Ellington Credit Company (EARN) Q4 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Residential Mortgage REIT Fourth Quarter 2016 Financial Results Conference Call. Today’s call is being recorded. At this time, all participants have been placed on a listen-only mode. The floor will be opened for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Maria Cozine, Vice President of Investor Relations. You may begin.

Thanks, Paula and good morning. Before we start, I would like to remind everyone that certain statements made during this conference call may constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical in nature. As described under Item 1A of our Annual Report on Form 10-K filed on March 10, 2016, forward-looking statements are subject to a variety of risks and uncertainties that could cause the company’s actual results to differ from its beliefs, expectations, estimates and projections. Consequently, you should not rely on these forward-looking statements as predictions of future events. Statements made during this conference call are made as of the date of this call and the company undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. I have on the call with me today Larry Penn, Chief Executive Officer of Ellington Residential; Mark Tecotzky, our Co-Chief Investment Officer; and Lisa Mumford, our Chief Financial Officer. As described in our earnings press release, our fourth quarter earnings conference call presentation is available on our website earnreit.com. Management’s prepared remarks will track the presentation. Please turn to Slide 4 to follow along. As a reminder, during this call we will sometimes refer to Ellington Residential by its New York Stock Exchange ticker E-A-R-N or EARN for short. With that, I will now turn the call over to Larry.

Thanks, Maria. It’s our pleasure to speak with our shareholders this morning as we release our fourth quarter results. As always, we appreciate you taking the time to participate on the call today. The fourth quarter was the most volatile quarter for long-term interest rate since 2009 with the 10-year treasury yield surging 85 basis points over the course of the quarter and the 30-year treasury yield up an even more remarkable 75 basis points. The day after the Presidential election, the 10-year yield increased over 20 basis points which was the largest one day move in the 10-year yield since the paper tantrum back in 2013. The agency mortgage market changed rapidly throughout the quarter shifting from an environment in the beginning of the year, where investors were worried about a refinancing wave and watching their yields and durations shrink as a result to an environment at the end of the quarter where refinancings were coming to a screeching halt and the durations of MBS were now longer than they had planned for. The 30-year mortgage rate increased 90 basis points over the course of the quarter leaving the majority of 30-year agency mortgages out of the money for refinancing. It’s almost hard to believe that only a few months ago in the third quarter, we experienced a highest market wide level of prepayment since 2013 and that at the end of the year, the MBA refinance index hit its lowest level since the financial crisis. When the dust settled after this massive shift in interest rates, EARN still had solid performance generating $0.22 in earnings per share on a fully mark-to-market basis. Even after paying out our $0.40 per share quarterly dividend, our book value per share only declined slightly by 1.1% to $15.52 per share. And our full year economic return for 2016 was 8.3%. The positive economic income we generated in the fourth quarter equated to an annualized return on equity of 5.6%, not bad actually. Let’s wait until all the other agency focused mortgage rates have reported their fourth quarter results and let’s see whether any others will be able to say that they had a positive economic return for the quarter. So far all the ones we have seen have reported negative economic returns and often they have reported substantial negative returns. Hats off to Mark Tecotzky and the rest of his investment team for an absolutely terrific job this past quarter. We attribute our performance this quarter to our disciplined hedging strategy and model driven asset selection. We are very selective right down to the individual pools that we choose to buy and this process of capital construction served us well this quarter as we successfully shielded our portfolio from lowest MBS valuations. In 2017, we will continue to execute this strategy in what could be an extended period of heightened interest rate volatility. Fortunately, with volatility often comes opportunity. We will follow the same format on the call today as we have in the past. First, Lisa will run through our financial results. Then Mark will discuss how the residential mortgage backed securities market performed over the course of the quarter, how we positioned our portfolio and what our market outlook is. Finally, I will follow with some additional remarks before opening the floor to questions. Go ahead, Lisa.

