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Edited Transcript of ANH earnings conference call or presentation 8-May-20 5:00pm GMT

Q1 2020 Anworth Mortgage Asset Corp Earnings Call

Santa Monica May 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Anworth Mortgage Asset Corp earnings conference call or presentation Friday, May 8, 2020 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bistra Pashamova

Anworth Mortgage Asset Corporation - Senior VP & Portfolio Manager of Anworth Management, LLC

* Brett I. Roth

Anworth Mortgage Asset Corporation - Senior VP & Portfolio Manager of Anworth Management, LLC

* John T. Hillman

Anworth Mortgage Asset Corporation - VP & Director of IR

* Joseph E. McAdams

Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC

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Conference Call Participants

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* Howard Henick;Scurlydog Capital;Equity Portfolio Manager

* Mikhail Goberman

JMP Securities LLC, Research Division - VP & Research Analyst

* Jonathan Caplan;Caplan Capital Management;Portfolio Manager

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Presentation

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Operator [1]

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Good day. And welcome to the Anworth Mortgage first quarter earnings conference call. (Operator Instructions) Please note, this call is being recorded.

Before we begin the call, I would like to introduce Mr. John Hillman, Anworth's Director of Investor Relations, who will make a brief introductory statement. Please go ahead, sir.

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John T. Hillman, Anworth Mortgage Asset Corporation - VP & Director of IR [2]

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Thank you, Chad. Statements made on this earnings call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended, and we hereby claim the protection of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to any such forward-looking statements. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You should not rely on our forward-looking statements because the matters they describe are subject to assumptions, known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Statements regarding the following subjects are forward-looking by their nature: our business and investment strategy, market trends and risks, assumptions regarding interest rates and assumptions regarding prepayment rates on the mortgage loans, securing our mortgage-backed securities.

Our actual results may differ materially and adversely from those expressed in any forward-looking statements as a result of various factors and uncertainties. Certain risks, uncertainties and factors, including those discussed under the heading Risk Factors in our annual report on Form 10-K in other reports that we file from time to time with the Securities and Exchange Commission, could cause our actual results to differ materially and adversely from those projected in any forward-looking statements that we make. All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time, and it is not possible to predict those events or how they may affect us. Except as required by law, we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information or expectations, future or a change in events, conditions or circumstances or otherwise.

Thank you. I would now like to introduce Joe McAdams, our Chief Executive Officer.

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [3]

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Thank you, John. And thank you for joining us on Anworth's First Quarter 2020 Earnings Call. With me today on the call are Bistra Pashamova, Senior Vice President and Portfolio Manager; Brett Roth, Senior Vice President and Portfolio Manager; and Chuck Siegel, Anworth's Chief Financial Officer.

As I'm sure you're all aware, the coronavirus pandemic had a swift, severe and truly unprecedented impact on the U.S. and global economies, financial markets and the U.S. residential mortgage market during the quarter. Concerns over the potential effect on mortgage credit and indeed all forms of private credit from the pandemic economic impact drove prices lower on our non-Agency MBS. This, in turn, led to further force selling from fund redemptions, margin calls and the like moving mortgage-backed security prices sharply lower still and causing lenders to demand higher borrowing haircuts and rates, and in some cases, to withdraw borrowing capacity from the market.

Anworth's hybrid reallocation of capital across both agency and mortgage credit investments as well as our target leverage levels heading into the crisis provided us with the excess capital and flexibility to manage through the worst of the market volatility during the quarter, but the cost was severe with Anworth's common book value per share declining 41% on the quarter. While we were able to avoid selling significantly during the worst of the market illiquidity, we did sell a substantial amount of our portfolio securities in late March and subsequent to quarter end, in particular, among our non-Agency MBS Holdings. While we did recognize significant losses from these sales, we have been able to reduce repo borrowings and build back up the over collateralization levels on our remaining borrowings and excess liquidity and cash to levels which we believe are appropriate given the current lower market values in mortgage credit investments and the current and continuing market uncertainties and volatility.

