Ellington Credit Company (EARN) Q4 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Residential Mortgage REIT 2017 Fourth Quarter Financial Results Conference Call. Today’s call is being recorded. At this time all participants have been placed on a listen-only mode and 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.

Thank you, Lori, 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 13, 2017, 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 Chris Smernoff, who will be replacing Lisa Mumford, as 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 3 to follow along. As a reminder, during this call, we’ll 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’re taking the time to participate on the call today. As announced this past this December, our CFO, Lisa Mumford plans to retire around the end of next month. Lisa has been an integral part of EARN since our inception and our talent and leadership has contributed greatly to our success. We thank Lisa for her service and wish her the best. Upon Lisa’s retirement, Chris Smernoff, the company’s Controller and Lisa second-in-command, would assume the role of CFO and JR Herlihy, the company’s Treasurer will become Chief Operating Officer. Chris will make an excellent CFO. You’ll hear from Chris in a few minutes. 2017 proves to be one of the least volatile years for interest rates on record despite three fed rate hikes, a new administration in Washington, several significant geopolitical headlines and the first pullback of quantitative easing in a decade. Over the course of the year, the 10-year traded in an extraordinarily tight 59 basis point range, and finished the year only 4 basis points lower than where it’s started. That 59 basis points range for the year was the tightest in over 50 years, so since the 1960s. As long-term interest rates remained range-bound, the yield curves consistently flat in each quarter throughout the year. Coming into 2017, the spread between 2 and 10-year U.S. treasuries was 126 basis points. But by year end, that difference had collapsed to just 52 basis points. Agency RMBS spreads finished the year tighter as well, with much of the tightening occurring in September, after the Fed provided clarity on its tapering agenda. However, given the intense market volatility we’ve seen in the last couple of weeks, these themes from 2017 seem almost like a distant memory now. Over the past week, the 10-year yield closed its highest 284, the highest level in more than four years and 43 basis points higher in the level just a few weeks ago coming into the year. Overall, the 10-year yield has now increased over 80 basis points since reaching its 2017 lows in early September of last year. Meanwhile, equities have been gyrating violently, and the S&P 500 technically reached correction territory yesterday. But let’s get back to the fourth quarter of 2017, and specifically, EARN’s performance. Although current coupon 30-year agency RMBS barely budged during the quarter, many of the shorter-duration assets that we hold at EARN, such as higher coupon pools and 15-year pools had mark-to-market losses even after taking to account hedging gains. These losses were almost all unrealized losses, and as Mark will discuss later, much of the unfavorable price action reversed after year-end. Pay-ups on our specified pools actually performed just fine with only slight declines, in line with expectations on payoffs given the slight rise in mortgage rates. Finally, the low volatility environment generated few trading opportunities for us, and our portfolio turnover was unusually low at 13% for the quarter. Overall, we produced a modest 1.6% economic return on an annualized basis. We’ll follow the same format on the call today as we have in the past. First, Chris 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. And finally, I’ll follow with closing remarks and then we’ll open the floor to questions. So over to you, Chris.

