBS spread since year-end and our estimation, book value may have recovered almost half of the Q4 decline, when we include our projection of the improvement in spreads and rates following yesterday's FLMC meeting. Looking ahead, we would not be surprised to see the recent rebound and risk assets continue in the short run, especially given a more dovish fed. But we continue to believe that the global economic slowdown is real and will ultimately take its toll on the U.S. economy. Our interpretation of yesterday's FLMC meeting is that the Fed abandoned its hiking bias and has shifted to a much more symmetric policy stance. Moreover, given our view that inflation will remain anchored and that us growth is likely to slow, this hiking cycle is potentially over. This is a pretty big deal and something that few would have expected just a few months ago. This more favorable interest rate environment coupled with materially wider MBS spreads should support attractive returns for AGNC as we began 2009. At this point, I would like to turn the call over to Bernie to review the results for the quarter.

Thank you, Gary. Turning to slide four, we had a comprehensive loss of $0.90 per share for the quarter, net spread and dollar all income excluding catch-up am and was $0.53 per share. The quarter-over-quarter decline of $0.08 per share, and net spread and dollar all income was attributable to several factors. First, our decision to delay deployment of capital during the fourth quarter acted as a temporary drag on net spread income. As we commented on our last earnings call, we proactively sold agency MBS and reduced our leverage at the end of September, because we believe spreads were bias wider. At October, we allowed our portfolio to contract further. During November, we began to gradually redeploy capital, including the $1 billion of new capital we raised during the quarter, with the majority of our purchases occurring later in the quarter. As a result, our average asset balance relative to our capital base was noticeably long [ph] in the fourth quarter. When comparing our average leverage quarter-over-quarter, this lower asset balance is difficult to see because our leverage calculation is also impacted by the by the decline and netbook value. Normalizing for this decline, our average leverage of 8.4 times tangible equity for the fourth quarter would have been just under 8 times or notably less than 8.5 times for the prior quarter. Second, as Peter will discuss in greater detail, another significant factor impacting the decline and our net spread income was higher funding cost and timing differences associated with our interest rate swap hedges. Lastly, the loss of quarterly management fee income from MTGE, following the termination of the management agreement in the third quarter contributed a small portion of the quarter-over-quarter decline. Although we received a termination fee in the third quarter that compensated AGNC for the equivalent of three years of fee income, we have not included any portion of the termination fee in our net spread and dollar all income. As Gary discussed, tangible net book value declined 8% to $16.56 per share as of the end of the quarter due to wider mortgage spreads. But I also want to highlight that spread movements do not alter the cash flow generating capability of our existing portfolio and consequently the impact on net spread or net book value due to spread movements should largely reverse overtime as the portfolio matures. Moving to slide five, with our new capital effectively deployed, we ended the year at 9 times leverage versus our average at risk leverage of 8.4 times for the quarter. Turning to slide six. For the year, we had a total comprehensive loss of $1.14 and $2.35 of net spread and dollar all income. Our total economic return for the year was negative 4.9%, including $2.16 of dividends. During the year we've raised a total of $2.6 billion of new equity capital, which was a creative to both net book value and earnings. As an internally managed mortgage rate the new capital significantly enhance our operating efficiency, further benefiting AGNC's low cost advantage. With that, I will turn it over to Chris to discuss the market.

