Joseph Lloyd McAdams - Chairman, Chief Executive Officer and President Joseph E. McAdams - Chief Investment Officer, Executive Vice President and Director.

Daniel K. Altscher - FBR Capital Markets & Co., Research Division Steven C. Delaney - JMP Securities LLC, Research Division Michael R. Widner - Keefe, Bruyette, & Woods, Inc., Research Division Jason Arnold - RBC Capital Markets, LLC, Research Division Jason Stewart - Compass Point Research & Trading, LLC, Research Division.

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.

These forward-looking statements are subject to various risks and uncertainties, including those related to changes in interest rates, changes in the market value of our mortgage-backed securities, changes in the yield curve, the availability of mortgage-backed securities for purchase, increase in the prepayment rates on the mortgage loans securing our mortgage-backed securities, our ability to use borrowing to finance our assets, and if available, the terms of any financing, risks associated with investing in mortgage-related assets, changes in business conditions and the general economy, including the consequences of actions by the U.S.

government and other foreign governments to address the global financial crisis, implementation of or changes in government regulations or programs affecting our business, our ability to maintain our qualification as a real estate investment trust under the Internal Revenue Code, our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended, and management's ability to manage our growth.

These and other risks, uncertainties and factors, including those discussed under the heading Risk Factors in our annual report on Form 10-K and 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 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, future events or otherwise.

Except as required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement that may be made today or that reflect any change in our expectations or any change in events, conditions or circumstances based on which any such statements are made. Thank you.

I would now like to introduce Mr. Lloyd McAdams, Chairman and Chief Executive Officer of Anworth. Please go ahead, sir..

Thank you very much. Good morning, or good afternoon, ladies and gentlemen. I'm Lloyd McAdams, and I welcome you to this conference call, in which we will summarize our recent operations, which were presented in our press release yesterday.

Also here with me today is Joe McAdams, our Chief Investment Officer and a Director; Thad Brown, our Chief Financial Officer; and Chuck Siegel, our Senior Vice President of Finance. There's one comment I'd like to make before we begin the substance of today's earnings call.

As you are probably aware, Anworth is the target of a proxy contest commenced by an activist hedge fund, Western International LLC. Western is seeking to unseat 5 of Anworth's incumbent directors at this year's Annual Meeting and to have elected to Anworth's board its 5 director nominees in an effort to obtain control of Anworth's board.

We will not be commenting on this call today on the proxy contest, but will refer you to the company's public filings that are available for free on the SEC's EDGAR website, www.sec.gov, which contain all relevant and material information about the proxy contest and this year's Annual Meeting.

As a reminder, our Annual Meeting will be held on May 22, 2014, at the Loews Hotel in Santa Monica, California at 10:00 a.m. Pacific Time. Thank you. With that said, I'm pleased to report that 2014 is off to a strong start.

As to our earnings, during the first quarter of 2014, our core earnings available to common stockholders was $11.9 million, which is $0.09 per diluted share. Our dividend.

For the quarter, we declared a common stock dividend of $0.14 per share based on yesterday's closing price and we're currently -- stock produces a 10.4% dividend yield for our shareholders.

As outlined in our most recent dividend declaration press release, we declared a dividend relative to the company's current earnings per share, excluding the cost of certain interest rate swaps for which we have discontinued hedge accounting, and we intend to continue to determine our dividend in this manner in the future.

By increasing the dividend to $0.14, shareholders are now receiving a distribution that reflects the full earnings power of the company's current portfolio of assets and related active hedges. During the quarter ended March 31, 2014, the cost of discontinued hedges was approximately $8 million or $0.06 per share.

Unlike last year's significant market volatility and uncertainty, the first quarter of 2014 saw increased stability for the markets in which we invest and borrow, in addition to the prepayment rate of our MBS continuing to decline, resulting in improving net interest margin and earnings due to reduced levels of premium amortization.

With our portfolio on strong footing, we've expanded our share repurchase program and continue to add book value and long-term earning power through these accretive repurchases of our stock. The combination of Anworth's increased earnings and dividend level increases the book value through portfolio appreciation and accretive share repurchases.

And an improving market backdrop have resulted in a strong quarter for your investment in Anworth. Completing the reinvestment of our dividend distribution, Anworth's shares produced a total return of 21% during the quarter ended March 31 and the year-to-date total return as of yesterday's closing price is now above 31%.

