Danielle Rosatelli - IR Bill Gorin - CEO Gudmundur Kristjansson - SVP Craig Knutson - President & COO Terry Meyers - SVP Director, Tax Bryan Wulfsohn - SVP.

Dan Altscher - FBR Doug Harter - Credit Suisse Joel Houck - Wells Fargo Rick Shane - JPMorgan Mike Widner - KBW Steve DeLaney - JMP Securities.

Welcome to the MFA Financial Incorporated Third Quarter Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to our host Mr. Bill Gorin. Please go ahead. .

Good morning. The information discussed on this conference call today may contain or refer to forward-looking statements regarding MFA Financial, Inc., which reflect management’s beliefs, expectations, and assumptions as to MFA’s future performance and operation.

When used statements that are not historical in nature including those containing words such as will, believe, expect, anticipate, estimate, plan, continue, intend, should, could, would, may, or similar expressions are intended to identify forward-looking statements. All forward-looking statements speak only as of the date on which they are made.

These types of statements are subject to various known and unknown risks, uncertainties, assumptions, and other factors including those described in MFA’s annual report on Form 10-K for the year ended December 31, 2014 and other reports that we may file from time-to-time with the Securities and Exchange Commission.

These risks, uncertainties, and other factors could cause MFA’s actual results to differ materially from those projected, expressed, or implied in any forward-looking statements it makes.

For additional information regarding MFA’s use of forward-looking statements, please see the relevant disclosure in the press release announcing MFA’s third quarter 2015 financial results. Thank you for your time. I would now like to turn this call over to Bill Gorin, MFA’s Chief Executive Officer..

Thanks very much, Danielle. I'd like to welcome everyone to MFA's third quarter 2015 financial results webcast. With me today are Craig Knutson - President & Chief Operating Office, Gudmundur Kristjansson, Senior Vice President; Bryan Wulfsohn, Senior Vice President; Steve Yarad, CFO; and other members of senior management.

In 2015 we continued to execute our strategy for orderly investment within our expanding residential mortgage asset investment universe. As we identify opportunities in the residential mortgage assets sector MFA has the focus and the requisite capability to analyze investment and to be a significant investor.

Turning the page 3, despite the low interest rate environment we continued to identify and acquire attractive credit sensitive residential mortgage assets. In the third quarter of 2015 we generated net income of $75.8 million or $0.20 per common share. The dividend was again $0.20 per share. Book value per common share was $7.70.

Through nine years since June 29, 2006 since the last federal funds rate increase the unemployment rate has declined and may continue to decline. The Fed certainly has signaled a desire to raise the Fed's funds rate in 2015 yet the labor force participation rate remains low, inflation remains low in the U.S. borders deflation in Europe and Japan.

Interest rates remain low across the yield curve on a global basis. Commodity prices are weak and the strong dollar is impacting U.S. companies. As a result future U.S. Federal Reserve actions including those to be potentially announced at the next Fed meeting scheduled for December continue to remain dependent on incoming data.

The probability of changes in the Fed funds rate has gone up with time. The exact lift off date still remains uncertain, but we currently anticipate that changes in monetary policy will be measured in gradual. At MFA we continue to limit the interest rate sensitivity of our portfolio.

We have a net duration of 0.58, we have a leverage ratio 3.3 to 3.1 [ph] and 73% of our mortgage backed securities are adjustable rate hybrid or step up.

Turning to page 4, in the third quarter we continue to get identify and acquire credit sensitive residential mortgage assets that generate earnings without increasing MFA's overall interest rate exposure. We significantly increased our holdings of credit sensitive residential home loans from $429 million to $777 million.

In the quarter our most interest rate sensitive assets agency MBS continued to pay down. Turning to page 5, as you can see MFAs yields and spreads remain attractive despite the interest rate environment, leverage again remain consistent at 3.3 debt to equity ratio. Turning to page 6, we present yields and spreads for more significant holdings.