As discussed in our earnings release, due to the significant deterioration in both the non-agency market as well as the financing market for those securities as well as our significant sales, we have elected to classify our non-Agency MBS as trading securities at March 31. So unrealized gains and losses on those securities will be reflected in net income for the current quarter as well as going forward.

Turning to the earnings. Core earnings were $8.7 million for the first quarter or $0.09 per share, up from $0.07 in the fourth quarter of 2019. GAAP net income, which now reflects the unrealized losses on non-Agency MBS as well as mark-to-market changes on our interest rate swaps as customary, was a loss of $188 million or $1.90 per share. Comprehensive income was a loss of $186 million on the quarter.

Looking at our portfolio composition at March 31, you'll see that non-Agency MBS declined to a market value of $282 million, down from $644 million at year-end due to sales and price declines as previously discussed. In addition, Agency MBS declined on the quarter as well from $3.8 billion to $2.6 billion at quarter end. The Fed's substantial purchases of Agency MBS during the turmoil did succeed in stabilizing and then significantly improving valuations on Agency MBS. Our Agency MBS sales were primarily done to improve excess liquidity and provide a buffer against additional market volatility or deterioration, but its values of Agency MBS became significantly fuller due to the Fed's actions, and we had the belief that agency prepayments would increase significantly during the second quarter, we did focus our sales on securities with less attractive prepayment mitigating characteristics and did sell some additional Agency MBS subsequent to quarter end, including our agency TBA positions, which stood at $157 million at March 31.

We did not add significantly to our residential loans held for securitization portfolio, and with paydowns during the quarter, the balance of those loans declined.

At this point, I'd like to turn the call over to Bistra Pashamova to discuss the Agency MBS portfolio.

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Bistra Pashamova, Anworth Mortgage Asset Corporation - Senior VP & Portfolio Manager of Anworth Management, LLC [4]

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Thank you, Joe. In mid-March, the Agency MBS market experienced volatility and disruptions in liquidity that were unprecedented in both magnitude and velocity. Investor deleveraging, mutual fund redemptions and constrained bank balance sheets combined led to an extreme spread widening across all Agency MBS coupons. Specified pools were additionally impacted by dramatic declines in payouts.

As Joe mentioned, the launch of the Fed's aggressive open-ended Agency MBS purchase program profitability to the TBA market and the reversal of most of the price underperformance. However, specified pool valuations remained at depressed levels.

As we move to reduce leverage and increase liquidity, our Agency MBS portfolio declined to approximately $2.5 billion at quarter end. The reduction in portfolio size was driven primarily by the sale of [further] securities. As mentioned, the majority of these were relatively generic, newer production, 3 and 3.5 coupon pools. We view these as most exposed to the expected significant increases in prepayments in coming months, given historically record low interest rates. Our 30-year fixed rate investments including TBA positions now constitute 63% of the Agency MBS portfolio. 15-year and 20-year securities combined at 9%, and adjustable rate MBS 28%.

As you can see, with the shift in our 30-year fixed rate allocation, the average coupon of our pool investments increased. However, their composition improved. Pools with loan balance and other characteristics that mitigate prepayment risk now constitutes 88% of the 30-year pool portfolio compared to 58% at previous quarter end.

On the other hand, the average coupon of our 1-year adjustable rate MBS decreased. And as these securities continue to reset to lower rates, we expect that will moderate prepayment speeds going forward.

With regards to portfolio prepayments during the first quarter, the overall agency portfolio prepayment rate was 18 CPR, and the adjustable rate securities prepayment was 25. As we expected, given record high mortgage refinance applications, we have seen an increase in prepayments so far this quarter to 29 CPR for both the overall portfolio and beyond.

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [5]

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Thank you, Bistra. At this point, I'd like to turn the call over to Brett Roth to discuss our mortgage credit investments.