Thanks, Bernie. Let's turn to slide seven. Volatility in both the interest rates and asset spreads increased materially during the fourth quarter given elevated concerns related to global growth and a reset of expectations for the path of future Fed policy. In the tables on slide seven, you can see that rates moved sharply lower, with five and 10-year swap rates rallying 49 and 40 basis points respectively. As Gary mentioned, Agency MBS spreads were materially wider, with static spreads on 30-year MBS ending fourth quarter approximately 20 to 30 basis points wider. In contrast, option adjusted spreads on 30 or MBS were around 5 basis points wider as the increase in market implied volatility and lower rate levels materially increased the option cost embedded in MBS rather than the OAS itself. This divergence in the change in static spread versus option adjusted spread was particularly large in the month of December with static spreads widening 10 to 15 basis points, while option adjusted spreads were largely unchanged on average. Some of the static spread widening associated with the sharp move lower in rates is anticipated in our hedging assumptions and therefore static spread changes can overstate the impact to NAV in a period with large declines in interest rates. Simply put, both OAS and nominal spread metrics are important in quantifying MBS performance and in a quarter like this, the right answer lies in between the two measures. Thus far into the first quarter, rates have stabilized, and Agency MBS spreads have tightened approximately 5 basis points. Turning to slide eight, you can see in the top left chart that the investment portfolio increased by approximately 10 billion, as we fully deploy the equity raised during the fourth quarter. In the charts on the lower half of slide eight, you'll notice that our TBA position declined to 7.3 billion, driven by generally weak roll implied financing rates relative to mortgage repo. Over the near-term, weaker roll implied financing rates will likely continue to bias our holdings in favor of specified pools versus TBA. Over the last two quarters, we've added a little more than 11 billion in high quality specified pools on a net basis while reducing our TBA position and growing the total investment portfolio by approximately 13.5 billion. Given the move lower and rates combined with the deteriorating quality of TBA float and relatively weak roll levels specified pools have outperformed in the first quarter after lagging the rate move in December and we expect that these tailwinds will continue to be supportive of higher quality pool valuations. I'll now turn the call over to Peter to discuss funding and risk management.

Thanks, Chris. I'll start with a brief review of our financing activity. Our financing costs were materially higher in the fourth quarter, particularly in December as the Fed raised short term rates another 25 basis points. In addition to the Fed, year-end funding markets were unusually tight and drove a surge in repo rates late in the year. Repo rates began to move materially higher in mid-December when we saw a nearly $50 billion outflow of money from government money market funds just ahead of the National Day of Mourning in honor of President Bush. Repo rate remained elevated throughout the rest of the year and peaked over the turn with the trading range of 3% to 7%. As a result, our average repo rate increased to 2.79% at year-end up from two-point three percent at the end of September and two-point four percent at the end of November. Since year end repo rates have returned to more normal levels with our average funding costs today being approximately 2.6%. Our aggregate cost of funds also increased during the quarter with only a portion of the higher repo costs being offset by improvement on the received lag of our pay fixed swaps. The average received rate on our swap book was 2.48% up just 11 basis points from the prior quarter despite three-month LIBOR being materially higher. This divergence is normal as it takes time for our swaps to reset. Over the next couple of quarters, the average received rate on our swap book will gradually converge with the prevailing three-month LIBOR rate. Turning to slide 11 and 12, we provide a summary of our hedging activity and interest rate risk position. Consistent with the growth in our assets, our hedge portfolio increased to $78.5 billion during the quarter with increases in both our swap and Treasury positions. Our hedge ratio remained high at 94% of our funding liabilities. As expected, given the rally in interest rates, our duration gap declined 0.2 years from 0.9 the previous. As we mentioned last quarter, despite the yield curve being flat and minimal earnings benefit, there are still important risk management benefits to operating with the positive duration gap given the negative complexity of the portfolio and the risk to MBS bridge and a sharp rally. With that, I'll turn the call back over to Gary.

Thanks, Peter. And at this point, we'll open up the call to questions.

Yes, thank you. We will now begin the question and answer session. [Operator Instructions] And the first question comes from Bose George with KBW.

Hey good morning. Actually, first I just wanted to ask about spreads you gave the number about spread widening and then some improvement can you just help quantify where spreads are right now relative to the end of 3Q and what that implies in terms of ROEs?

Well I guess relative to the end of the quarter let's say we're about five basis points give or take tighter in static spreads which is still obviously materially wider than where we were at the end of Q3. So, we still view it, I mean obviously I mentioned in my introductory remarks that book value may have recovered almost of the loss last quarter but we still see the investment in environment as being very favorable, both on the spread side and I think from a big picture perspective, also on the rate side kind of given the change in the Fed's mindset and obviously the change in the global economy.

