Joseph Lloyd McAdams - Chairman, Chief Executive Officer and President Joseph E. McAdams - Chief Investment Officer, Executive Vice President and Director Brett Roth - Senior Vice President and Portfolio Manager.

Richard A. Eckert - MLV & Co LLC, Research Division.

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; increases in the prepayment rates on the mortgage loans securing our mortgage-backed securities; our ability to use borrowings 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 affecting our business; our ability to maintain our qualification as a real estate investment trust for federal income tax purposes; our ability to maintain an exemption from the Investment Company Act of 1940 as amended; risks associated with our home rental business; and the managers' 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 is required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements that may be made today or that reflect any change in our expectations or 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 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 earnings press release that was issued yesterday afternoon.

Also with me here today are Joe McAdams, our Chief Investment Officer and Brett Roth and Chuck Siegel. But before our comments to details about our current portfolio and outlook, we'd like to briefly discuss my views that have evolved over the years about the valuation of mortgage REIT stocks in general and how it relates to us.

My efforts have been to loosely use statistical techniques to identify the factors which seem to have the most influence on mortgage REIT valuations. The bottom line is that based on these observations, the most significant factor seems to be dividend yield. It even appears to be more significant than GAAP or core earnings.

Others projected the stability of core income as a historically important factor, which improve valuations in more volatile interest rate environments, but recently appears to be considerably less significant, probably because it is hard to measure and with short-term interest rates being so low during the past 7 years.

Higher market capitalizations of mortgage REITs also indicates a higher valuation, which I presume means that large investors are willing to accept slightly lesser yield for more liquidity.

As we indicated in early 2014, the bottom line for us is to allocate our assets with a focus on increasing dividends and income while being prepared to provide above-average stability of our interest rate spread between the assets and our liabilities in changeable interest rate environments.

I believe that our current portfolio and our ongoing additions to it are a good start to achieving this goal over the next 3 to 5 years, based on the relatively low interest rate sensitivity of our agency mortgage-backed securities, which as we reported in our press lease, represent 97% of our assets.

Of that 97%, approximately 1 quarter or 24% of total assets were invested in fully indexed ARM securities, which have annual coupon resets at or about 1.3 -- 1 3/4% above LIBOR resetting each and every year until their final maturity.

The second category, which we described was that 50% of our assets are hybrid ARMs, whose interest rates will begin to reset as do the fully indexed ARMs, on average, in about 3 years, during which time, we have hedges to provide a more stable financing cost.

And lastly, number three, 26% or approximately 1/4 of our assets invested in agency securities are in 15-year fixed rates, which we think are sufficiently hedged and provide what we believe is an attractive yield.

And you will have noted that 2.5% of our assets are invested in non-agency mortgage-backed securities, which, as we reported in our press release, have a higher yield. It's just a haircut on our non-agency securities. It's considerably greater than the haircuts on our agency securities.

I think it will be reasonable to assume that 7-or-so percent of our stockholder equity has been allocated to non-agency, mortgage-backed securities. So in summary, I believe that our management of the agency portfolio and the investments in non-agency securities are and will be providing tangible positive results for us.

With that, I would like to turn the meeting over to Joe McAdams, who will discuss the detail of our portfolio and outlook. Thanks..

Thank you. For the fourth quarter, Anworth's portfolio generated $15.5 million or $0.14 per share of core earnings. This was up slightly from $0.13 the prior quarter. Our GAAP net income reflected a $0.14 loss on the quarter.

This loss resulted from declines in the fair value of the company's interest rate swap and eurodollar futures positions being reflected in quarterly income in accordance with GAAP, while the increases in fair value of most of the company's mortgage-backed securities are not.

The company's comprehensive income for the quarter, which includes all the changes in fair value, realized and unrealized of the company's portfolio of assets and related derivative hedges, was $15.8 million for the quarter or $0.14 per share. Bringing the total comprehensive income for 2014 to a total of $99.9 million or $0.79 per share.

Turning to the data disclosed in our earnings release regarding the composition of our asset portfolio, you'll see that on the quarter, our assets decreased as a result of our smaller equity base due to share repurchase activity during the quarter.