Thank you, Larry and good morning everyone. In the fourth quarter, we had net income of $2 million or $0.22 per share. The main components of our net income were our core earnings, which totals approximately $4.9 million or $0.54 per share. Net realized and unrealized losses from our securities portfolio which were $25.1 million or $2.75 per share and net realized and unrealized gains from our derivatives in the amounts of $22.2 million or $2.43 per share. By this measure, net realized and unrealized gains from our derivatives excludes the net periodic cost associated with our interest rate swap since they are included as the component of our core earnings. Our core earnings includes the impact of catch-up premium amortization, which in the fourth quarter increased our core earnings by $600,000 or $0.07 per share. Catch-up premium amortization is calculated based on interest rate levels and prepayment projections at the beginning of each quarter. Last quarter, this adjustment was negative at $1.4 million or $0.16 per share. If we exclude the adjustment in both the fourth and third quarters, we can see that our core earnings declined by $0.01 in the fourth quarter to $0.47 per share. The premium catch-up amortization generally tends to fluctuate from quarter-to-quarter. Excluding the adjustment, the largest variance in our quarter-over-quarter earnings was an increase of approximately $400,000 or $0.04 per share in our interest expense. Interest expense includes our cost of repo as well as costs related to our short U.S. treasury positions. The increase in our interest expense was almost entirely offset by a slight increase in our interest income and decreases in our swap hedging cost and operating expenses. In terms of our net interest margin components, the weighted average yield on our aggregate portfolio declined to 2.75% in the fourth quarter from 2.78% in the third quarter each adjusted to exclude the impact of the catch-up premium amortization adjustment. While our weighted average agency RMBS yield increased 3 basis points quarter-over-quarter to 2.59%, our weighted average non-agency RMBS yield decreased over 3 points to 7.2% quarter-over-quarter, because we sold certain high-yielding positions towards the end of the third quarter. This small portfolio has consistently augmented our overall results. With respect to our cost of funds, our cost of repo increased 10 basis points to 81 basis points during the quarter, but this was partially offset by 5 basis points decrease to 25 basis points in the periodic cost associated with our interest rate hedges and our short U.S. treasury. Overall, in the third quarter, our annualized cost of funds increased to 1.06% from 1.01%. As a result for the fourth quarter, our net interest margins adjusted for the impact of the catch-up premium amortization adjustment decreased to 1.69% from 1.77%. During the fourth quarter, as interest rates rose, prices declined on our agency RMBS and resulted in net realized and unrealized losses. However, those losses were significantly offset by net realized and unrealized gains from our interest rate hedges. The fact that we generally aim to hedge out most of our interest rate duration risk helped us greatly this quarter as interest rates rose significantly. Consistent with our portfolio management style, we actively traded our agency RMBS portfolio. Portfolio turnover for the quarter was 16% and we took advantage of trading opportunities that we identified following the large interest rate move. At the end of the fourth quarter, our aggregate MBS portfolio was just over $1.2 billion and our leverage adjusted for unsettled purchases and sales was 8.3 to 1. I would like to now turn the presentation over to Mark.