And if you just compare it to like the ROE that you guys generate on a core basis this quarter is whatever 12.5-ish. Our incremental returns better than that?

Yes, so if you just do a rough calculation of ROEs, let's say, TBA 4% coupons as an example. Spreads are pretty close to 100 still static spread assume overtime 10 to 15 basis point funding advantage repo versus three-month LIBOR. That gives you a margin of 1.10 to 1.15 and with nine times leverage and 3.5% base yield on mortgages. You're pretty close to 14% on a growth ROE basis. And then, again given AGNC very low operating expenses that still can - it'll do a net ROE expectation of pretty close to 13. And that's a big differentiator versus the space where expense ratios are much higher. So, Importantly the 13 is better than what things look like materially better than what things look like a quarter ago.

Okay, great. That's helpful. Thank you. And then just given the views on or the expectations in the market, in terms of rates going forward. What are your thoughts on hedging the portfolio? Any potential changes and how you look at that? Thanks.

It's a great question, in this environment. And I remember we got the question on the last call, given how inexpensive it was to hedge duration. Why don't you - why do you run with any duration gap at all? And our response was that when you manage a negatively convex mortgage portfolio, where durations drift, zero is not - zero duration gap is not necessarily, the best risk management position and we commented that a positive duration gap made sense. Now the kind of the duration drift and our portfolio is much more symmetrical in the two direction. So, a quarter ago when rates were higher almost all of the risk to duration was that it was going to contract if there was a rally like what we saw. Whereas today the difference between extension risk and contraction risk is much closer. That said, I think our view is that spreads are more likely to widen into a further rally and we'll tend to perform better into a selloff. So, I think given that we'll still like to maintain a positive duration gap in the near-term maybe increase it a little from where it is now especially if we back up in rates. But that's how we're looking at the rates picture right now.

Okay.

Doug, this is Peter. One thing I would add sort of beyond higher level of view that music Gary just gave you with respect to the composition to the hedge portfolio. I wouldn't expect a big change in the mix between our swapping treasury hedges. But one thing I do want to point out that I think is often overlooked, and it had an impact this last quarter when you're looking at our overall cost of funds is that each quarter, some of our swap portfolio matures and rolls off and we often ultimately have to replace it. For example, in the fourth quarter about $2 billion of the portfolio matured. And we added $4.5 billion worth of new swaps in the fourth quarter, and yet our portfolio increased by $3 billion. I point that out because when we enter into new asset market swaps, they typically have a negative carry profile, for example, swaps from three years out to 10 years on average in the fourth quarter if you entered into a new swap had a negative carry profile of 40 or more basis points. So, the point is as you roll your portfolio into new swaps if you do them at the market, then it's going to have a negative cost to us. And that actually in cost, the pay rate on our portfolio by 6 basis points in the fourth quarter. And as we look out over 2019, as I said, we typically have about $2 billion mature in a quarter, that's just an incremental cost that will mute somewhat the benefit that we expect to get, and we'll continue to get from rising three months LIBOR leg on our swap. So, I just wanted to add that.

Okay, great. That's helpful. Thanks.

Thank you. And the next question comes from Doug Harter with Credit Suisse.

Thanks. Gary, can you talk about your leverage expectations. Obviously, the recovery in book value would push that down kind of thoughts as to take advantage of the wider return opportunity to increase leverage, look to raise more capital. How are you thinking about that dynamic?