Given the leverage we're utilizing or may utilize in the future each of these asset types are generating attractive returns to MFA shareholders. On page 7, we illustrate how our holding to credit sensitive loans has grown throughout 2015. At today's market prices these mortgage loans generate higher yields and residential mortgage backed securities.

Importantly these loans are qualifying real estate assets they are more credit sensitive and less interest rate sensitive. The third quarter increase was due to access to a good supply of investment opportunities within the sector. Turning to page 8, undistributed retaxable income was approximately $0.04 per share at the end of the quarter.

There were two items that we want to highlight which we believe may increase taxable income but not gap income over the next several quarters. So it's important.

What we’re not trying to do here is forecast absolute gap earnings or taxable earnings, what we’re trying to highlight to you is why we currently estimate there will be a difference that taxable income will exceed gap income over the next couple of quarters.

We anticipate a resecuritization unwind in 2016 which is expected to generate taxable income by an amount estimated to $0.15 per share. In addition there is an expected countrywide settlement which we expect to increase taxable income by an estimated $0.05 per share.

Turning to page 9, Gudmundur will present the slide which is an update on MFA's interest rate sensitivity..

Thank you. On slide 9 we show the interest rate sensitivity of MFA assets and liabilities.

In the third quarter our asset duration declined eight basis points to 142 basis point at the end of the quarter, the decline was primarily caused by an increase in assets with low sensitivity to interest rates and a reduction in assets with higher sensitivity to interest rates.

As we added approximately 350 million of non-performing whole loans in the quarter while our agency MBS portfolio declined by about 310 million in the quarter.

The notional amount of our swap heads just remained unchanged was approximately 3 billion At the end of third quarter, but the hedge [ph] duration declined 20 basis points to minus 3.7 at the end of the quarter as our swap heads had shortened naturally over time.

In aggregate MFAs portfolio net durations declined modestly to 58 basis points at the end of the third quarter from 61 basis points at the end of the second quarter.

MFAs strategy of limiting interest rate sensitivity to asset selection has allowed us to be well positioned for the substantial increase in interest rate volatility we've experienced this year. And our portfolio continues to exhibit limited sensitivity to changes in long term interest rates and spreads.

By maintaining loan [indiscernible] and limited sensitivity to the long end of the curve we really MFA is well positioned for continued interest rate volatility and a potential gradual increase in fed funds in the near. With that I will turn the call back over to Craig..

Thank you, Gudmundur. Moving to page 10, we continued to increase our usage of the Federal Home Loan Bank advances in the third quarter and subsequent to quarter end, we currently have $800 million of borrowing with the Federal Home Loan Bank of the Des Moines.

The average cost of this borrowing is 25 basis points with the term of a little less than five years. For the time being we have put agency collaterals to secure these advances.

We're excited about this partnership with an extremely solid counterparty and we look forward to working together with the FHLB to further their core mission of supporting housing finance. As a condition of membership MFA insurance has purchased stock in the FHLB of Des Moines thus helping them to build their capital base.

In addition when we access FHLB advances to finance the mortgage position we purchase additional stock in the FHLB in the form of activity stock. So we are effectively capitalizing any borrowing that we undertake with the FLHB.

Moving to page 11, we purchased approximately 232 million of RPL/NPL mortgage backed securities in the third quarter while experiencing pay downs of about 333 million. We continue to like these assets, due to their low sensitivity to interest rates and what we believe to be low credit risk while at the same time providing low double digit ROEs.

Spreads our new issue deals have widened somewhat recently and we've been able to invest at attractive yields of 4% and better since quarter end. The fourth quarter has been a heavy issuance quarter in past years. So we are hopeful that there will be attractive opportunities to invest in these assets in the next two months.

Moving to page 12, the credit metrics on the loans underlying our legacy non-agency portfolio continue to improve, 76% of the loans underlying our legacy non-agency portfolio are now amortizing.

This principal amortization together with home price appreciation continues to reduce LTVs, delinquencies are curing, 60 plus day delinquencies as of September 30 for the portfolio has declined to 13.8%. On this page we illustrate the LTV distribution of current loans in the portfolio.