Thank you, Lisa. The fourth quarter demonstrates why our strategy with EARN is to capture mortgage spread and focus on relative value which doesn’t require bets in the direction of rates or the shape of the curve. The aftermath of the U.S. elections was an almost 100 basis points sell-off in the 10-year swap rate and with it a large increase in the duration of mortgage backed securities. Just like the Taper Tantrum was another example of how a macro economic premise that is taken as a given and has guided market pricing for years can then be challenged and rejected by the market in a matter of days. By the end of the year volatility spiked and interest rates closed near the highs of 2016. Mortgage investors that had been laser focused on elevated prepayment rates found themselves worried about extension risk in a world suddenly felt the discount securities. Over the quarter we had to quickly adapt and shed risk in a declining market. We came into the quarter with a healthy net interest margin of our assets over our liabilities and that NIM we captured together with the advantageous portfolio choices we made and the trading gains we have with continued turnover in our portfolio were more than enough to offset the additional hedging costs that we incurred even on a fully mark to market basis. We generated a 5.6% annualized economic return for the quarter against the macro economic backdrop that was one of the most volatile in years. We believe that this quarter in particular and this past year in general shows that substantial returns can be generated without the need for large interest rate bets or excessive amounts of leverage. This past quarter also shows the danger of having once portfolio construction premised on the prediction of the outcome of macro events. Prior to the elections the polls showed that Clinton would win and further more financial researchers declared that if Trump would actually win both interest rates and stock prices would plummet. So even if you had a better crystal – better election crystal ball than everyone else and you correctly predicted that Trump was going to win, you probably would have had a portfolio positioning that would end up losing a lot of money. For all these reasons, we try not to tie the company’s fate to unpredictable exogenous events. We can’t inflate ourselves completely, but we try to do it to a large extent and we focus on sources of repeatable income like predictable net interest margin, long-term relative value opportunities and short-term trading opportunities. The sell-off that finished the year with the largest since the Taper Tantrum in 2013 from high to low in the quarter the 10-year swap rate hold [ph] off 110 basis points. On Slide 7, you can see that the duration of Fannie 3.5% on the left axis and the level of 10-year interest rate swaps on the right. The big consequence of the gap in rates and volatility was the dramatic duration extension of mortgages. For example, the duration of Fannie 3.5% more than doubled. We dynamically adjusted our portfolio during the quarter both the asset side and hedging and liabilities side to manage the duration risk of the company. We also had a tremendous benefit this quarter and having the significant portion of our hedges in TBA mortgages. As expected TBA mortgages extended on a percentage basis in duration more than our specified pools. So our TBA mortgage short position dynamically and automatically hedged a large portion of our specified pool portfolio. Meanwhile the mortgage basis came under some stress. In other words agency MBS underperformed interest rate swaps which is not surprising for such a large move in rates. While the mortgage basis widened the magnitude of the widening was much less than with similar sell-offs in the past. This lack of substantial underperformance makes sense to us for a number of reasons. Since the 2008 financial crisis, the ownership base of the mortgage market has shifted from the highly levered convexity hedges like Fannie Mae, Freddie Mac and certain money managers to the Federal Reserve. To-date, the Fed has bought and held all of its mortgage MBS holdings and even purchased MBS to replace natural run off that is taking away a lot of – that is taking a lot of pressure that the MBS market had to endure on previous episodes. We believe that the Fed’s large ownership portion of the MBS universe is in itself supportive because it limits the amount that private participants have to sell in times of stress. The size of REIT holdings is a good example of this. Currently, REITs own approximately $100 billion less MBS than they did in 2013 and do so with the smaller duration gap and less leverage. Much of that $100 billion may have wound up at the Fed. And the Taper Tantrum, it was de-leveraging and rebalancing that were among the larger culprits causing mortgage widening. But now, that loaded gun simply doesn’t exist to the some extent in the current market. However, the Fed had signaled that it may allow its MBS portfolio to start shrinking later this year which has the potential to create a tremendous opportunity for us. Prepayment speeds slowed down over the quarter as rates have been gradually rising since Q2. Taking a look at Slide 8, Fannie 3.5%s of 2014, they had been paying 32% CPR in September, a 25% CPR in December. That decline became much more dramatic since year end. As borrowers react to the current rate environment, the MBA refined, closed out the year at the lowest point since the financial crisis. This is a big positive going forward. Prepayment risk is much more manageable and prepayment protection is much less expensive now. In the most recent prepay report received early February prepayments dropped 30% from the prior month. We have always embraced the idea that portfolio composition is supposed to be dynamic over cycles. The ideal portfolio changes with the times and actively managing our holdings is one of the better tools we have in preserving book value. When prepayments change quickly, we believe that our infrastructure and expertise provide us a distinct edging able to – and monetizing pricing and efficiencies as the market tries to adapt new information. We are thus able to thrive in the rate value that started the year and the sell-off that ended it. Even with our vast expertise in understanding mortgage prepayment behavior, we also have to humbly acknowledge the uncertainty of policy risk. Central bankers across the globe were very supportive of mortgage basis in 2016. We don’t know when, how or even if this support is going to be stripped away, but it’s something we constantly acknowledged in our portfolio of construction. Policy risk can arise from places other than Central Banks. The new administration showed on Day 1 that housing policy is on the front burner when it rolled back to recently announced reduction in mortgage insurance premiums. Policy risk can lead to wider spreads for agency RMBS, which could be a challenge to book value in this short-term, but a benefit in the long-term if we could put capital to work at more attractive valuations. With our TBA short positions currently keeping our mortgage basis exposure at modest levels, we have ample ability to add exposure given an opportunity. 2016 was a wild year and wild is not a price action typically associated with strong performance from MBS. I am sure enough on a duration adjusted basis, agency MBS underperformed treasuries by 10 basis points. The total return for agency MBS in 2016 was only 1.6%. EARN’s compounded economic return on the other hand was 8.7% in 2016. We think that this return in this year is proof-of-concept for our strategy. Actively trading MBS with the quantative analysis of both fundamental and technical factors is an investment approach that can generate great returns without betting on a particular macroeconomic view. We were able to generate positive economic returns in the market quickly rallied 100 bps earlier in the year. We were able to generate positive economic returns in the market could be sold off 100 basis points. We are modest in our reliance on our macro economic views and instead utilize our model driven asset selection process with an aim towards generating strong net interest margin in a variety of interest rate regimes. This is what serviced well in 2016 and what we expect will continue to reward our shareholders in 2017. We think 2017 can be a year of tremendous opportunity. Mortgages may re-price substantially wider in response to actual anticipated changes in the size of Federal Reserves mortgage holdings, should that happen look for EARN’s to take advantage by adding to our mortgage portfolio and reducing our TBA shorts. Currently, our net interest margin is at a healthy level and our repo borrowing costs relative to what we get paid on the floating leg of our swaps were the best levels in years. Now back to Larry.