Sure. Well, first off, what I would say on the leverage issue. We've spoken on this call and at other presentations about our view on leverage, which is haircuts have improved dramatically, the markets are much more stable than they were post crisis and that, it was just a matter of time that we wanted to be running higher leverage and we thought it made a lot of sense to do so. But as we stressed even on the last call, it wasn't the right opportunity given the spread environment. Well, I mean, the environments changed both from the rates perspective and spread perspective as we've discussed. And so, we're very comfortable with higher leverage at this point and think it's prudent. So, to your question, yes, book values improved, but even with the improvement in book value, our leverage is still has not come down at all from its, from the 9, that we disclosed at year-end. So, on the margin in this environment, our expectation is leverage higher not lower. And again, I mean, we feel good about the investment environment. We think it's an attractive spread environment and I can't stress enough I mean, the change and kind of the perspective on the interest rate environment with the Fed that's kind of has a much more balanced stands for the first time in years basically. So, hopefully that answers the question. I think you also asked about equity and obviously the investment environment I described to, it's favorable for the equity equation. The other factors that we always talk about that we look at it that are very important price to book ratio is obviously a key factor. Another one that we've discussed often is the fact is as an internally managed company as we grow our operating expenses drop as our equity base increases. Given how low our operating expenses are at this point to both an absolute term and relative to the space I think that's a much smaller factor for us in the equity equation. There is one other factor that has become relevant at least us thinking about this equation and that is as TBA specialness has gotten weaker and our preference on the investment side right now is for specified pools versus TBAs. That does serve as some headwind to how much or how often you can raise equity TBAs are obviously much more liquid you can buy them in very large quantities very quickly and if you're comfortable running a big TBA position that certainly it's certainly helps in terms of quickly deploying capital in the end state that you want it in. On the other hand, specified pools while they're available in ample size for AGNC they take longer to acquire and we're very careful about optimizing that mix so in an environment where stat specified pools are more attractive than TBAs that has to be factored into this equation. I want to be clear it, doesn't in anyway preclude raising equity, it just in the current environment and this may reverse at some point and not too distant future it is something that we added to the equation.

Just following up on that last point Gary the kind of the lower average leverage for the quarter I guess how much of that was kind of intentional, kind of trying to protect yourself a little bit from the spread widening you saw coming versus kind of that factor of kind of specified pools taking that the end state taking a longer to acquire?

So great follow-up question and a 100% of that was intentionally and unrelated to the specified pools. In Q4 given the volatility our mindset was related around an entry point for TBAs and when we want it to buy the mortgage basis. Essentially, the way we address specified pools is we're consistently looking for good pools all the time whether we quote, need them for this week or not. And so, we're very active in that market. And I think Chris can give you a couple of numbers. I think the numbers like we, over the last two quarters, we've probably bought $11 billion -

On a net basis.

On a net basis relative to run off $11 billion in high quality specified pools. And we will - we'll do that whether we're raising equity or not, but they - so that was - the timing issues were unrelated to the specified pool issue. But in the end, if your end state investment is TBAs, then you can get into that in a day or two if you want, okay. If your end state investment is specified pools - if we continue - if we raise capital over and over again, and bigger and bigger size, we're going to have a deficit, it's going to take us a while to overcome in terms of acquiring specified pools. It doesn't really affect the timing of deployment into TBAs, which will be the first step of the process no matter what.

Thanks, Gary.

Thank you. And the next question comes from Rick Shane with JP Morgan.

Hey guys, thanks for taking my question. Look, you guys are highlighting what I would describe as a strategic shift in response to a more symmetric rate outlook. You mentioned higher leverage, you also there was commentary about that costs of adding additional swaps. When we think about the rate outlook softening, and voluntary declining, does it make sense at this point to increase the swaps and exposure to sort of mitigate tail risk if that lesson for that more symmetric outlook proves to be wrong?

Yes. Rick, good question. Thank you. It's Peter. Obviously, the answer is it could. We obviously have not increased our swaption portfolio effects. You can see our swaption portfolio shrinking and actually the, when we have exercised our swaptions in the last couple of quarters we've taken delivery of swaps that were in the money. So those options gave us the protection we wanted and prove to be valuable. The way we would look at it and when we look at those options in general is that we often look at those options is protection against really tail risk events, which are important and we look to get into them, when the level is right and when the cost from the implied volatility used to price the options is right. We've seen implied volatility coming down, if it comes down further, we may find it. Even though, our rate view may not be for materially higher rates. There are times when we like to put on that, out of the money protection, because it's particularly cheaper. It's a balance between the level of rates, the cost of the option and obviously, our overall view on the interest rate environment. And as Gary described, our view of the interest rate environment is much more benign today. And our expectation is, it will become more evident that rates will be more stable going forward over the next 6 to 12 months. But obviously, we'll have to wait and see how the market plays out.