In addition, due to strong performance of our portfolio last quarter, we were also able to announce the first steps to opportunistically invest in REIT assets other than Agency MBS. While Agency MBS and Agency ARMs in particular will continue to be the focus of our core portfolio strategy going forward, we expect the changing landscape of the U.S.

mortgage market to present us with opportunities to enhance our earnings on a risk-adjusted basis and provide diversification potential. Now at this stage, I'd like to introduce Joe McAdams, who will discuss the specific portfolio results for the quarter..

Thank you. As Lloyd pointed out, this was a good quarter for Anworth's portfolio. Our book value increased, as our Agency MBS assets outperformed our hedges on a price basis. Our net interest income increased primarily as a result of lower prepayments on our MBS, as well as a relatively benign outlook for prepayment rates going forward.

And we also saw the cost of our repo borrowings fall, as we see increased stability in our funding market from where things stood at the end of last year. Turning to the data that we have disclosed in our earnings release and the composition of our portfolio of assets.

The fair value of our assets totaled $8.6 billion as of March 31, which was a slight increase on the quarter. And our new purchases were focused on hybrid ARMs with between 5 and 7 years until initial reset with some additional purchases of 15-year and 20-year fixed-rate MBS.

In particular, on this table, I'd like to draw your attention to the fact that we now have 20% of our portfolio in adjustable-rate MBS, whose interest rate will be adjusting within 12 months and will continue to do so going forward.

Also, you'll see there was an additional 24% of the portfolio in hybrid ARMs with between 1 and 3 years until their initial interest rate reset. These ARMs and hybrid ARMs currently have an average interest rate of over 2.8%.

So short-term interest rates could rise significantly prior to these bonds' near-term resets, while still allowing for an attractive net interest margins. And when you additionally factor in total expected principal repayments, over 50% of our current portfolio would have limited exposure to interest -- increases in short-term interest rates.

And that's before taking into account our significant interest-rate swap position, which protects a large portion of our borrowings from rising rates over both the near and longer term.

So as has been our long-standing strategy, we continue to have a portfolio that is significantly protected from the effects of an increase in short-term rates in the future. Looking at other portfolio characteristics.

The portfolio's average coupon remains 2.65%, and the average cost is 103.24%, resulting in an unchanged current yield of 2.57% prior to amortization of purchase premiums. Premium amortization expenses declined to just under $10 million on the quarter and the portfolio prepayment rate decreased to 12 CPR from 15 CPR the previous quarter.

While we may see some increase in CPR in the near term due to seasonal factors and the relatively small decrease in mortgage rates year-to-date, our outlook for portfolio prepayments going forward remains positive. Turning to our liabilities.

I'd like to first go into a little more detail regarding the discontinuation of hedge accounting for certain of our interest rate swaps. We elected to discontinue hedge accounting for swaps with a total of $1.7 billion in notional face amount.

These swaps were initiated during 2010 and 2011, when interest rates were significantly higher than they are today, and were intended to hedge the expense of borrowings relative to our purchases of primarily 5-1 hybrids during this period.

As of today, due in large part to the relatively high rate of prepayments on these bonds that they've experienced over the past 3 to 4 years, their remaining principal balance is substantially lower, and the bonds that remain have lessened sensitivity to rises in short-term interest rates than when they were purchased.

For these reasons, we determined that these swaps are no longer effective components of our asset liability management strategy and elected to discontinue hedge accounting for them. These swaps have not been terminated, and if short rates were to rise unexpectedly in the near term, the company would still receive their full economic benefit.

Going forward, all of the cash flows and changes in fair value of these discontinued hedges will be recognized into earnings as an expense during the then current quarter.

And the swaps' negative fair value at the time of their discontinuation as hedges, which stood at approximately negative $40 million at March 31, remains on the balance sheet under Other Comprehensive Income and will be amortized into interest expense over the remaining term of the swaps.

All of our other swaps will continue to be accounted for as in prior periods. With that aside, I'd like to highlight that the average interest rate on repo borrowings decreased to 35 basis points at March 31. As I alluded to earlier, we've seen an improvement in the repo market, both in terms of rates and liquidity for our borrowings.

When taking into account our interest-rate swap hedges, the average interest rate on our liabilities now stands at 1.05% at March 31, with an average adjusted maturity of 892 days or approximately 2.5 years.