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Brett I. Roth, Anworth Mortgage Asset Corporation - Senior VP & Portfolio Manager of Anworth Management, LLC [6]

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Thank you, Joe. As we have been discussing, story of the first quarter was the COVID crisis. Prior to the middle of March, the non-Agency market was continuing to trade at continuously tighter levels. As we know, that quickly changed. As liquidity began to evaporate, the pricing in the non-Agency market quickly gapped down. With that, lenders began quickly reprice collateral and make margin costs. Because we had chosen as a strategy to run our financing book conservatively, and have, by design, not taken full advantage of the amount of leverage offered to us by lenders, we had collateral available to us to meet initial margin calls. That gave us the flexibility to step out of the way of the initial deep downdraft in prices and instead hold off sales a few days when we were able to sell assets in an orderly manner as market levels were recovering. We believe this helped us to buffer the amount of loss we realized on our portfolio.

As of March 31, the market value of the assets we sold was 191 million of assets. We sold an additional 111 million in April for a total of 302.6 million. As a result of these sales, we were able to reduce our repo balances by 255 million in total. Thus, we were able to generate excess cash through these transactions to help us meet repo pair offs and margin calls on the non-agency portfolio. At this point, we have successfully navigated a complete financing cycle post COVID. We believe we have reached a steady state and our position to proceed forward with our non-agency portfolio. Currently, our portfolio is comprised of approximately 72.5% of legacy MBS and 20% -- 27% of credit risk transfer assets. Approximately 75% of our CRT investments are focused on agency reperforming loans. Since quarter end, we have seen a 5% increase in the value of the assets in our non-agency portfolio.

Turning to our loan portfolios. In general, it is too soon to see any impact of the coronavirus on reported performance on these portfolios. We will begin to see data that shows possible effects of the coronavirus starting with the May 25 remittance report.

Looking at the residential loans held for investment portfolio. This is a portfolio of high-quality jumbo loans originated in 2014 to 2015. Overall, the performance of the loans within this portfolio continues to be strong. We did realize a default on a loan in March, which was not COVID related, however, the severity was minimal and had little economic impact on the portfolio.

Voluntary prepayments remain elevated, north of 30 CPR March and north of 20 CPR in April. Our portfolio of loans held for securitization is our non-QM loan portfolio. Our current portfolio of assets has a weighted average FICO of 742, LTV CLTV of 70% and DTI of 38.5%. Approximately 84% of our portfolio is comprised of hybrid ARMs, of which the majority are 7/1s. The credit performance of this portfolio continues to be strong with defaults remaining at 0 CDR.

This quarter, we did have one loan designated in the 60-plus delinquent bucket, which was unrelated to the COVID crisis. We have been receiving calls related to forbearance requests by borrowers. Not all of these calls have resulted in borrowers entering into forbearance agreements. Currently, by loan count, approximately 13% of the loans in this portfolio have entered into 3-month forbearance agreements.

On the funding side, since the corona crisis, we have seen our weighted average haircuts increase and funding spreads have widened significantly. The increase to our cost of funds has been somewhat offset by the decline in rates. We have also extended our financing term with 55% of our portfolio being financed in 3 months terms versus historically using 1 month financing terms. That said, we are currently financing our positions with multiple financing partners. Thanks, Joe.

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [7]

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Thank you, Brett. Turning now to the additional details on portfolio financing. In line with our asset sales, repo borrowings declined similarly to a total of $2.5 billion at quarter end, with an average rate of 1.86% overall and a hedged rate of 2.15%. I would point out that we had a limited amount of Agency MBS repos maturing in the last few weeks of the quarter. So when combined with our sales of MBS securities and the reduction in agency repo balances, a few if any repos at quarter end had been initiated at the new post Fed cut rates. As we have been rolling our borrowings during April, the current average agency repo rate now stands a full percentage point lower than its 1.76 average at March 31.