Thank you, Larry. Good morning, everyone. I’ve worked alongside Lisa in EARN since before the Company’s initial public offering. I look forward to taking over as the Company’s Chief Financial Officer upon Lisa’s retirement. In the fourth quarter, we had net income of $793,000 or $0.06 per share broken down as follows; core earnings of $4.9 million or $0.37 per share, net realized and unrealized losses from our residential mortgage-backed securities portfolio of $10.7 million or $0.81 per share as prices of securities in our portfolio decreased, and net realized and unrealized gains from our derivatives of $5.8 million or $0.44 per share. By this measure, net realized and unrealized gains from our derivatives exclude the net periodic costs associated with our interest rate swaps since they are included as a component of core earnings. Our net income of the $793,000 for the quarter ended December 31, 2017, was significantly lower than our net income of $6.3 million for the quarter ended September 30, 2017. The primary driver of this decrease in net income was unrealized losses on our Agency RMBS investments that were only partially offset by net gains from our interest rate hedges. Our core earnings, includes the impact of the catch-up premium amortization adjustment, which in the fourth quarter, decreased our core earnings by approximately $400,000 or $0.03 per share. After backing out the catch-up premium amortization adjustment from interest income in both the fourth and third quarters of 2017, we arrive at our adjusted core earnings of $0.40 per share and $0.43 per share respectively. Further modest compression of our net interest margin this quarter led to a modest decrease in our quarter-over-quarter adjusted core earnings per share. In the fourth quarter, our net interest margin adjusted to exclude the impact of the catch-up premium amortization adjustment was 1.41% as compared to 1.45% in the third quarter. While the average yield on our portfolio also adjusted to exclude the impact of the catch-up premium amortization adjustment ticked up from 3.01% in the third quarter to 3.04% in the fourth quarter, our cost of funds increased by a greater magnitude from 1.56% to 1.63%. Our repo borrowing rates rose as LIBOR increased during the quarter, and that increase was partially offset by a slight decrease in our cost on interest rate swaps which is also included in our cost of funds. On a per-share basis, the quarter-over-quarter increase in our cost of funds impacted our earnings by approximately $0.10 per share. Our annualized expense ratio for the quarter was 3.06% or two basis points higher than last quarter but still meaningfully below the 3.6% level incurred in the first half of the year, which were calculated before we were able to fully benefit from our larger capital base as a result of our secondary offering and ATM program activity in the second and third quarters. As Larry mentioned, with unusually low volatility of the fourth quarter, this resulted in reduced trading opportunities and as a result, our Agency RMBS turnover was only 13%. Our overall RMBS portfolio decreased by 3.3% to $1.686 billion as of December 31, 2017, as compared to $1.743 billion as of September 30, 2017. The decrease relates to a small drop in our leverage as our overall debt-to-equity ratio adjusted for unsettled purchases and sales decreased to 8.3:1 at year end from 8.3:1 as of September 30, 2017. For the fourth quarter, carry from our agency portfolio, along with gains from our hedges with the net-net realized and unrealized losses on our loan holding. And the strategy generated gross income of $1.7 million or $0.13 per share. Meanwhile, on our non agency portfolio – sorry meanwhile, our non agency RMS portfolio performed well, driven by a strong carry and net realized and unrealized gains, generating growth income of approximately $550,000 or $0.04 per share. Our interest rate hedging portfolio continues to be dominantly made up of interest rate swaps and short positions in TBAs and to a lesser extent, short positions in U.S. Treasury Securities. For the quarter, we had strong total net realized and unrealized gains of $6.1 million or $0.45 per share on our interest rate hedging portfolio. Our interest rate swaps generate net gains for the quarter as interest rates grow in our short positions and TBAs also generated gains as prices decline during the quarter. In our hedging portfolio, the relative proportion based on 10-year equivalent of short positions and TBAs increased slightly quarter-over-quarter relative to interest rate swaps. At the end of the fourth quarter, we had total equity of $192.7 million or book value per share of $14.45, as compared to $196.8 million or $14.76 per share at the end of the third quarter. Our economic return for the quarter was 40 basis points or 1.6% annualized. I would now like to turn the presentation over to Mark.