Taking into account all swaps, including those for which hedge accounting has been discontinued, the average adjusted rate and maturity stand at 1.48% and approximately 2.75 years.

Given that we estimate our asset portfolio's duration at 2.75 years, as of March 31, you can see that we have little to no net interest gap between our assets and liabilities. Our total position on interest rate swaps has a notional face amount of approximately $5.4 billion, which is 72% of our total balance of repo borrowings.

As you can see from the table that breaks down the various characteristics of our interest rate swaps, we have over $1 billion notional amount of relatively higher-cost swaps maturing over the next 2 years, while the swaps that continue to be accounted for as hedges are our longer-term swaps, with an average remaining term of almost 5 years and an average fixed rate that we pay of 1.64%.

Our leverage multiple remains at 8.1x our long-term capital, which is unchanged from year end. We remain comfortable with this level of leverage, particularly in light of our portfolio of predominantly adjustable-rate MBS, our very narrow asset liability gap and the generally improving market environment for both our assets and our borrowings.

The average net interest rate spread improved 5 basis points to 62 basis points in total for the quarter. I would point out that the average cost of funds of 1.48% includes the cost of all swaps, whether they are currently accounted for as hedges or not.

So given that the average interest rate on our liabilities adjusted only for our interest rate hedges was 43 basis points lower than that adjusted for all hedges, the 1.05% versus 1.48% at March 31, it could be implied that the net interest rate spread would be approximately 1%, if only the current hedges were taken into account.

Lastly, I'd like to highlight that the book value per share stood at $6.10 at March 31, which increased from $5.98 at December 31. Based on this value, yesterday's closing price of $5.40 reflects a price-to-book ratio of 89%. The increase in book value was primarily driven by the outperformance of our assets relative to their hedged liabilities.

But book value was also increased by our continued active share repurchase program. Since the company has been repurchasing shares at a discount to book value, these repurchases are accretive, and our buyback program added approximately $0.04 to book value during the quarter.

With that, I'd like to turn the call back to Lloyd for further discussion of the company's share repurchase program and other developments..

Thank you very much. On December 13, 2003, from a historical perspective, our board announced that they had authorized the company to acquire an additional 5 million shares of our common stock through our share repurchase program.

Having completed the repurchase of the bulk of these shares during the first quarter of 2014, our board again announced on March 14, 2014, that it had authorized the repurchase of an additional 10 million shares of our common stock.

Since our common stock has been trading below its book value, the result of these share repurchase programs, as expected, has been to increase the book value per share and the income per share, as Joe just mentioned.

During the quarter ended March 31, we repurchased an aggregate of 5.6 million shares of our common stock at a weighted average price of $5.01 per share during our share repurchase program. Since these shares were acquired at a discount to book value, these repurchases created $5.94 [ph] million of additional value for shareholders.

This amount is another $0.04 per share in addition to our earnings, which Joe just mentioned. During the current quarter, through April 28, we've repurchased an aggregate of 4.7 million shares at a weighted average price of $5.24. Next, I would like to talk about what we see as some of the opportunities over the next several years and decade.

We remain optimistic that our investments in high-quality mortgages will provide attractive levels of income during this period. We also believe that owning adjustable-rate mortgages will provide more stable income and is the best way to provide these attractive levels of income. With that said, I'm also confident that the U.S.

residential mortgage market will be changing and will ultimately look very different from what we have seen in the recent years. During this recent period, the United States government has guaranteed nearly all of the securitized residential mortgages.

And the United States government, through the Federal Reserve, has bought a very large portion of these very government-guaranteed mortgages.

While no one knows with certainty how the mortgage market will evolve, we're taking the necessary steps to ensure that Anworth is prepared if the government begins to shrink its large footprint in this market, which should result encouraging private capital from many sources including the mortgage REITs.

While we believe that there will still be attractive opportunities to invest in high-quality low-risk adjustable-rate MBS, we're also confident that the expanded role of the private sector will present new and very attractive opportunities for Anworth as the mortgage landscape changes.

We believe that each of the components of the residential mortgage creation and management process will provide opportunities to earn attractive returns.

In that spirit, the company's Board of Directors has created a strategic review committee to independently evaluate and identify our REIT-eligible qualified opportunities that would best achieve the board's broad low-risk objective, while also providing our shareholders with attractive income potential.