Of particular note, as Lloyd mentioned, is the addition of approximately $200 million of non-agency MBS during the quarter.

While these securities represent 2.5% of the portfolio, as Lloyd pointed out, there's an allocation -- this resulted in a allocation of approximately 8% of the company's equity and other longer-term capital due to the lower leverage that we utilized in this investment strategy.

And we expect this allocation to increase going forward as long as the current invest opportunities persist.

In the agency MBS portfolio, the majority of the assets continue to be adjustable-rate MBS with a percentage of ARMs resetting within 12 months and continuing to do so going forward, now standing at 24% with an additional 12% of the portfolio and hybrid ARMs with between 1 and 2 years until their initial rate reset.

Fixed rates represent a total of 26% of our portfolio with the vast majority being 15-year maturity bonds, which we expect to perform better than traditional 30-year fixed-rate MBS in a period of volatile longer-term interest rates including the potential for a steepening yield curve.

Looking at other agency MBS portfolio characteristics, the average coupon declined slightly to 2.65%. The average cost now stands at 103.35%. Premium amortization expense increased to $12.3 million on the quarter despite having a smaller agency MBS portfolio.

Although the actual portfolio prepayment rate decreased from 18 CPR to 15 CPR during the quarter, prepayments on our portfolio that were reported subsequent to year end and not included in these fourth quarter statistics declined further still with an annualized prepayment rate of 12 CPR on average for the portfolio for the most recent prepayment report.

With that said, the decline in mortgage rates during the fourth quarter, which continued into January, should result in some increases in refinancing activity and prepayments later this year.

However, the recent increase in mortgage rates we've seen this month, in February, should mitigate the magnitude and duration of those increased prepayments on the portfolio. Turning to the data on our non-agency MBS, I'd like to turn the call over to Brett Roth to discuss our recent asset acquisitions..

Thank you. Excuse me. As you could see and as we've discussed over the fourth quarter, we were very active in acquiring and growing the portfolio of non-agency and our exposure in the mortgage -- residential mortgage credit space, having acquired a portfolio of approximately $199.7 million.

On the schedule in the press release, you can see how we have set -- invested across the sectors of loan types, supporting the securities that we've purchased. So we've been pretty -- I think, we've been pretty diversified in the types of assets that we have acquired.

A couple of things, I want to point out of note, when you look at the prime sector of the assets we've acquired, you see the 6.39% yield there and the 76.83 dollar (sic) [ 76.83% ] price. And I just want to point out those assets we were purchasing would be assets that were in the senior portion of the support -- of the overall security.

That's why we were able to acquire those assets at those higher yields relative to, for example, some older senior tranches in the Alt-A world. The other thing I want to point out is if you'll see in both the subprime and the in the nonperforming sector, where we have higher dollar prices for the acquisition costs of those assets.

In those sectors, we chose to purchase newly securitized assets, where we benefit in the -- in support and structure of the bonds in hope -- in order to help enhance and protect the performance of the bonds that we have purchased. Just summarizing, overall, you see the weighted average projected yield on the portfolio of 5.75%.

And we feel we're on a risk-adjusted basis, that we are being paid for, well, the assets we are acquiring..

Thanks, Brett. If we turn the page and the reports to our company's portfolio financing, total repo borrowings now stand at $6.4 billion with an average repo rate of 37 basis points. This rate increased 5 basis points from the prior quarter end.

That was driven primarily by higher agency repo rates and also, from the addition of a relatively small balance of non-agency repo. As an aside, even with the higher repo cost for that non-agency MBS, the loss adjusted yield of 5.75% that Brett referenced for our non-agency portfolio results in a significantly higher spread than our agency portfolio.

And these investments are accretive to the portfolio's earning potential, even at the lower level of leverage that we've discussed. When taking into account our interest rate swaps, our average interest rate paid now stands at approximately 1.06%, with an average adjusted maturity of approximately 2.1 years.

Given that we estimate our asset portfolio's duration at approximately 2.25 years as of December 31, you can see that we continue to have a narrow duration GAAP between our assets and liabilities, which was reflected in the book value stability of our portfolio on the quarter. Our leverage multiple stands at 7.8x our long-term capital.