The red bars represent at risk loans where the homeowner owes more on the mortgage than the property is worth. These are loans we worry most about transitioning to delinquent in the future because the borrowers are underwater. As you can see these red bars are disappearing.

Please also note the increasingly large green bars on the left side, loans with LTV below 80% are attractive refinance candidates. A combination of low rates available today and a thirty year amortization term versus the 20 year remaining term on most of these loans today can offer homeowners substantially lower monthly payments.

And of course given our deeply discounted purchase price for these assets, we're very happy when the underlying loans pre-pay.

On pages 13 and 14, we show home price appreciation in the two states with the highest concentration of loans, 44% of the underlying loans are located in California although HPA has declined from the frothy levels of the last couple of years we have still seen good progress in the last 12 months.

Page 14, illustrates the last 12 months of HPA in Florida are second largest state concentration. Improving home prices obviously bodes well for the credit performance of this portfolio. On page 15, we show realized credit losses experienced on the portfolio over the last three calendar years and for the first nine months of 2015.

After realizing losses of 164 million in both 2012 and 2013 losses decreased to 90 million in 2014. The run rate thus far in 2015 is a little lower than it was in 2014. We released 6.9 million of additional credit reserve in the third quarter based on updated projected future performance on the underlying loans in this portfolio.

Our credit reserve now stands at $815 million and will be reduced in the future as actual losses are realized on the underlying loans. These realized losses occur when the property securing the mortgage loans are liquidated for less than the outstanding loan amount.

In addition as we have discussed previously for many of the fixed rate bonds in the portfolio unrealized losses are generated when mortgage loans are modified through coupon reductions to troubled homeowners while the loan modification reduces the interest rate paid by the borrower, the bond that we own has a contractual fixed rate coupon.

So the interest collected from the borrower maybe less than the interest owed to the bondholders. In order to cure this interest shortfall the trustee uses principal receipts to pay interest on our bond.

This use of principal to pay interest effectively under-collateralizes our bond as the underlying principle balance of the loans is less than the principal balance of the bonds that we own.

For some bonds this loss is recognized in the period in which it occurs as a realized last, but in most cases this loss is not realized until the loan balance is reduced to zero and yet we still have a bond balance outstanding which is likely many years from now.

At that point, the unrealized loss will become a realized loss, approximately $50 million of these unrealized losses have already occurred. Turning to page 16, we made good progress growing our credit sensitive residential home loan portfolio in the third quarter increasing this asset class to 770 million as of September 30.

Our credit sensitive home loans appear on our balance sheet on two lines, loans held at carrying value and loans held at fair value. This election is permanent and it is made at the acquisition of the loans. Typically we elect carrying value for reperforming loans and fair value for non-performing loans.

We added additional warehouse borrowing capacity during the third quarter. And now have three warehouse lines with aggregate borrowings of approximately $427 million. We've also added additional staff to help with the asset management function. associated with this portfolio.

We're excited to have the ability to oversee servicing decisions on troubled loans and we believe we can achieve improved returns on these loans through thoughtful and diligent asset management. On slide 17, we owe the five largest state concentrations in our [indiscernible] portfolio with five states comprising over half of the portfolio.

Property value is typically the single most important metric in determining the value of reperforming and non-performing loans. So obviously home price appreciation is a good omen for returns on these investments. And with that I'd like to turn the call back over Bill Gorin..

Thanks, Craig. In summary, we continue to utilize our expertise to identify and acquire attractive credit sensitive, residential mortgage assets. We have substantially grown our holdings of RPL/NPL mortgage loans in 2015. Our credit sensitive asset continued to perform well.

Future Federal Reserve decisions or monetary policy will remain dependent on incoming data but MFA is well positioned for changes in monetary policy and/or interest rates. This completes today's MFA presentation.

Operator, could you please open up the line for questions?.

[Operator Instructions]. And we do have a question here from Dan Altscher from FBR. Your line is open. .

I want to touch on the slide, Bill that you referred to with I think the slide 8 with the future items to future taxable income.