In addition, as previously announced, the board has retained Crédit Suisse to assist it and the strategic review committee in this ongoing process. The first requalified assets in which we have invested are single-family residential properties. Our initial investment is quite small, and we intend to be very deliberate in our effort.

We have under contract approximately 58 residential properties, whose cost is about $8 million. We are expecting to receive attractive returns on equity from these properties, which we purchased individually at what we believe are attractive prices.

Other areas of interest to the strategic review committee are mortgage securities not guaranteed by the government, acquired mortgages directly to be securitized by us, and mortgage origination and other types of specialized real estate assets.

We are very optimistic that these and other investment opportunities will enhance our core investment strategy of investing in predominantly adjustable-rate agency MBS, funded with hedge liabilities.

We believe that the steps we're taking will make Anworth better positioned to benefit from opportunities arising from a changing residential mortgage environment likely to be mandated when the federal government establishes new regulations relative to the future roles of Fannie Mae and Freddie Mac. In summary, we continue to execute our strategy.

And during the first quarter, we took significant steps to generate long-term value and increase shareholder returns. We increased Anworth's ongoing share repurchase program, increased the quarterly dividend and we announced an expanded investment strategy to position Anworth for future growth.

We have also formed our independent strategic review committee to assist with the execution of our investment strategy and explore long-term wealth enhancement opportunities for the company. Moving forward, we remain committed to creating long-term value and generating significant returns for our shareholders.

With that, we can turn to the question-and-answer session. I would like to remind everyone, though, as I discussed earlier, today's call is about our quarterly earnings and operations. We would appreciate it if you would keep your questions focused on our results, and we thank you for your cooperation in advance..

[Operator Instructions] Our first question is from Dan Altscher with FBR..

I was wondering if we could talk a little about the single-family rental opportunity. 58 homes is not a huge portfolio at this point.

But can you maybe give us a sense of how big that portfolio could actually get? And why moved into single-family today, as opposed to some of the other asset classes that you've been looking at as part of the strategic review?.

The investment in any type of residential properties will remain at a small level until the strategic review committee completes an analysis with Crédit Suisse. So I don't know what Crédit Suisse and the strategic review committee are going to determine.

But we did reach the conclusion that it was appropriate for us to, in terms of building infrastructure and identifying parties and operating smoothly, that a very small, almost insignificant investment would be made to help us benefit in that regard. As to other areas, as we know, the securitization market has really not developed.

We will watch carefully to see how it develops. We would like to participate in it when it develops. But the timing is not right for that area.

Other areas of participating in investments that have something to do with the collapse of housing prices in 2007, '08 and '09, they seem to be relatively mature, but we will pay attention and watch carefully to see if any opportunities develop there.

As it relates to more operational activities in the housing market, I think it would be premature to actually start investing in those types of areas when it is not yet known what is the future of the largest issuer and guarantor of mortgages in the United States is.

Specifically, we watch very carefully what the Congress is proposing, and we are going to assume that sometime in 2014, they'll actually make up their mind about something, and then we will have a better idea. And while all this is going on, the strategic review committee with Crédit Suisse will be laying the groundwork for us..

Great.

And so I'm wondering how do you weigh the opportunity to repurchase stock now that the stock has clearly moved up higher? Obviously, we saw -- you repurchased a lot clearly still in April, how do you view that trade-off going forward as well versus some of the other strategic options that could be on your plate right now as well?.

Well, this has 2 parts. The one part is the stock price itself. The other part is the investment opportunities that the investment team has and presents to the company. And from the purchasing stock perspective, if you can purchase shares at a significant discount to book, that is clearly accretive to all remaining stockholders.

At some time, it may be so high that you don't think that the couple of cents per share is worth it because there's better opportunities to produce higher rates of return buying mortgage-backed securities. And that is the method that we've thought about and used in the past..

Okay. And just a final quick question. In the press release where you give the swaps detail, I'm just curious, I'm looking through like the less than 12 months bucket hasn't really changed in size, yet we're 3 months later, and the remaining term is actually longer.

And so did some of those swaps end up getting rolled? And it's kind of like the same idea with the 1- to 2-year buckets. It's actually bigger and the maturity remaining term is the same, yet we're 3 months down the road.

Haven't those been rolled also?.

Daniel, I think it's just a coincidence that we have the same notional amount. It may be that the number of -- the exact balance that rolled out of the bucket rolled into it or the exact balance that mature rolled into it. But -- because otherwise, you're right. It doesn't seem entirely consistent..