Thanks Mark. Since our IPO in 2013, we have been saying that our objective is to deliver attractive dividend yields over market cycles or mitigating risk especially interest rate risk and on the form of an agency focused mortgage REIT. This past quarter and this past year were both testaments not only to our ability to deliver returns, but also to the validity of the basic premise of our objective. We are different from other mortgage REITs and proudly so. We seem to use TBA short positions much more heavily than other mortgage REITs to hedge our risk. Why wouldn’t we, being able to use TBA short positions at so many, so many extra dimensions to our ability to manage the portfolio and these are instruments where we have strong convictions that we actually have an edge. On Slide 8, look again at the prepayment instability of the non-specified TBA pools versus the specified pools. So when we use TBAs as hedges and the interest spike like they just did, our TBA short positions not only dynamically extend with our specified pool assets, but they extend more than our specified pool assets. And each TBA coupon has its own unique hedging characteristics with very particular portfolio effects not only on interest rate exposure, but also on volatility exposure, prepayment exposure and mortgage basis exposure. Our significant use of TBA short positions sets us apart from our mortgage REIT peers and helps us drive our performance in especially volatile quarters. The mortgage market is notoriously inefficient. From mortgage manager being able to use TBAs in your hedging portfolio provides so many more options and so many more inefficiencies to exploit. For us at Ellington Residential, the agency mortgage market offers so many ways to make money without taking undue risk given that why would we want to risk so much on who gets elected, what’s happening behind closed doors of the Fed and whether large scale government policy changes will lead to higher or lower interest rates. Furthermore, does anyone have the consistent ability to predict where interest rates are going over multiple cycles? I am skeptical that there are more than a handful of investors who can do that. And those who can should be placing most of their wages in different markets. On the other hand deciding whether to hold low balance Fannie 3.5%s as opposed to low FICO Gold 4%s whether they hedge with TBA Fannie 4%s as opposed to TBA Genie 3% as well, yes that’s something we are confident we are pretty good at. We have been doing that kind of thing for over 30 years and over 20 years at Ellington alone. 2016 certainly proved to be a year full of market surprises. As we move further into 2017, Ellington Residential’s objective is to be nimble and ready to adapt to a wide range of market scenarios. While we wait for clarity from the new administration on their policies related to government spending housing in the financial markets, we could see continued periods of high volatility in interest rates. Additionally, we should start to see the Federal Reserve’s footprint in the TBA market contract further. As prepayments continue to slow in response to higher rates and the Fed receives less principle to reinvest through open market purchases. Leaving greater significance we could also see the Fed finally reduce its MBS holdings by discontinuing its current policy of reinvesting the billions of principle payments received each month or perhaps even selling down its portfolio outright. Any of these policy shifts would have significant consequences for the agency MBS market. The Fed bought $387 billion of mortgage bonds just in the past year alone in order to maintain its holdings at $1.75 trillion. The Fed currently owns a full 30% of the entire agency MBS market. And with the biggest buyer starting to walk away, we could see a significant widening of spreads. We want to be ready for that scenario. An adoptable strategy is especially important in the uncertain markets as was evidenced by our strong performance this quarter in comparison to our peers. The prospects for the agency MBS market remain well suited to our comparative advantages of diligent and opportunistic asset selection coupled with disciplined and dynamic hedging. Our goal is to generate sustainable income from a strong net interest margin that not only supports a high dividend, but provides room for EARN to grow returns over time in a variety of market conditions. And with that our prepared remarks are concluded. I will now turn the call back to the operator for questions. Operator, please go ahead.