I guess one -- can you just talk about what or why they do not impact GAAP and why they only impact taxable income? And I guess is the point you're trying to make also that when we think about distribution requirements for 2016 that these are obviously favorable items that support the dividend or regardless of the GAAP or that have implications that would drive a higher distribution because of the taxable income..

So the second part of your question it's also almost algebraic. You got three variables in the [indiscernible] so I won't be able to answer your question. What we're saying is as I pointed out I'm not forecasting with GAAP income is based on what we currently know we imagine that taxable income will exceed GAAP income.

And yes you're right, historically taxable income has driven the dividend which is a Board of Director decision. So I would say to the extent that taxable income exceeds GAAP income and to the extent that dividend is more in-line with taxable income we shouldn’t be surprised if the dividend possibly exceed GAAP income.

So I think I answered part two of your question. Part one I will actually hand over to our tax expert Terry Meyers..

As it relates [Technical Difficulty] tax purposes and not for GAAP purposes, it is really because the transaction, the resecuritization that we’re planning to is not tax transaction, for financial reporting purposes it was, however for tax purposes it is not.

And as a consequence if the securities have increased the value since we originally undertook the transaction [indiscernible] recognize the results from that increase in value..

I will just add to that from a GAAP perspective, when we did this resecuritization transactions there was no impact on GAAP financial reporting when we did the initial transaction because we can sell it at the underlying assets, transferred to trust.

And similarly when we unwind these transaction there is also no impact on GAAP reporting because everything remains on the balance sheet before and after..

I don't think any of us are surprised to once again see gains from sale of non-agency. I think what was striking in my view was I guess the size of the gain relative to I guess the notional amount of security sold.

So to me just press a little bit of context as to what those bonds actually look like whether it's vintage or credit or anything like that?.

It's relative to the cost basis. You saw bonds are traded, we like the prices we sold comparable assets and really is relative to our particular cost basis. But you're right that's not indicative of the whole portfolio for average, advertise cost about 74 when we have these marked at 90.

It just so happens these gains were above average and it's probably due to the fact that these were assets we acquired earlier on and that's why such a large gain..

And I actually I want to talk a little bit about FHLB, Craig I think you mentioned in your script that you pledged agency collateral in terms for five years so I guess one can you just give us a little bit sense of the differential in terms of the borrowing rates that you're seeing for five years versus if you were trying to get be like a five year term repo or anything of that nature? And then also was is that is or is that exposure also, does that have a hedge against it too often not maybe protect against the duration of the borrowing but you know I guess a comparable move against the asset if you will from a book value perspective?.

Well the hedge against the assets we have had it all along, we haven't bought agency securities in almost two years, so we pledged agency securities and they have been hedged as they have been hedged for years. As far as the borrowing rate, it's a five year term but it's a monthly reset.

So you know yes it's actually is a five year term but it adjust monthly, so it's unlike normal repo other than the fact that the cost is lower..

Can you help us just get us a sense as to what the differential has been in the cost?.

Well I said that the average cost is 25 basis points, monthly repo cost is what 36 or so. So 36 to 38, and in addition not to make it more complicated but because we purchased activity stock and the activity stock is typically 4% of the borrowings that activity stock actually pays us the dividends which is currently about 3.5%.

So if you factor the 3.5% dividend and the 4% activity it probably lowers our cost by another 12, 13, 14 basis points. It doesn't show up as lower interest expense, it shows up as an income item but the two are obviously related..

The next question comes from Doug Harter from Credit Suisse..

Can you guys talk about the liquidity in the whole loan market and the availability of the product?.

We’re assuming sort of significant supply of whole loans throughout this year, so we’re seeing almost $30 billion - $38 million worth of supply across the non-performing and reperforming loan and that has been [indiscernible] demand as you see the few large players which we five and six tend to soak up the majority of the supply and then you’ve a lot of other participants that participate on a smaller level as well..

And I guess is there a typical size deal that you guys prefer to play in or that you find is more economic?.