But given the decline in volatility helps, but volatility still elevated over where it was for most of last year. And so, I don't think we see this as a great entry point yet to buying options?

Got it. But again, my assumption is, if your rate outlook is correct in the near term, the cost of that hedge will go down in the importance in an environment where you've taken the leverage off of protecting yourself against that tail risk actually increases as well?

No. We would like the opportunity if all, I think that's an excellent point. If all comes down materially higher leverage against a bigger option portfolio would be - something we'd be very interested in. So, excellent point.

And again, it's going to take the market some time here to sort of digest what the Fed did just yesterday. And obviously, the next couple meetings will be important to hear what the Fed says about his posture. But you're right, our expectation is about get cheaper.

Okay. Great, guys. Thank you very much.

Thank you.

Thank you. And the next question comes from Mark DeVries of Barclays.

Yes, thanks. I was hoping you could quantify for us. The impact, the per share impact on spread income from some of the issues you highlighted the kind of weight on that, the delayed deployment of some of the capital and some of the issues around repo costs?

Yes. This is Peter, I'll start, and Gary can chime in. As Bernie mentioned, obviously about a penny was due to the MTG fee, but in general, the difference beyond that was about half and half between the deployment of capital and higher funding costs, the year-end pressure was probably a little bit greater magnitude than the deployment of capital. So, but those were the two big factors this sort of, or about half and half of the difference in the quarter-over-quarter change in net spread income. Funding costs were a little bit larger than the deployment of capital probably.

Okay. Got it. Thank you. And then Chris, I was hoping you could elaborate more on the point you made about the reality being somewhere between the impact on - and static spreads?

Sure. So, I mean a lot of the movement or the disconnect between the move and static spreads versus OAS was the increase in implied volatility or the increase in option cost, which to the extent that realized vol is lower than the move and implied volatility, or you don't go out and purchase rate options immediately after the move higher and implied volatility. You can expect to earn back that that option cost in a sense. And so, we've seen so far quarter to date, implied volatility has declined. And so, some of that disconnect in spread, differential between static spreads and OAS has reversed so far this quarter. The other thing to point out is the static spread metrics are simply spreading to an average life point on the curve. And our durations, our hedge ratios are shorter than that point on the curve, and which effectively incorporates or anticipates mortgage under performance versus that metric into a move lower into rates. And so that's a big part of it.

Just theoretically, what I'd add is, if you just take a step back from this quarter. If you just say, what is OAS quote, good for? OAS will capture kind of assuming volatility stays the same is better for capturing the expected spread move given a change in rates. So, we expect mortgage spreads to widen into a Raleigh as the option, the prepayment option gets more in the money. OES captures that. On the other hand, OAS ignores essentially in the number changes to implied volatility. And whereas static spreads will widen if volatility goes up. And so, the OAS component is better for normalizing or kind of excluding the rate move. And the static spread number is better for capturing changes to volatility, which do impact both ours and most other investors' P&Ls.

Great. That's very helpful. Thank you.

Thank you. And our last question comes from Trevor Cranston with JMP Securities.

All right, thanks. Just two quick ones. First you guys have talked about the impact of the funding costs going up to around the end of the year. Can you comment on where you're seeing repo rates today versus sort of where they were at 12-31?

Sure. Hi, Trevor. This is Peter. As I said, we've seen some pretty substantial improvement from where we were at the end of the year and last two weeks a year in particular. We're really distorted. And I would say on average, our December funding rates were probably 15 basis points higher than we would have expected, just based on the fact that really in the fourth quarter we had the effect of two Fed tightening not just one. Because the previous tightening occurred at the end of September right, at the end of the month. So, it was the full effect of that tightening as well as the tightening in December. We have seen some improvement as I said, we're our average repo rates today are around 260. I think over the near term and in the next couple of quarters, if three months LIBOR stays about where it is, I think that our funding should be in the last 10 to 15 basis points relative to that level. But again, I think we're going to see the funding markets, the liquidity, the levels all change pretty quickly here. We we've also seen more money coming into the repo markets, we seem the term market start to actually invert relative to shorter repo rate so I think there's a lot of people now pricing out of the fed that will change the outlook going forward but in that LIBOR minus 10 range 10 to 15 basis points is probably a reasonable proxy for the near term.