Okay.

So -- but there has been rolling in at least the less-than-12-months bucket? Like that -- some of that -- some portion of that has already rolled forward?.

Right. That's why the average fixed rate is lower, because the higher cost swap has matured. It just coincidentally swaps with -- an equal balance have rolled move into that bucket..

Our next question is from Steve Delaney with JMP Securities..

My question would be on the CPR that obviously benefited the net interest spread by 5 basis points and helped earnings move up $0.02.

Could you give us an update, Joe, on what the CPR printed for the month of April? And then maybe looking forward to second quarter to help us with modeling, what type of range of expected CPR might we see in the second quarter?.

Sure. The average CPR for the first quarter was 12. The first print we have seen so far that would be a component of our second quarter prepayment rate was the April release, which was a 13 CPR. We -- there is typically a lag of a few months, and we did see about 15 basis points or so of a decrease in mortgage rates during the first quarter.

So I don't expect the prepayment rate to return back to where it was in the fourth quarter in the coming quarter, but we -- and there's also seasonal factors. The first -- the winter is usually the lowest month seasonally as well. So I think we would expect to see some increase in CPR, some increase in premium amortization.

But again, relative to our longer-term expectations, we think it's a pretty positive environment..

Okay, great. So if we were sort of in the 13, 14, sounds like that would be a reasonable range for 2Q..

Sure..

Okay. Great. And can you comment at all -- you had a nice increase, I think 2%, in your book value in the first quarter, ending at $6.10.

Can you comment at all on the trend in book value as we've moved into the second quarter?.

Sure. We have -- the increase in book value was at least -- there was a significant component of it that was driven by our assets appreciating by more than the value of our liabilities, and our swaps have decreased. And that's through outperformance of our mortgages, as they're very well hedged.

We've seen continued -- some continued outperformance of the sorts of agency securities we invest in this quarter. I would estimate the net change in mark-to-market would be approximately $10 million so far this quarter..

Okay. Great. That's helpful. And any estimate for -- you continue to be very aggressive in the buyback, I think 4.8 million shares in the month of April.

Do you have an estimate for the accretion per share related to that 4.8 million shares repurchased in April?.

We haven't done the math. But again, the level of accretion would simply be the difference between -- for any period, would be the difference between the average purchase price and the prevailing book value..

Yes. And we can certainly calculate that. I guess one final thing, and this is a bigger picture. It's tied into your diversification and the strategic review committee.

I was interested in the wording in the March 21 press release, where the committee, the new committee, the immediate role was stated to be to identify individuals and organizations to participate in the new -- and managing the new diversification program.

I'm wondering if what that is really saying is that you are trying to look for some sub-advisers who may assist in certain specialized asset classes. I don't know if you're familiar with it, but there's a mortgage REIT -- mortgage trust that very much relies on a third-party sub-advisor.

So any color you could give to help us understand what this immediate role for the committee is really all about..

Steve, Lloyd. The Board of Directors and the strategic review committee specifically -- this is -- they are very active in this area. And this is why they retained Crédit Suisse. Clearly, they will evaluate all of the ways. First, once they identify what the opportunities are, they will then evaluate all the ways of -- I'll use the term, staffing them.

And there are many, many different ways this can happen. I think they're going to rely heavily on Crédit Suisse for advice, as to how this should be done in the most appropriate and best way. There is -- it could take many, many different forms. All I know is, is they take their responsibility very seriously.

And I know that Crédit Suisse is already talking with them about these matters. Anytime they ask us for opinions and advice, we of course give it. But you should recognize that the board and the strategic review committee and Crédit Suisse are doing the bulk of the analysis..

Understood. That's helpful, Lloyd. And it sounds like the process is evolving.

And as we sit today, I think what I'm hearing is, while single-family rental was a first step, there is no down-on-paper master plan for the entire diversification, that, if I understand what you're saying, that, that is in the process of evolving and will probably come out in somewhat piecemeal fashion, as we move forward?.

That is correct. Just to keep in perspective, there's the portfolio management function, which is responsible for all of these areas of specialized expertise. But then again, we're a public company and we have an entire financial infrastructure here in California, in Santa Monica, where all of the reporting -- and that is centralized.

So it's important that, that function also be able to handle multiple portfolio activities. So that's what they're all working on..