So it will really depend on the assets underlying, so really we can look at deals as small as 10 million and as large as 300 million, it's really all going to depend the specific pricing and the specific underlying assets..

And then taking a step back, you guys have run a conservative leverage historically. And I guess how the spreads wide enough that you'd be willing to put a little extra leverage on or are you going to sort of maintain leverage around current levels obviously depending on the mix. .

Yes. I look at that question as do you want to grow your asset base at this particular time? Because how you fund it is how you fund it and basically we're placing asset run off.

It's hard to say that spreads are wider than they will but we have been very active in acquiring loans and at a rapid pace while allowing more interest rate sensitive assets to runoff. So there's 3.3 number plus or minus has been the right number for years now.

So there is nothing I see in the availability of assets and mix that number is going to change a lot at the moment..

We have a question from Joel Houck from Wells Fargo..

Thank you Bill with a question from a Joe Hockey. From Wells Fargo. Thanks and good morning guys.

So you guys are in a unusual position and that the price to book has come down with the rest of the group and so you haven't really been asked about buybacks, curious as to your thoughts about the merit of buybacks relative to opportunities you’ve on the investment side and at what level if it all makes sense to go to the board authorized buybacks and actually start doing buybacks..

So even though you've had some certainty about interest rates, to us it's an uncertain interest rate environment.

Volatility has increased, we've said before right size we very much like our investment strategy and our investment opportunities and as you point out we’re not at a large discount, about a 10% discount is friction cost to raise an equity.

So I don't envy people that trade at large discounts but I guess at a large discount at times when we share price good investment opportunities like I don't rule it out forever, but we're very happy executing our strategy which is a very high value add strategy for investors.

These are assets that they really cannot buy themselves particularly our focus on loans now. And I think that's -- premium or a book we can't control moment to moment but we have not been trading at large discounts and I think that reflects the market's comfort with our strategy and execution..

And on the investment allocation, I think for you guys it makes sense. Your strategy makes sense given the opportunities that you have on the non-agency side.

Nonetheless I'm curious as to what would it take either spread widening in agency or fed action or lack of action in order to get more enthusiastic about agency and I asked the question more for insights because it does seem that it seem we've now heard from many quarters on these calls you and your peers is that no one likes the agency complex risk reward tradeoff..

So I would say that on a number of these phone calls, I’ve said that our expertise which I believe exists here and I'm sort shown is to make superior credit decision and in no way our investment strategy is based on the saying that we have the best call into the Fed or even the best call prepays.

Agency asset the absolute yield because historically we’ve refrained from investing in fixed rates. Absolutely yield to close to 2% two that’s really a leverage gain and a hedging gain and even if you have the exact right call on interest rates in the prior quarter the hedging proved difficult. So I think ours is the more value added strategy.

How many companies do you need to invest in agencies for you over time and I think we've evolved to a less strategy less dependent on leverage, less dependent on interest rate exposure and more dependent on doing credit work.

So if the yields were very different I'd give you a different answer but based on what you’ve seen, we do the last two years I think we continue to focus on the credit assets which we’re very interested in and we’re seeing very good supply and good investment opportunities..

We have a question comes from Rick Shane with JPMorgan. Your line is open..

I really appreciate slide 6 where you break down the spreads in and cost of funds by line and show leverage, when we do the quick math it looks like in general the ROEs for the different products are pretty similar.

I would like to hear how you think about that and I think it really goes back to Joel's comment that this is not a strategy as you migrate into -- you grow the RPL/NPL portfolio of trying to per se enhance ROE but given the volatility given the environment we're in..

Well said Rick, and you’re right. When I think what I said in my preamble was we’re looking to add interest rates earning assets without increasing our interest rate exposure.

So we're not an ROE maximizing strategy, it's a very -- zero interest rate environment, how can I continue to generate ROEs close to 10% without incrementally adding interest rate risk because if we added interest rate risk on the asset side you would have to be adding hedges and sometimes that’s difficult to do.

I think it is in a zero interest rate world when you’ve look at how much risk you have to take to earn something, we’re very excited to continue to invest in assets to generate ROEs close to 10%. I think that's similar to what you said but that's how we look at it. .