[Operator Instructions] Your first question comes from Doug Harter of Credit Suisse.

Hi, guys. This is actually Josh Bolton filling in for Doug. I have a few questions about your hedging portfolio. I appreciate the comments you made in your prepared remarks. Can you talk a little bit about the timing of the hedges that you put on during the quarter? It seems like they may have been put on largely before the big move in rates after the election. I am curious to hear your thoughts about timing of the increase in the hedges. Thanks.

Sure. This is Mark. What we do is everyday and really during the course of the day intraday we are monitoring how much interest rate exposure is in the company that we are leaving shareholders with and so that process of monitoring in real time the interest rate risk and trying to mitigate it in real time. That’s been normal course of business for us since we went public. So the process wasn’t substantially different than what we always do. It was just the magnitude of the changes were bigger and the nimbleness it’s sort of required on the part of the manager I think was different given the magnitude of the moves. So, if you look on Slide 16 that you can see how the hedging composition changed over time right.

Speak to the timing of the TBA proportion…

Yes, so we increased the TBA shorts. We also increased the amount of longer duration treasury shorts. And when we increased the amount of TBAs relative to treasuries, it was our view that when you got this surprise result in the election, it was introduced significant enough uncertainty that we thought it was permanently going to raise actual implied levels of volatility in the market. And against that backdrop, we thought it was beneficial to move more of our hedge into the TBA shorts.

Yes, that’s something we are constantly reevaluating right how much of the mortgage basis. Do we want to be exposed to? We have been as low – we have been under 20% I think at times in terms of our TBA shorts as a percentage of our hedging portfolio we have been as high. We have probably gotten close to 50% at times. So that’s something that we feel is well within our mandate to make judgment calls on in terms of where we think the mortgage basis might be vulnerable. And as Mark said when we think of the market maybe underestimating the uncertainties in volatility of following or proceeding an event.

Great. Thanks for the color, guys.

Your next question comes from Jim Young of West Family Investments.

Yes, hi and congratulations on a great job this quarter with maintaining book or book only being down 1%, that’s terrific. My question is how are you thinking about the leverage at this environment? You picked up from 8.5x at the end of December. But as you start to think about how the Fed’s involvement with the agency mortgage market. Are you decreasing leverage in anticipation of an opportunity or how much leverage are you willing to put on if the bonds do widen out like you think that they could this year? Thank you.