Our next question is from Mike Widner with KBW..

Nice job on the share repurchases. Certainly, I'd like to see more of that. I guess -- so I have a couple of questions.

I guess the first one, where do you guys see on the agency portfolio incremental spreads on investments that for capital you're putting to work today?.

When we look at the purchases we made during the first quarter, again, which consisted primarily of 7/1, 5/1 hybrid ARMs, with some additional fixed-rate purchases, we saw a spread, again, on a hedged basis, consistent with how we've managed the portfolio, of between 105 and 110 basis points.

Obviously, given that the yield on those assets is 2.5%, that involved some fairly significant additional swaps and other costs to arrive at that net spread..

Okay. Great. And so, I mean, if I take a really simplistic approach and put 8x leverage on that then that takes me somewhere in the vicinity of 9% to 10% ROEs.

Does that kind of sound ballpark-ish?.

Right. I mean, we are -- as rates -- there's sort of a -- there's a -- you're right. There's the leverage times the spread. There's the yield you earn on your equity. There's expenses associated with the company. So yes, you're in that neighborhood. You're correct..

Right. So I mean, I guess -- well, then, so let me contrast that with single-family rentals, which you guys are obviously just getting into. But as we look across the existing players there, I mean it seems to be a lower ROE space. Scale is a challenge for the guys that have 5,000, 10,000 houses already.

And I guess I'm just -- I'm wondering what your view of the economics are, in terms of ROE potential and how it compares. And I guess I'm just wondering how you get to a risk-adjusted return expectation there that makes it an attractive endeavor at this point..

This is Lloyd. Again, I'll focus it. We see this as a very small part of what we're doing. And it performs various roles in helping us prepare for all of these other areas that are going forward. And they may not even be part of the portfolio management process.

The -- I can only speak about the minute number of properties that have been purchased and say, "We have bought them at a cap rate of more than 8%." We buy them one at a time. We're not into the bulk business. And the cap rate is 8% after all expenses.

That's certainly not 9% to 10%, but at the same time, there is some expectation that we believe we have purchased these properties at a discount to what most people would call the market or appraised value. We purchase them through foreclosure auctions. So we're comfortable with -- that they will not be a drag on earnings..

Right. And the other issue is, again, the cap rate is the cash rate. I mean, any additional appreciation in the underlying real estate asset would increase the overall return to the company..

Yes. We can't speculate what that is..

I mean, yes, fair enough. I guess, as I put this together along with kind of what you're talking about, getting into other areas, adding infrastructure, I guess, I'm just having some challenges understanding getting to scale in a variety of businesses that are frankly -- I understand what you're saying, they're related.

But it just strikes me that the expertise involved and the management involved in sort of buying agency MBS and managing that portfolio is probably quite different than that, that needs to go out and find attractive homes in good neighborhoods that you can actually rent.

And, I mean, not only is, I think, there are some expertise required in picking the houses, but also in operationally managing the houses. And if you're going to outsource it, outsourcing that.

So I guess, it just strikes me that there's a scale issue that -- we know scale economies exist in mortgage REITs, but it seems like an even larger scale that is required in some of these other businesses, origination, securitization, et cetera.

And I guess I'm just sort of struggling with how -- I mean, quite honestly, you've already got an ROE that's below peer averages, and the more you diversify, it strikes me that the more you add to your overhead structure and don't help that issue.

So I guess I'm just sort of -- the strategic review committee, it just strikes me that I don't understand how they're coming up with conclusions that you need to be in more businesses rather than focusing on one. I guess that's the simple question, maybe..

I believe there's going to be a dramatic change in the U.S. mortgage market. I don't know what's going to happen. I think that being in one business is -- clearly, our portfolio will be dominated by the adjustable-rate business.

I do not know whether it will be dominated by the adjustable-rate business 10 years from now, that are issued by Fannie and Freddie. I don't know the answer to that question.

But from my perspective, setting up the infrastructure inside this organization to deal on the financial reporting basis, with other types of assets, is an important thing to do, to give us the opportunity to participate in things that may happen several years from now.

You're focusing greatly on this, and I can understand where you're coming from, but you're -- I think maybe you're making an assumption, this is going to be a very large part of what we do, and that is not the case.

So then the question is -- but I do think it's important that we be positioned to participate in the opportunities that will probably come forward within the next 2 years. I focus almost exclusively on our agency adjustable-rate portfolio.