Our next question comes from Mike Widner from KBW..

So I think you covered everything pretty thoroughly and most of the reasonable questions had been answered, so I'm going to ask you one that's maybe a little out there.

You have had the agency MBS portfolio pretty much on rundown or autopilot, every one want to look for a couple of years and in the non-agency party of your portfolio you guys have been opportunistic from time to time this quarter included of selling things that are at prices that you think are full or perhaps at prices where you wouldn't buy them today so it makes sense to sell them.

So my question I guess is if you look across your whole portfolio and I think this is universally true across mortgage REITs, but you know the one asset you couldn't fathom buying at current prices is current reset ARMs.

And so you know I'm just wondering you know why not sell those why continue to hold on to them if the market yields are so low, the prices are so high, so at a line with kind of historical norms. I know that they show as having no duration on paper and I'm just not sure that you know that risk is worth taking given where the prices.

So just kind of interested in your view specifically on current reset ARMs and why hold onto them?.

As you know there are certain REIT requirements and 40 Act requirements which we need to have qualifying real estate assets.

And I think what you're seeing during our evolution which has been orderly is qualifying real estate assets in the -- and the main have included agencies, but now the growth is in loans which are also qualify real estate assets. So you sort of see one asset running off while another one is growing keeping us in the required compliance.

So hopefully that will give you an answer to the flows in and out of those two asset classes.

Does that answer your question Mike?.

Well I mean sort of. But I guess you know what I'd say like, the issue with current reset ARMs and sort of the longer reset ARMs and turn into current reset ARM.

So if I look specifically at those you're not really don't appear to be shrinking your balances current reset ARMs again as the other stuff runs into those is probably shrinking but not as much as the whole portfolio the whole agency portfolio is shrinking..

Well that’s actually a very good thing that your shorter duration less interest rate sensitivity asset is not growing rapidly. Gudmundur, can actually give you an update on the merits and if people talked about, I wish I had a highly seasoned burned out portfolio. Well, that's what we're talking about here.

Gudmundur, do you want to talk about some of the merits of our short duration?.

Yes. So I guess when you talk about the short reset I mean you’re referring to the fact that the trading in a premium in the marketplace and so the risk to that is the rapid increase in prepayments so you have to go really quicker than you expect.

Over the last of couple years what has surprised people actually got who have current reset ARMs is that the speeds have been very low and therefore the carry has been fairly nice on them.

So one has to think when one looks forward what will cause that to change and why would prepayments increase? Well one of them would be okay, if the Fed is about to raise rates very quickly and then a rational home owner would say well maybe my rate [indiscernible] should lock in a fixed rate as 150 basis points higher.

And I don’t think a lot of people on this call expect fed to raise rates rapidly. So the rational homeowner is in no rush to reach out of his very low mortgage rate that he has on the current reset ARM. So the risk to the market value of that part of the portfolio.

I don't view that as being large, but you know I'm sympathetic to your view that there is potential risk regarding high prepayments but that will predominately come to Fed is raising rates quickly and these people would feel the need to lock in lower funding rates for 30 years or 20 year mortgage..

So I certainly appreciate that and that's a thoughtful response I guess what I'd say is you know my personal concern isn't at all with the prepays I don't think there's a whole lot of risk of pre-pay speeds on those jumping higher rates, it's more of the absolute price and it's you guys are carrying them in the vicinity of 107, I think you guys know historically if you look back at the last tightening cycle and I don't want to say we're heading into a similar tightening cycle but you know a $1 price around 103.5 might be more normal and I guess you know very specifically my question is have you looked across your portfolio, you know your entire assets I'm pretty sure if you had to rank what I buy today at current market prices those -- I'm pretty sure would be dead last on your list.

You know 107ish, and so again I do believe there's pricing risk that doesn't have to do with prepayment risk and it has to do with more distortions created by the Fed being at zero and anyway I mean it's just a more philosophical question if you wouldn't buy them here why sell other things that aren't quite as low on your list of things you'd buy at current prices..