Thank you, Chris. 2017 finished with many of the macro themes that dominated the year that’s still in place. Risk assets continue to tighten, the yield curve continue to flatten, and levels of implied volatility continued to decline. Rate trended higher during the quarter. Yields on the 10-year swap rate ended the year up to 10 basis points, finishing at the upper end of the quarter’s range. The stock market made new highs, the Agency Mortgage basis was slightly tighter in Q4 after a stellar performance in Q3. If you look a little more closely, the answer to the question, what happened in Q4 depends on what part of the yield curve you look at. In Q4, you had a remarkable almost eerie stability in the 10-year note yield, but you had a big selloff in the front end of the curve, alongside a rally on the very long end of the curve. This yield curve flattening was expressed in the mortgage market and the change in the prices of high coupons relative to lower coupons. Higher coupons were down and priced a lot, intermediates did okay, and lower coupons like three, did very well. Take a look at Slide 6. Here – how we showed the change in the yield difference of two-year notes and 10-year notes in Q4 and continued the graph into 2018. You can see the tremendous yield curve flattening in the two-year to 10-year spread in Q4 but also a chunk of that flattening has been reversed so far in 2018. This is essentially the market trying to price and the actions of the Fed, which drives the short end, and expectations of future inflation which drives the long end. On the next slide, Slide 7, when you look at the changes in the price of Fannie 3s and Fannie 4.5s it’s even more interesting. These bonds both have positive durations. And in fact, Fannie 4.5s have generally been viewed recently is having less than half the duration of Fannie 3s. So in a normal quarter, whatever price change the Fannie 3s is, we would expect the price change of Fannie 4.5s to be about 40% is large. But looking at the left-hand portion of the slide, you can see that in Q4, far from moving down 40% as much, Fannie 4.5s moved down 3x as much, that’s really bad [indiscernible]. However, on the right-hand portion of the slide, you can see other relationship has normalized since year-end. Price action, like what we saw in Q4 is very unusual, and it can create book value volatility in either direction. You can see that the relative performance of Fannie 3s and Fannie 4.5s has done 180-degree turn since the start of the year. Against this backdrop, EARN’s portfolio performed only modestly well in the fourth quarter, with gross income before G&A expense of $2.3 million, acquitting to an annualized return on equity before G&A of approximately 4.7%. Well, Q4 continued many of the themes in the earlier part of 2017. 2018 has been a completely different story. Rate volatility has been much higher, mortgages have widened in spread, and the market now trades with skittishness and risk aversion that we haven’t seen since the early days of 2016. 2018 market trends reversing so many of the trends that we saw on Q4. Some of our portfolio positioning techniques that muted performance in Q4, such as our substantial interest rate hedges in the long end of the yield curve and our substantial TBA hedges has really helped our 2018 performance. EARN was defensively positioned at the end of 2017, but we viewed mortgages as attractive for much of Q3 and to the start of Q4. By the end of the fourth quarter, the combination of very tight spread, very low realized and implied volatility, and low realized and expected prepayments collectively seems like a recipe for a lot of risk and limited reward. We thought that the first quarter of Fed balance sheet tapering would be easily absorbed by the market it was, but we also thought the real test for MBS would come later in 2018, especially in Q2 and the balance sheet reduction reaches $36 billion a quarter. As a result of this positioning, our returns for the fourth quarter were modest. We have take advantages of some of the MBS widening so far in 2018 to add to our mortgage exposure, and we still have a lot more dry powder to add a lot more mortgage exposure should we see additional spread widening and market stability. If you turn to Slide 8, you can see the underperformance of MBS so far in 2018 have done much of Q4 2017 outperformance. In Q4, five-year rates moved to 24 basis points and Fannie 3.5 moved down only about a third of a point. This year, five-year rates have moved up 40 basis points, so about a 50% bigger moves in Q4 that Fannie 3.5s have moved down 2.5 points – or it takes more work to manage to increase interest rate volatility like what we’ve seen in the past weeks. The market is presenting us with more opportunities than it did in Q4 as MBS underperformed. This can make it a good time for us to add some additional net mortgage exposure to the company, whether by replacing some of our TBA hedges to swaps, or just adding MBS outright. On the net interest margin basis or otherwise, incremental agency MBS purchases now look a lot more attractive than they look at the end of Q4. With our stock trading well below book value and with our ample liquidity, we plan on using accretive stock buybacks to enhance the book value per share. We can’t control the stock market volatility, but we can use this as a driver book value per share accretion when it presents us with the opportunity we now see. So we have two important tools to drive performance going forward. One, a wider net interest margin and new MBS purchases, and we’ve already added some; and two, accretive buybacks to increase book value per share. We have already been buying back some of our TBA shorts, which have helped our 2018 performance. And once we are in the open trading window, we can start to share buybacks. The Agency Mortgage market is unique in stability to generate attractive returns without taking credit risk or excessive interest rate risk. Our job at EARN is to deliver returns in that fashion and at that way, be an all-weather investment vehicle. We get a lot of questions about how the Fed rate hikes and the overall level of interest rates affect our ability to pay a dividend. They should never big affect. Why? Because we hedge most of our interest rate exposure. Higher repo costs, which come from fed rate hike activity are offset by a higher floating payments that we received in our swaps and lower TBA roll levels on our short TBA positions. The same thing goes for prepayments. We are doing our job well using our research and selecting our pools wisely. We should be able to predict how changes in interest rates change prepayments, and we should be able to help inflate ourselves in that risk. What we can control is the number of opportunities created by market volatility and pricing dislocations. Last year, there were a lot of dislocations, and our gross income before G&A expenses in 2017 equate to a gross return on equity of almost 9%. Looking forward, we don’t have a crystal ball, so we don’t know when this heightened volatility will abate. The big daily and even intraday swings we have seen recently in stocks and interest rates are extraordinary. But last year stability in interest rate and stability in stock indices was also aberrational. What we do know is that EARN’s capital for Agency MBS should become more valuable as the Fed reduced its balance sheet. They’re just more MBS for private investors to absorb so they expect to return of owning MBS should go up, and it has. That big picture trends to live in with their rich opportunity set to drive earnings this year versus last. We remain clearly focused on capturing that opportunity, trimming excess risk from the portfolio and delivering results. With that, I’ll turn the call back to Larry.