We think that is the area where, in the next 5 years, will be amongst the best performing of the strategies available, given what I think most people think will happen over the next 5 years. So I'll leave it at that..

Well, I appreciate that. And -- I mean, maybe it's to some degree gets resolved in the way Steve, I think -- Delaney, suggested. I mean, you can certainly branch out into other areas and have management outsource, and that can be a reasonably efficient cost structure.

I guess at this point, it just -- as an analyst, it just seems like it's all very unknown. And what you're telling us is there's going to be a lot of change, but you can't tell us what that's really going to look like.

And I guess that makes it difficult to render an investment opinion, or at least a very strong opinion either way on what the future looks like. Let me ask you one final question. This is in part related to the hedges that are no longer deemed to be effective from a hedge accounting standpoint.

And it ties between that and actually the overall portfolio. If I go back to what Joe just said, I mean, ROEs on incremental investments today stand around somewhere in the vicinity of 10%, let's just say. Your results this quarter amount to about a 5.5% ROE.

And so there's a naive question, forgive me for being naive, but with all the complexities of dealing with the noneffective hedges and so on and so forth, I mean, can't we just hit the reset button? Or is there an option to hit the reset button, and say, "You know what? If we liquidated everything today, and just reinvested at that 10% ROE, do you not end up at a 10% portfolio ROE, as opposed to the 5.5% that you're currently generating?" And I guess that's the piece that -- I'm still struggling with why not liquidate the hedges if you don't deem them effective? And why pay a dividend rate that's commensurate with an earnings level that you say you could get to, but you're not actually operating at?.

I guess there's 2 questions there. But the first is from a GAAP standpoint, if you have a hedge and you discontinue that hedge, whatever the -- and whether it's terminated or not, that loss, whether it's unrealized or realized, is amortized into expense over the remaining life of the hedged item. And that's not a choice we make.

That's what would happen. So regardless of whether these discontinued hedges, these legacy swaps that, again, have a little over 1 year to maturity on average, were terminated or remained in our balance sheet, the GAAP accounting for them would be the same at this point.

The difference would be, are we amortizing a unrealized loss or a realized loss into earnings?.

I mean, sorry for interrupting, though, but I understand that part. But, I mean, that's GAAP accounting as opposed to economic reality. And the economic reality is, if you -- you're still paying the net cost of those hedges.

And so -- again, with respect to the dividend policy where you're saying we're sort of going to overlook those from a dividend standpoint, the fact is that, accounting aside, you do have the real cost of those and you actually do get a benefit as those were negative, if there was a reprice.

So I just -- I'm struggling with the concept of sort of ignoring them for dividend purposes while they are still there for economic purposes..

I understand what you're saying. The odds are, given how short they are, and given how low expectations are of short-term rates rising over the next year, that there's not a lot of economic value from those swaps that will be achieved.

And the negative fair value on those swaps is basically the net present value of the fixed-rate payments that we're going to be making.

That's the most likely outcome by far, is over time, we make the remaining payments on these swaps that would be basically equivalent to where we -- the loss we could have taken if we closed them out today, or last month, or last quarter. And the net fair value returns to 0 and the book value would increase by an equivalent amount.

So I mean, that's -- if your question is why didn't we just close them out, our belief, from a portfolio management standpoint was, given how low future short-term rate expectations were, it seemed -- there was this very little additional potential price downside, other than rates staying at close to 0 forever.

But as unlikely as that might be, I think there are still some chances for some unexpected price appreciation. So I think from that standpoint that's why we've kept them.

If you're saying, well, that's -- what's the economic reality of the portfolio and why have we made this dividend distribution change? I would point out that we have a significant negative mark to market on our book value.

So the GAAP earnings, the economic reality of having those swaps, is that we expect book value to increase, and the way it's going to increase is by having a lower level of GAAP earnings or having a lower level of dividend distribution while we wait for these swaps to mature.

So in a situation where the economic yield, right, the value of our portfolio, the yield of our portfolio at its current market price, in our minds is equivalent to this $0.14 dividend distribution level. The $0.09 dividend distribution level is -- takes into account the fact that from a GAAP standpoint, this $40 million loss needs to be recaptured.

So while I agree completely that there's a certain equivalence to all this, we think that the way we have chosen to do it now, to have a dividend level that is reflective of the current economic -- the earnings of the portfolio at market value, including those negative losses on the swaps, which we think is reflective of the current earning power.