Well the amount of sales was $25 million, so it's not like we're actively selling. It's really making sure we're in compliance that we need to be, not adding interest rate risk. These are very short duration assets, you're right. They're highly valued in the market. But these are pretty burned out in terms of prepay.

So incrementally we’re not growing there. They are going away at their own pace and part of the rationale is 40 Act compliance and our recompliance..

[Operator Instructions]. Our next question comes from Steve DeLaney from JMP Securities. Your line is open..

One quick one, obviously the big change in the balance sheet in third quarter was the 348 million doubling almost doubling of the RPL/NPL whole loan portfolio and Craig thanks for the color I think it was slide 16 you told us how you were financing those currently with warehouse lines.

I'm just curious guys if you look at that portfolio in terms of the scale diversity of RPLs and NPLs, is securitization an option for you going forward in that asset class? And is there any possibility to either boost the spread or increase the leverage through a securitization transaction? Thanks.

Well in interest of boasting the spread I think I can safely say that that would not boast -- a securitization would not boast that because you know active participant in the RPL/NPL security space and we can purchase this 4% yields and slightly higher.

So we look at that as an attractive asset and therefore I think we would have to say that we view it at the same time as an expensive liability. So yes it's certainly a possibility we certainly could do that but I think right now I would say that we're a better buyer of those securities that we are a seller.

As far as the leverage on that portfolio, it's a little more complicated to add leverage on the loans because the lender has to do due diligence on the package so it's typically easy to do when we acquire a package because we're doing that diligence together with the lender.

It's a little more of a process to take loans that we maybe have owned for a while and finance those, so we've said all the time that our leverage there will increase and it has and obviously as you can see we do have additional borrowing capacity there..

And so Craig to think about the leverage obviously, it looks like if we blend it between the two given the 427, it looks like about 1.2 times on 350 million of equity, are we thinking about that right?.

You’re and again -- we have said before we don't target leverage, we don't try to optimize that but if you consider that it's typically 25% haircut maybe a little bit higher. We certainly could -- that leverage number could be a little bit higher. I think what is it 2.5 or so on the non-performing NPLs.

So we don't have that much leverage on that reperforming book, but that could change over time..

We have a question from [indiscernible]..

I’ve two questions, one is on the $0.20 I guess taxable income that you will have to distribute, can you just let us know how quickly you have to distribute that income, just hypothetically assume you've got it in the first quarter.

How long until you have to distribute it? And two if that gives you a cushion on your dividend, did you change your investment strategy a little bit? Investing in securities with higher capital gain? Are you buying at a discount, you got a capital gain versus the net interest income, you know what changed metrics of what analysts look at but actually it's a better total return..

So let me go back to what I said originally. We’re saying there's a differential GAAP and tax of $0.20 as you point out, but we're not telling you what the GAAP income is, so it doesn't necessarily mean there is some excess relative to the dividend. So starting and I know you understand what I'm saying.

But starting with that in terms of one -- when one need to distribute taxable income. It's when you file your taxable return which is September of the following calendar year. So the answer would be we have approximately, 18 - 19 months to distribute all your taxable income.

Does that answer question Alan?.

Yes that answers that question. What about on the strategy that it gives you somewhat of a cushion that you can buy things at a discount, capital gain versus spread income, is it an alternative of that strategy because you have--.

Not really, we would look at the way you look at, we look through investments that gives the best total return. We have always operated that way, so it does not increase our flexibility.

By the way when we purchase an asset at a discount we’re accreting to the appropriate number which generates taxable income and generate GAAP and taxable income so realizing a gain through the income statement we’re in different, we own we as invest for total return and there has not been any tax or dividend problem with that..

Yes I know that I look, you look at it that way, I look at it that way but the analysts always look at it as one time in nature. So, okay, thanks..

And there are no further questions in queue. I'll turn it back over to you..

Great. Well I want to thank everyone for participating today. And we look forward to speaking to you again next quarter. Thanks. Operator you can disconnect..

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