That’s a great question, Jim. This is Mark. So, in addition to thinking about how much leverage we have which is really the amount of our borrowings relative to our equity capital. We think also a lot about our net mortgage exposure and that’s a calculation where we look at current phase of our mortgage holdings and we subtract from that the current phase of our TBA shorts and we compare that to our equity capital. So if mortgages were to underperform swaps or treasury substantially, we thought the market had some excessive reaction to some announcement about the Fed. I think what you probably see us do is just buyback a lot of those TBA shorts and put them into either interest rate swaps or treasuries. So then you would see a company that had more mortgage exposure, but wouldn’t necessarily be an uptick in our leverage. So that’s what obviously depends on how things move and relative value, but I think that’s the most likely reaction we would initially have to a substantial underperformance in mortgages. It wouldn’t manifest itself as a material increase in leverage, but it would really change Slide 16, it would change the amount of those TBA shorts.

And Lisa wants to add something.

Yes, Jim. If you consider unsettled purchases and sales and leverage actually didn’t go up that much and went from 8.2% at the end of September to 8.3%.

Yes. If you look at the earnings release the last bullet point actually in the summary in the first page we encourage people, obviously we disclose it both ways, but we encourage people to look at our leverage after unsettled purchases and sales, because if we have an agent in a specified pool, for example, that is being financed upon repo, but we sold that the trade date before quarter end, but it’s going to settle on TBA settlement date usually in the following month. That’s going to as a tactical matter keep our leverage high, because repo still exist as of the end of the quarter. But from a risk perspective that is coming off, that borrowings coming off when we settle that trade a couple of weeks later. So we show it both ways. And as Lisa said when you adjust for unsettled purchases and sales, both ways it really was just a very modest tick up.

Okay, thank you. And I recognized this as basically impossible to answer, but can you give us your best sense as to how much – how many basis points you think the bounce could widen out this year. I mean, I recognized there is lot of factors in there, but how much they are widening are you concerned about?

This is Mark. Obviously, this is just speculation on my part. I think a lot of it has to do with, what the Fed says and sort of how aggressively they taper, you are only going to reinvest half their pay-downs each month versus 100% or if this is not going to reinvest any pay-downs. So, I don’t know like if you look at the taper tantrum, I think the range is – I think at the low end, maybe though 8, 10 basis points and at the high end maybe something like 30 odd basis points. So then mortgages are a little bit wider than historical standards now. The question is if you own them now, when you are capturing a little bit better margin than what you normally capture, is that enough to compensate for that risk? And it’s probably enough to compensate you sort of if the widening comes in at the low end, but it’s probably not enough. It’s not enough to compensate if the widening comes at the high end. There was an interesting piece I can send you that Bernanke wrote, came out a couple of weeks ago on what he thinks is sort of the proper size of the Fed investment portfolio right now. And it was interesting because it wasn’t that much smaller than the Fed’s portfolio is right now, but I think that the market can do back flips and work itself up into frenzy without really knowing much. So that’s sort of our view now that it made sense to have material – substantial amount of TBA shorts. Because I guess we are hoping that you get some volatility and we are hoping that we get a really great point to add more mortgage exposures in the portfolio.

Yes. And just to add on that, Mark, I was just doing some back of the envelope calculations right, so if spreads widen 10 basis points, then what do you want to call that 0.5 point, I mean – just for argument’s sake, call 0.5 point, but last time some of our – we own a lot of premium securities and some of those have lower durations, but for your typical mortgage REIT asset that could easily be 0.5 point price. So, if they are levered 7 to 1, that could be 3.5% on book value. Now, if you don’t have any TBA shorts against you, then that’s 3.5% on book value right, but if you do then that immunizes you from those shocks. And given that the Fed is they have footprint as in the TBA market right, so one could argue that specified pools would do better than TBAs. The other thing that I just want….

And it supports also your – then your going forward NIM is higher too.