And over the next year or so, as these swaps mature, is where the GAAP earnings of the company is headed anyway, in a way that'll be book value neutral, is going to be more valuable to the shareholders than the opposite..

Well, I appreciate the comments and the color.

And I mean, and there's portions of that, that I agree with, and as long as I think the part that's most important is that it seems like where you expect the earnings to gravitate toward are sort of more like that 10% level as opposed -- which would be the $0.14-ish level as opposed to the $0.09 level that we're currently seeing.

I mean, that certainly stands to reason. It's just the path of getting there, it makes it a little more opaque, and frankly, a little confusing, but that's okay. But as always, I appreciate the comments and the color, guys..

Okay..

Our next question is from Jason Arnold with RBC Capital Markets..

Just wanted to say I appreciate your long-term evaluation of the business opportunities for down the road. I think that's a smart tack, to not leave the eggs in one basket. So just a couple of quick questions.

All of my questions have been answered, but can you give us the geographic balance of the small number of single-family homes that you guys have invested in?.

Yes, they're in the state of Florida..

Okay.

And then, would you guys see that being kind of a focal point for the business? I mean, I know it's early stages here, but would you see that being kind of somewhat similar to what some of the other single-family rental strategies are doing, in that they're kind of across the country in select markets or are relatively concentrated?.

If I'm asked my opinion by the board, you want to invest in areas where there's net growth in the country, net in-migration. And in-migration is historically been the best way to invest in real estate rental. So that would be my recommendation. But I can't tell you that, that's what they're going to do.

Clearly, Florida is an in-migration state, without question..

Okay. Makes sense. And then I guess, just one other quick one. Would you -- I mean, I know you said a 8% cap rate was what you were looking at.

Would you guys consider utilizing leverage on this strategy, kind of similar again to some of what the other guys are doing out there?.

Obviously, leverage is always available. But I don't think we'd be using leverage until we get the full magnitude of what the board and Crédit Suisse determine as the best way to execute the strategy..

Our next question is from Jason Stewart with Compass Point..

Just first on the strategic review committee.

Do you have any sense for timing on when you'll get a response?.

They'll be meeting a couple of times a month, every month, for the next 5 or so months..

Okay. And then on the share repurchases, what were the primary factors that drove the decision to accelerate that? Because I mean it looks like -- the stock has obviously had some pretty decent performance this year, and the share repurchase activity continues to grow..

As has been the case in the past, I believe -- I don't know if we are now at our largest share repurchase, but previously our largest share repurchase was -- in 2005, we bought back 7% of the company. What triggered that is a rising interest rate environment.

This is the -- you may recall, this is when Greenspan raised rates from 1% to 5% in a quarter. I guess it was -- he did it 25 1/4 raises. Took the stock down well below book value. So that was the trigger. The same thing happened in the third quarter of 2013. Rates started moving up, 5-year rates -- swap rates, moved up rather dramatically.

And that triggered our starting to repurchase shares of stock. And we're now -- the stock has recovered because we bought a lot of stock..

Okay.

And would you consider -- I mean, is it a fair way for us to look at it to say if the return to book value is equivalent to the ROE, levered ROE on the MBS strategy, that, that's a point where you would stop buying stock?.

That's an important point. It's always sort of a complicated -- that's -- I think that's a rubric that sort of oversimplifies the decision to a certain degree because share repurchases are still accretive. And they make their -- they have the potential for new investments on a per share basis to have an even higher ROE.

So I think there are -- I don't think it's as direct a comparison. Clearly, when you have a situation where the discount to book is greater than your ROE, I think that's a situation where we're clearly going to be -- have predisposed to moving forward with our share repurchase.

I think there are opportunities where repurchasing shares at a discount may be slightly less than the ROE can still be a net positive..

At this time, we'll turn the call back to Mr. Lloyd McAdams for any closing remarks. Please go ahead, sir..

Well, thank you very much for your attendance in today's call. And most specifically, we appreciate your interest in Anworth. If you'd like to obtain more information about the company, please visit our website at www.anworth.com. And if anything else comes up, don't hesitate to give us a call. So thanks for your participation.

And we look forward to meeting with you again next quarter. All the best..

The conference has now concluded. Thank you for attending today's presentation. And please disconnect your lines..