Thanks, Mark. Lower net mortgage exposure and significant hedging in the long end of the yield curve muted our results for the fourth quarter. We positioned ourselves this way with book value protection and preservation of capital in mind, recognizing that mortgage spreads had moved to the tight side, prepayment expectations were low, expectations for volatility were at all-time lows and also, recognizing as usual, that we don’t think we have an hedge in forecasting the future direction of long-term interest rates. We’re okay by spending a little portfolio insurance in complacent markets, but it means that we can outperform in more hostile environments. I once again, remind you that at this time, 12 months ago, we have just come off a sudden spike in interest rates following the election, and EARN was the only company in the peer group with a positive economic return for the fourth quarter of 2016. As we’ve discussed in the past, part of our interest rate hedging portfolio includes a substantial TBA short. And as a result, we carry lower effective mortgage exposure that our headline leverage would suggest. Slide 17 illustrates this point well. Although we finished the fourth quarter with overall agency pool assets of $1.66 billion and equity of $193 million for a ratio of 8.6:1, we also held a net TBA short position of $596 million, deducting the amount of the TBA short from our loan agency pool portfolio, our net exposure to agency pools is around $1.06 billion, resulting in a 5.5:1 net agency pool assets to equity ratio. During times of hide heightened volatility, such as January of this year and the fourth quarter of 2016, this lower net mortgage exposure helps mitigate widening of the mortgage basis. Additionally, because the Fed purchased of agency pools via TBAs, as the Fed tapers its purchases, it withdraws a large source of support for TBA valuations. We combined the TBA hedges with various interest rate swaps and to a lesser extent, short positions in U.S. Treasuries, to hedge our interest rate exposure along the entire yield curve. Please turn to Slide 18, which outlines our portfolio sensitivity to interest rates. You can see that we estimate that we are roughly indifferent to an instantaneous 50 basis-point upward shock or downward shock in interest rates. We think that this is unique among the peer group. Looking at the Agency MBS sector overall, while we see some short-term opportunities with some of the spread widening we’ve seen recently, we see a few possible areas of vulnerability for the remainder of the year. It starts with the Federal Reserve’s balance sheet normalization plan. In January, the monthly amount of tapering of MBS purchases went from $4 billion to $8 billion, and the tapering will increase an additional $4 billion at the beginning of each subsequent quarter this year. Provided they stick to their schedule, the aggregate amount of tapering by the Fed will be $168 billion this year. That’s $168 billion of reduced MBS buying by the Federal Reserve in 2018. And when you add that, the estimated new MBS issue and supply of $250 billion in 2018, that’s over $400 billion of supply for the private markets to absorb, which is a lot. And agency spreads could widen in response. Second, market expectations are around three more interest rate hikes from the Fed in 2018. And third, many central banks are expected to withdraw stimulus for the first time in a decade. So we see many reasons for caution, and our portfolio management and hedging strategies become even more critical, some withdrawn parallels between the recent volatility on the 2013 Taper Tantrum. We do not expect the same extreme spread and rate movements that we saw during the Taper Tantrum, as demand for Agency MBS is much more diversified than it was in 2013. Still, we do believe that our all-weather portfolio is well positioned to withstand or is shaping up to be a more challenging investment environment. Finally, in light of the significant discount of our current share price to book value, we see an extremely attractive opportunity to repurchase shares aggressively at these prices. We requested, and our Board of Directors has authorized, repurchase of up to 1.2 million common shares. At current price-to-book levels, we intend to use this authorization aggressively as it is – it’s an excellent use of capital despite slightly wider mortgage spreads. With that, our prepared remarks are concluded. I will now turn the call back to the operator for questions. Operator, go ahead please.

[Operator Instruction] Our first question comes from the line of Doug Harter of Credit Suisse.