Despite lower stockholder equity levels, our calculated leverage was little changed at 6.1x due to the reduction in repo balances. Once outstanding trades settled and additional sales were made subsequent to quarter end, our current leverage now stands at below 5x total capital. Our interest rate swaps declined in notional balance to $1.3 billion, given the decline in mortgage rates and lower duration estimates on Agency MBS. Our reduced swap position still leaves our agency hedge duration as negative with an estimated gap close to approximately minus 1 year at March 31, albeit on a significantly lower leverage multiple. As discussed previously, our book value per share declined by $1.91 to $2.69 at March 31. As there was no dividend declared during the quarter, this resulted in a negative return on common book value of minus 41.5% for the 3 months ended March 31.

Subsequent to quarter end, we declared a $0.05 dividend for the first quarter and plan to resume declaring quarterly dividends on the customary schedule beginning in June. This dividend would have represented an 18% annualized yield based on the quarter end stock price. Subject to quarter end, we have seen improvement in the values of both non-Agency MBS and the hedged values of our agency holdings. We would estimate a common book value per share to be up approximately 5% in the month of April. Given the current price-to-book discount and dividend yield, I have received some questions regarding share repurchases. During the first quarter and indeed to date, our focus has been to generate and maintain excess liquidity to preserve capital and maintain the continued financing of our investment portfolio. While other companies in our space have needed to defensively raise capital at these expensive and dilutive levels, Anworth has not. That said, in light of the current continuing economic uncertainties related to the pandemic and the potential for further volatility, we believe it would be premature to reduce our capital base and excess liquidity at this time. We do understand and have demonstrated over time how share repurchases at substantial discounts to book and share issuance at higher prices and potentially significant premiums to book can enhance long-term shareholder return, and we will continue to evaluate all opportunities to improve shareholder return as we move forward.

With that, I'd like to turn the call back over to Chad, our conference operator, for any questions you might have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Mikhail Goberman with JMP Securities.

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Mikhail Goberman, JMP Securities LLC, Research Division - VP & Research Analyst [2]

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I hope everyone is safe and doing well. Difficult quarter, obviously, but it seems like things are getting a little better. I guess I'll start with -- you mentioned that you sold about 111 million of non-agencies in April. Forgive me if I missed it, but you said whole loan balances have declined as well since March 31. Could you provide a ballpark figure on that?

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [3]

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Well, the value -- the carrying value of our loan portfolio is on the table -- Page 2 of our earnings release. Residential mortgage loans held for securitization from -- went down from 153 million to 142 million, primarily driven by repayments during the quarter.

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Mikhail Goberman, JMP Securities LLC, Research Division - VP & Research Analyst [4]

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I was referring more to -- apologies for the misunderstanding, since quarter end.

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [5]

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Well, there's -- we get 1 remittance report a month. So we've had 1 additional month of paydowns. I don't -- do you have that handy, Brett? We have not sold loans subsequent to quarter end.

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Mikhail Goberman, JMP Securities LLC, Research Division - VP & Research Analyst [6]

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Okay. I guess, I appreciate the book value update for April. I guess, going forward, it seems like it's a pretty good environment for Agency MBS investing in general based on your comments and some of the comments from your peers. Trying to think about where the dividend is right now. And I know you're going to announce a dividend next month versus the sort of $0.09 that you reported in the first quarter. What is sort of a core EPS run rate? How can we think about that going forward?

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [7]

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Yes, it's a good question. And it's a bit of a difficult question at this point. But the first thing I would point out is that the way we report core earnings is to take into account the actual impact of agency prepayments during the quarter. As Bistra indicated, we did believe this was going to be a quarter with substantial prepayment increases, which would obviously decrease the sort of quarterly carry on our agency portfolio. We had 2 prepayment reports subsequent to quarter end. I believe the average is 29%. And I believe that this month, which came out yesterday is 35 -- 33 to 35. So clearly -- and this is on a portfolio that, as Bistra pointed out, consists almost entirely of pools with prepayment characteristics. So we had viewed May as really the -- probably the tightest month in terms of requirements on our excess capital to meet margin calls for agency prepayments and then also maintain a significant prudent buffer for the market volatility.