Right. Yes, exactly. So – and the roles come under even more pressure, so that helps you in terms of again, if your short TBAs is part of your strategy and I guess finally I would just say that another mitigating factor is that Fed – prepayments are lower. I think I mentioned this in my remarks so their footprint in the market is already less, because their only activity right now is really just replacing the prepayment runoff, which has gone down a lot. So, if you look at the Fed’s purchases to replenish their runoff as a percentage of the total volume of trading in the market, most of which of course is not just replenishing runoff right, you have got money managers getting into the market, getting out of the market. So, most of the volume is obviously not just replacing runoff. It’s huge market. So the Fed’s presence is definitely not what it used to be in terms of just because their runoff is less. And so I think pulling that away we will have less of an effect still very significant, but less of an effect that it might have in other environments. It looks like we got one more question it looks like.

Yes. Your question comes from Steve DeLaney of JMP Securities.

Hi, good morning everybody. Just first one, I echo Jim Young’s comments and congratulations, great job on protecting book value in a very volatile quarter. Repo seems to be something we used to always about and it seems like it’s sort of another thing that’s working well for the mortgage REITs these days, it seems like repo has lagged Fed funds and LIBOR as those other rates, benchmark rates have moved higher, just curious if you feel that that benefit of pricing is going to be sustainable over the next year. And as maybe looking out longer term, just curious since you guys have two public vehicles and a lot of private money involved in the mortgage market, has Ellington looked at maybe creating its own broker-dealer so that you would be able to do more direct repo with rather than [indiscernible] repo? Thanks for your comments.

Yes. I am going to – let me just address that last part in terms of broker-dealer. So it’s true, we have two public companies and we have private capital as well. But we are still not big enough to justify creating a broker-dealer just for that purpose. And the other thing I would say that is that and I know that other people deal with these conflicts. But we are also and we and many of our clients and investors are loafed to introduce a broker-dealer and the fact that we have multiple clients who would own that broker-dealer, would it be the management company that creates one set of conflicts, would it be one of our public companies and not the other that would set another set of conflicts. So A, even though we are big, we are not big enough, I would say to justify that broker-dealer. And I think you will see that the REITs that have that are much larger. And we also are not crazy about the kind of complex that that might present.

Got it, that’s helpful Larry to understand.

So Steve, this is Mark. Thank you for your kind words. Yes. That’s been a really significant event, so we sort of track it where is three months repo compared to three months LIBOR, because there months LIBOR is what you get paid on the floating leg of a swap. And that swing since sort of when the fears were most heightened about availability of repo to where it is now, it’s probably been 20 basis points, 25 basis points swing. That means you could just look at mortgages spread to the treasury curve or something like that and you wouldn’t realize that leveraging these if you are paying on – if you are doing them with swaps and repo you have got that 20 basis points benefit from where you had been. So it’s really significant. The other thing which we have observed which also to us is a significant positive is that some of the largest U.S. banks which were not aggressively looking to add repo exposure, trying to remember maybe a year ago or whenever sort of repo was felt like it was a little bit – there was scarcity associated with it. But they have been looking to add. So that to us is significant, right. You have enormous $1 trillion balance sheets now aggressively involved in the agency repo market and it’s not the incremental capacity is not coming from smaller non-banks.

It’s so interesting.

Although we have – we do continue to see increased interest from foreign banks I would say. So we will be doing more repo with them. They seem to have great appetite for the product and the non-bank presence continues to grow. And it’s interesting there have been some U.S. banks that decided and if you do the math, I mean it’s hard for us to do the math obviously from here. But if you do the math based upon Dodd-Frank it does seem like the return on equity for things like treasury and agency repo are really low. But nevertheless, so you had some banks that have gotten out and haven’t really gotten back in. But you have other banks have decided we are speculating that it’s not really the loss leader, they are not losing money, it’s just not a great return on equity for them compared to maybe some other opportunities. But I think they feel like and I agree with this to be a presence, a big presence, at a big presence in the agency mortgage market which is obviously a big market. This is just something that you need to be involved in. We get a lot of information if you do it. You obviously service your customers better. So I think that we are certainly heartened to see those banks staying in the business in some case and stepping up in others.

That’s great. And the foreign players that you mentioned had sort of come in, are they more Asian or Eurozone?

I would say – I was going to say Canada and Asia I think are the most notable, yes.

Got it. Thank you so much for the comments.

Thanks Steve.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day.