Thanks. I was wondering if you could put anymore context, kind of around your commentary about your risk positioning and kind of how January actually unfolded for you guys.

Yes. We wouldn’t – rather not be too specific on that. I think you can see that the TBA short, given that spreads have widened so far this year is obviously helped us. And Mark, do you want to – you can comment, I think a little bit on just, the TBA short, how it’s a – maybe evolved a little bit so far this year versus where we came into the year.

Sure. Yes, so we bought some of that TBA short back. We still have some TBA shorts. We’ve sort of – we view the initial legs of the spread widening as sort of necessary to get mortgages back to a price and a pricing spread to treasuries, where they were going to – they have to be attractive enough to get money managers and other pools of capital to absorb the Fed’s supply. So I mean it came into the year at very tight levels, so it took some correcting to get them to the point where they’re attractive. There has been certainly more intraday opportunities. And having the TBA short was very supportive of protecting book value so far this year.

Got it. And then I guess, how do you view – kind of know that we’ve kind of have the initial move. How do you view kind of your risk positioning? Is this is a time, where you would continue to take off some of that TBA short? Or do you kind of want to keep that risk positioning as we could see more of it – just how are you thinking about – how you’ve change the portfolio over the course of January, February – yes, the first week of February to position yourselves going forward?

Some of that is a function of how the market trades. We have some sort of proprietary metrics that we look at. I think if you continue to see the sort of volatility we’ve seen, then I think there’s a good chance mortgages continue to underperform. It’s expensive to control the interest rate risk on mortgages, when you see the kind of interest rate volatility we’ve seen, that can compare to Monday versus now, it’s already a 15 beat move. If you get some stability, then I think it’s a more attractive entry point for mortgages – but we also pay out attention to what’s going on in other markets – high yield has been cheapening up. So I think we pared down the size of our shorts, but until we see either a reduction of volatility or wider spreads, we’ll keep some of those short positions in place.

All right, makes sense. Thank you.

Thanks.

Your next question comes from the line of Steve Delaney of JMP Securities.

Thanks for taking the question and all the best to Lisa for a happy retirement. I’d like to start with the buyback, but in the context of leverage. So as you buyback your shares, obviously it’s going to be accretive to book, but it would seem to me that it does have the potential to reduce your earnings power, unless you see that you have the flexibility to let your leverage go slightly higher. Could you comment on that thought process in terms of benefiting book, but maybe putting stress on earnings? Thanks.

Yes, sure. In total dollars for the whole company, I agree, right. As we lower capital base, that would naturally lead to a lower earnings. But on a per-share basis, you basically – especially, the type of discount that we’re trading at right now, I think that book value accretion is going to more than offset. On a per-share basis, the only drag really that we see is that as our capital base shrinks, our G&A is going to creep up, right? But at these levels, that balance is very much in favor of buying back shares. So yes, it’s not – so we issued stock in the middle of last year from average next to the company was 2014 handle, let’s just call it. So obviously now, we’re trading much, much cheaper than that. So the same math that we did that showed back that it made sense to issue shares while we’re overall slightly dilutive, but the G&A savings and all the other ancillary benefits of the invader outweighed that now – that balances into the other direction. So I think certainly – and the reason that we chose at 1.2 million shares, we think that’s a good start – let’s see where that goes and let’s see where our stock price after that. But certainly at these levels – that amount of shares and the fact that we have on our G&A would be a modest enough if we can buy back shares at these prices, it makes a lot of sense.

Okay, that’s helpful. And I do want to say that this ratio you’re using of net assets to equity, I find it very helpful, and I think maybe that’s something I think the industry as a group should adopt.

Yes. And one of the reasons I think the industry and the group really haven’t so far is that from you would know better than me since you follow closely all of the peers. But my understanding is that we – no other company really comes even close to us in terms of the volume of TBA shorts. So other companies, for other companies, it’s probably not going to be all that different from – just a straight gross asset to equity calculation.

Yes. Good point. So I guess the second thing, I’d like to talk about, credit. You have some flexibly I think in your charter, credit is currently only about 1% of assets, and flatter curve, in improving economy, would that be a backdrop that would cause you to increase your equity allocation to credit? And in that, I guess how closely are you watching the CRT market? And given this volatility can have you seen any spread widening there that would make CRT bonds more attractive? Thanks.