So as we move forward, we do expect prepayments to mitigate. As we move into the summer and fall, the agency -- the refi index has fallen pretty significantly from its highs, but it's still almost twice where it had been in the fall of last year. So I think the carry for Agency MBS will be attractive once speeds come down. We are cautious, given the high level of valuations and the wide spread between primary and secondary mortgage rates. So I don't think we're going to be in a particular hurry to be taking our leverage back up on the agency side, but I do think we will see some opportunities in the coming quarters for potentially some better entry points than right now given the high level of prepayments. Back to your original question. Obviously, when we think about our dividend, we declared a $0.05 dividend for the first quarter, we had $0.09 of core earnings. The second quarter has really been about capital preservation and maintaining liquidity. And I think when we look to declare a dividend in June, we'll take 3 factors into account. Obviously, our core earnings during the second quarter, the fact that we have some excess core earnings over our first quarter dividend, and more importantly, at that point, where we see the run rate moving into the third and fourth quarter.

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Mikhail Goberman, JMP Securities LLC, Research Division - VP & Research Analyst [8]

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That's very helpful comments. Just one last final one. I think you mentioned repo -- your repo rate is down to about 75 basis points. Is that right? I just wanted to confirm.

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [9]

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It's between 75 and 80 currently on the agency side.

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Operator [10]

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Next question comes from Jonathan Caplan with Caplan Capital Management.

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Jonathan Caplan;Caplan Capital Management;Portfolio Manager, [11]

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I just have 2 questions to you. Number one is kind of a high-level question. Based on the performance generally over the last decade, 15 years over, I kind of went back and look at different periods of time and seeing what happens to book value in various situations. It used to be that if interest rates were going up, you usually had more of a problem protecting book value. Now it seems like in most markets, there is a very big issue in terms of protecting book value. And as I'm sure you're aware, book value has gone down dramatically. I'm just wondering if this calls into question about whether the business operating model makes any sense or has any long-term value in terms of appreciation of book value. And the second question is with regard to share repurchase, the stock traded below $1 for a good period of time, and the company was pretty much silent about how the condition of the portfolio. Even if you're not in the position of repurchasing stock, I think it would be helpful to let the shareholders know kind of what the pro forma book value is at any given time. So that -- when I look at it trading under $1, I said, I think they're in trouble and they might not survive because we weren't getting an information from management. So I'm wondering if you could do a better job of communicating estimated book value when markets are in dislocation.

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [12]

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Sure. I appreciate your comments. I'll take your second question first. The -- in terms of estimating book value, we certainly put out several communications during this period of time that -- and we always want to have as much high-quality information available to the shareholders as we can. In fact, on one of our press releases, which we put out on a Friday, we noted that we had an estimate of book value as of 3 days prior. But given the tremendous illiquidity and dislocation in the market, we really could not make a good estimate of where things are trading at that point. So I do hope you'll appreciate. It was truly a stretch of us of a few weeks that were particularly unprecedented. And we really tried to put out as much information as we could out there. I think there were several points since the last quarter where we did provide updates as best we could. So yes, I take it to heart that the more information we can get out, the better. We -- but we did release at the time, several updates during the quarter in terms of where things stood. But I do appreciate -- I hope you can appreciate that there's a trade-off between wanting to always provide the best information we can and also have it be correct and of an accurate quality. And that sometimes that's a tough balance to have.