Got you. Okay, that's helpful. And then second question obviously most of the focus has been on the agency book for rate reason but I was curious if with all the credit spread widening and volatility, we've seen there's you've guys have found any opportunities to add to the credit book over the fourth quarter or in the first quarter? Thanks.

Sure. This is Aaron. So, we took up risk we took up risk a little bit in Q4 as you can see by our balance interest by about a $100 million. We've added a little bit more risk over the last few weeks in January. Having said that as Gary mentioned in his prepared remarks, I mean we aren't kind of hold - our outlook on the U.S. economy and credit risk is in very favorable at this point and while credit spreads providers so we're agency mortgage spreads, so risk adjusted returns the whole space increase in our investible assets. We do see opportunities in the credit risk transfer market. We have added some risk therein continue to like to underline fundamentals but don't see the portfolio growing materially at these levels.

Got it. Okay, thank you.

Thank you. And we have now completed the question and answer session. I'd like to turn the call back to Gary Kain for concluding remarks.

I think there may have been is there one more question in the queue?

Yes, there is a follow-up question from Bose George from KBW.

Hey guys. Thanks. Actually just - I don't know if you said this already, but where are the spreads, effective spreads on TBA versus specified pools?

So, you're talking about just like the statics spreads versus. There is - again on the OAS front you're going to have an OAS pickup, so they are more favorable like generally five plus basis points better on an OAS basis. And Chris on a static basis?

Yeah, I mean generally speaking I mean it depends on the coupon that you're looking at and its respective money and that's versus current mortgage rate. So, third year for us for example let's just take a typical loan balance bucket say 150K max pools or HLB pools as they're referred to, trade with a pay up of around 20 to 24 ticks. So, a spread give of call it 5 to 10 basis points. Again, it varies depending on the moneyness [ph] of the spec story or strategy. But generally speaking to Gary's point, specified pools are a far cheaper way to source back some of the negative convexity embedded in a mortgage position, because the option - the options that you're effectively buying back trade at a significant discount to fair full theoretical value where your alternative options on interest rates that you could buy to cover a similar risk. So, generally speaking they trade and that's where the OAS pick up comes from then. Third year for us currently traded at theoretical discount fair value probably around 50% to 60%.

Okay. That makes sense. So, back at the envelope, it's sort of 5 to 10 basis points?

Yes.

Yes.

One thing is specs for what we call high quality specs but a bit component of our specified pool strategy is not just high quality specs and so it's kind of a mix it can be as simple as new production pools where you only pay up a tick or something with reasonable characteristics and so they are there's no real spread give up and you just end up with pull that you're putting on repo, where you're starting in the same place. So, you should think them a mix there's still a mix, today it's a small component as TBA. There's a pretty sizeable component kind of in a theoretical new portfolio that's kind of these more cheaper specified pools are better than average pools and then there's the high-quality pools that Chris talked about.

The only the last thing I would add with respective to sort of the net spreads on specs versus TBA is that with roles measurements coming off and basically trading flattish to repo rates in the case of 30 year MBS the carry profile on specs versus TBA has improved a fair amounts over the last quarter or two and so, if that contributes to some of the that's part of the reason why we're optimistic on valuations going forward as well.

Right, so you have prepayment speeds obviously are key component and they're slower.

Okay, great. Thanks a lot.

Thank you.

Thank you. And I would like to return the floor back to Gary Kain for concluding remarks.

Great. And thanks to everyone for your participation on the Q4 2018 call. And we look forward to speaking with you next quarter.

Thank you. The presentation has now concluded. Thank you for attending today's call and you may now disconnect your lines.