Hey, Steve, it’s Mark. That’s a great question. So we had a bigger credit exposure, I think coming into Q3. And that was a primarily in non-Agency mortgages, as that sector performed extremely well throughout the first three quarters of 2017, we pruned some of those positions and we just reduce those holdings. We haven’t yet increased them. And you are exactly right, so CRT has been a bit of a bumpy ride – it pretty substantially underperformed in Q3 when the – the terrible flooding in Houston and in Florida, sort of made people realize that those credit risk transfer bonds aren’t only just exposure broadly speaking to U.S. home prices, but they have almost like a cat bond, your catastrophe bond, quality that they’re so thinly enhanced that localized weather events like hurricanes, flooding and earthquake, fires can be enough of a stress on a small part of the country that it can materially impact your credit enhancements. So I can that – flooding is on Houston – Houston was between like 1.5% and 3% exposure in most of the CRT bonds, but that was enough to appreciably reduce the credit enhancement. So the market share widened in that Q3. And then in Q4, that became a distant memory, to sort of tighten like everything else. Now this year, it has underperformed. I think in part – in sympathy with all credit spreads, like high yields down a few points. So it’s widened back – it’s not even back to where it was in Q3. So when we look at the return on equity potential of the agencies versus something like the CRT, right now, I think we’d be more focused on adding our agency exposure. But one of the motivations for having the ability to have some credit exposure in EARN at the outset of the company was is – that kind of exactly what you’re referring to. If you do get a real stress in credit, to able to take advantage of that because we are – within the firm, we have so much expertise there. So I would say, what we’ve seen a little bit of widening there, in my mind, it’s not enough yet to justify assuming some of the capital back to the, back to credit, but it’s something we watch. And it’s another thing were 2018 looks a lot like 2017 is standing on its head. Like 2017 was sort of – if we accept for that little bit of widening in CRT, most of other sectors like non-Agency MBS high-yield sort of had almost like continual tightening in 2017. And now some of those things are moving in reverse, so we’re keeping our eye on it. But it hasn’t been enough yet, in my mind, that we want to swing some of the capital back that way yet.

Right. Relative to where you see the returns on the Agency portfolio. And my final question would be this – we’re up about mortgages, I think primary rates, around 4.5% and up to 75 basis points from the September recent lows. I’m just curious, we – when I think about the spec pools in the pay-ups and – I look at that as an insurance policy for more stable prepays. So I’m asking, our primary rates at a level right now that you don’t need to buy that insurance? Or is it a question that while even if you felt that way, are you just a little scared off from the TBAs given the Fed taper and sloppy they might get?

I would say that in some of the coupons, they’re like 3.5 coupons, the cost of that insurance has come down a lot, right? So it’s not like you have to spend a lot of money for it. And pay-ups and specified pools, they do have an interest rate component to them. So they’ve come down, but they’ve probably come down on amounts that sort of commensurate with the change in interest rates. So, yes, certain parts of the TBA stack right now, you don’t need as much prepayment protection. Also, the other big thing is just as the yield curve has steepened out, forward mortgage rates have moved up even more than just the spot rates, right, because yield curve has steepened out. So now versus the forward curve to the bunch of coupons where you don’t have all that many scenarios when mortgage prepayments rear their head. So I would say, in some of these lower coupons, we’re only going to really buy that prepayment protection if we can get it very cheaply priced, so on the order of a handful of ticks.

Got it.

I just want to add one more thing, which is that..

Yes, Larry.

When – you’ve got interest rate environment like we have here. We rebalance the portfolio with – as interest rates move. And as you know, if you’ve got a portfolio very pre-payable mortgages, then that rebalancing is going to cost you money. It could be a lot of money if things are really, really volatile. So especially in the environment that we’re in now, specified pools because they’re going to hold up better, and going to have a more stable average life profile across the financial interest rates scenarios, the rebalancing costs are a lot lower on this. So in a more volatile environment, true, that we’re higher in rates, and that would argue maybe against it, if you don’t want to stay there. But in a more volatile environment, that’s a good reason to be attracted to those as well, and another reason why we think that though – sometimes, our value is not appreciated by the market.

Got it, appreciate the comments guys.

At this time, there are no further questions. That does conclude the Ellington Residential Mortgage REIT 2017 fourth quarter financial results conference call. You may now disconnect your lines. And have a wonderful day.