On your first question involving the decline in book value per share over time, you're correct. I mean, clearly given the last quarter, that would have pulled our long-term 20-year return down significantly. The mortgage REIT model per se is one where we earn a high and attractive level of income, and we distribute that income to our shareholders every year. We have had some episodes in over our long history, whether it was long term capital, whether it was the Fed taper tantrum, the 2007, 2008 mortgage crisis and obviously this quarter as well, where there have been significant mark-to-market declines in the value of our leveraged portfolio. Our policy in the past, even though we would be allowed to not pay a dividend for a significant period of time because of those losses, has been that we thought it was best for total stockholder return to continue paying a dividend based on the go-forward basis. So what you will -- you obviously have seen over time is a loss of book value during some of those periods. But a distribution of dividends over that period of time that is very substantial. So even though we may have had a 10% dividend distribution over a long period of time, we might have wind up -- wound up with a 7% or 8% annualized return over that period. So that is a feature of how things have operated over the past decade. We've had 2 or 3 periods with some significant price declines, but have continued -- and when you look at the book value per share declining over time, that's correct. At the same time, the amount of dividends we have paid to contribute to the total stockholder return has also been very substantial over that time as well.

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Brett I. Roth, Anworth Mortgage Asset Corporation - Senior VP & Portfolio Manager of Anworth Management, LLC [13]

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There had been a question about the loans held for securitization balance between March and April. All of that information came into us yesterday. So we just have been putting it through. It looks like we are -- the balances have declined about $4 million to $5 million from March to April month end.

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Operator [14]

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The next question comes from Howard Henick with ScurlyDog Capital.

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Howard Henick;Scurlydog Capital;Equity Portfolio Manager, [15]

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I apologize, I missed the very beginning of the call. So if this has been discussed, just let me know. My global question is, how do you see any of these going forward? You sold obviously more non-agencies than agencies. Do you want to become a pure agency fund like you were in the old days or restore the balance now that things have settled in? Or what are your thoughts in that regard?

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [16]

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Well, there's obviously a considerable amount of uncertainty still as to what the economic impact on residential mortgage credit over the next 6, 12 months maybe. That said, our belief is given the current market values for the non-agency securities we hold, and the fact that, as Brett mentioned, we are in a relatively stable position, we feel with the much lower financing levels we have on those balances that they have the potential to provide a very attractive return going forward and the potential for continued capital appreciation. So we are not in a hurry to sell those securities that we think will continue to perform -- to improve their performance over time. That said, I think the funding market for mortgage credit is, while it's stabilized, is certainly not strong and healthy. I think we would have a hard time at this point substantially increasing our repo balances on that sort of paper. So...

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Howard Henick;Scurlydog Capital;Equity Portfolio Manager, [17]

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You kind of on hold is what you're saying in right now?

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [18]

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We're on hold until we see either, a, prices improved substantially, in which case, we might look to sell securities or if we -- if prices continue to stay at these levels, if we see some improvement in our ability to get some financing. The yields on these securities are in high single digits, which is very attractive, but isn't really our shareholders return boggy when it comes to yield. So we realistically would need some level of leverage to provide an attractive return on those investments.

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Howard Henick;Scurlydog Capital;Equity Portfolio Manager, [19]

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So as you were saying earlier, obviously prepayments have been pretty high. Where do you -- and at some point, you want to stop paying down repo theoretically over time as your leverage gets lower. Where are incremental investments going at this point in time?

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [20]

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Well, as we had viewed that given the stabilization in the non-agency market, but still, obviously, a good deal of volatility potentially, and the record low interest rates we saw during the first quarter, that really this period of time, April, May, June, was going to be the period where agency prepayments were going to be very high. We have to make a margin call when the factor comes out and we get the money from Fannie and Freddie 2, 3 weeks later. So we feel this period of time, this quarter, both on the agency side, due to prepayments as well as on the non-agency side, given the higher degree of volatility and lower liquidity was going to be sort of at the point where we wanted to have the most potential excess capital. So we have not been deploying new capital into new investments subsequent to quarter end.

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Howard Henick;Scurlydog Capital;Equity Portfolio Manager, [21]

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But that's fine. But when you get to the point that you would (inaudible) but assuming this situation, where do you see the opportunities, I guess, if I'm not being clear, I'm sorry.

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [22]

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Right now the opportunities in the Agency MBS market would be driving potential levered ROEs in sort of the low teens, where we're holding our non-Agency MBS would be in the high teens. So right now when we get to that point, we're looking to deploy additional capital, we have to evaluate whether the potential risk in Agency MBS was -- and prepayment risk was worth a low-teen ROE.

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Howard Henick;Scurlydog Capital;Equity Portfolio Manager, [23]

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Got you. And my other question is a little different. What -- given how much you've shrunk, and I got -- I'm assuming your expense ratio hasn't shrunk as much. What do you think your expense ratio is including the outside manager because you pay them as a percentage of your total equity? And how does that compare to your peers at this point? And if so, given this amount of shrinkage, does it make sense for you guys to remain a stand-alone entity? Because as you get smaller, and assuming you're cutting your expenses dramatically, which you're not, I can't believe you can because it's people, unless you're cutting your fees to the outside management company, you have to be dramatically higher than your competitors.

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [24]

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Right. Well, 2 things there, Howard. First, I apologize, I do not have a good estimate of a pro forma G&A expense. What I will point out is that when you look at the 2 major expenses that are not depreciation in the first quarter, you have $1.5 million of management fee and a $1.1 million of other G&A expenses. The management fee is based on stockholder equity. So it will continue to go down as the size of the portfolio goes down. So there's not a lot of -- now it's based on stockholder equity, excluding unrealized gains and losses, but obviously we've had a substantial number of realized gains and losses this quarter. So even though there was a relatively small decline on the quarter, that was really only related to March's management fee. So the run rate would be lower going forward. It is correct that there can be some challenges relative to the other. $1.1 million of quarterly G&A expenses, auditors, legal, the like to try to ratchet that down in line with the smaller equity base. But for the most part, the #1 line item for expenses is something -- is the management fee -- the external management fee, which is based as a percentage of stockholder equity.

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Howard Henick;Scurlydog Capital;Equity Portfolio Manager, [25]

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But stockholder equity is probably overstated, given -- if you took -- based on what you just said because you're not taking to kind of mark-to-market losses. I assume the equity is included to mark-to-market losses would be substantially lower. Is that not correct?

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [26]

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Well, again, we had some unrealized gains heading into this quarter. So it's -- in general, I wish I had the answer for you, Howard. But -- and I'm happy to work on it and look it up for you. But in general, it has tracked fairly closely. There have not been significant discrepancies between that. We don't have -- we have not had large unrealized gains and losses that we have kept on the books for a long period of time. I mean, we have swaps coming over. This swaps tend to be relatively short.

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Howard Henick;Scurlydog Capital;Equity Portfolio Manager, [27]

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And my last question would be, in light of these other things that we just talked about, have you or would you consider a sale at some point to a larger competitor to get the benefits of consolidation?

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [28]

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I think as I said in the comments, and this is maybe more related to the -- well, I think it's in the same vein, the idea that currently -- I mean, as do many of the mortgage REITs now, but Anworth has dealt with this in the past as well. Trading -- when you're trading at a significant discount to book, you're small, you don't have as much volume or liquidity as other larger competitors might. Just as we have considered share repurchases in the past, we're committed to doing what it takes to improve shareholder return over the long run. And we certainly will always consider all the avenues that are available.

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Operator [29]

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(Operator Instructions) Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Joe McAdams for any closing remarks.

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [30]

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Thank you. I appreciate your participation and interest in today's call, whether you're listening today or on a replay in the coming days. We have a -- I guess, we have a shareholder meeting that will be virtual, so -- and electronic. So absent that, we look forward to talking to you again this time next quarter.

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Operator [31]

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Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.