If we take into account the implied financing embedded in our TBA positions, our effective leverage is 8.6x long-term capital, which is a slight increase from the prior quarter.

The total interest rate swap position at year-end has a notional balance of $3.3 billion, relative to total repo borrowings of $6.4 billion and approximately $700 million of implicit short-term financing via our TBA positions. Additionally, the short eurodollar positions had a notional amount of $5.5 billion.

Remember that these contracts each reflect a 90-day borrowing, so the total position is the equivalent to approximately $1.4 billion of annual protection from rising short-term interest rates.

So combining these hedges with the fact that a significant portion of the securities, which are financed via repo, are ARMs with less than 1 year to their interest rate reset, we believe our portfolio continues to have significant protection from the effect of rising short-term rates in the near term.

This quarter, we present the portfolio's effective net interest spread and we've done this in a manner in which is consistent with the way core earnings is reported.

A full reconciliation of this calculation is presented in the back of the earnings release, but average asset yields for the quarter was 2.14%, which includes 24 basis points from TBA roll income.

The effective cost of funds, which includes all net payments on swaps and also excludes noncash amortization expense relative to the designated hedges, was 1.07% for the quarter, resulting in an average effective net interest spread for the quarter of 1.07%.

This spread is approximately 10 basis points higher than an equivalent measure would have been for the third quarter with the increase driven primarily by an increase in TBA roll income. The company's quarterly $0.14 dividend was maintained in the fourth quarter, and the book value per share increase net of this dividend to $6.47.

This brought the return on equity to common shareholders to a total of 18.2% for the year.

This strong return for 2014 reflects not only the attractive income and book value increases produced by the company's portfolio of predominantly adjusted rate mortgage-backed securities, but also the significant economic benefit provided to the shareholders from the company's accretive share repurchases.

And with that thought, I would like to turn the call back over to Lloyd..

Thanks, Joe. During the fourth quarter, we continue to repurchase shares. We note that the average cost was $5.15. Book value started off with $6.34 and ended up at $6.47. We do have -- we've provided a calculation that there was $9 million of benefit. We would like to point out to everyone that, clearly, that's based on the beginning, the book value.

Toward the end, clearly, the book value was higher and the benefit would be greater, but that is a very complex and non-GAAP calculation. So $9.3 is a rough estimate of what the gain was to shareholders. Truly when the book value is up at the end of the quarter, it would have been greater than that amount, which was the case this year.

We continue to actively participate in the market most days, repurchasing our shares when we can. And with that, we have no particular reason to change. In the future, we see the benefit to stockholders being great.

We have more than enough paydown from our agency securities portfolio to provide for this activity plus the funding of the -- of what presently are higher-yielding assets in the non-agency space. So with that, I would like to turn the meeting back to Gary, our moderator, for our question-and-answer session..

[Operator Instructions] The first question comes from Richard Eckert with MLV and Company..

One quick question and one longer question.

The quick question is when did you de-designate your hedges -- or de-designate the swaps of those hedges?.

Let's see, there was a couple -- we were -- it didn't all happen at once. A portion were de-designated earlier in 2014. And I believe the balance were de-designated in the third quarter of 2014. All of them had been de-designated prior to the fourth quarter..

Okay. Now the somewhat longer question.

Do have some kind of targeted allocation between agency and non-agency? And any kind of timetable for getting there?.

Well, I think it will evolve as we move forward. We see opportunities in the non-agency space and in the mortgage credit space in general as being attractive in the current environment.

Not only on an income basis relative to our agency portfolio, but also, thinking about opportunities that arise going forward with the evolution of the mortgage market. We did, during the fourth quarter, increase our allocation to approximately 8% of our capital through non-agency MBS. I think that allocation will continue to increase.

And I think, we're also, as we discussed last quarter and in some of our prior calls, also be looking at ways to gain exposure to the mortgage credit space, not simply through -- not only through non-agency MBS finance through repo but also looking at other avenues such as deacquisition of loans or securitizations going forward.

So I do think we plan on having a substantial mix between our traditional hedged agency allocation as well as a growing allocation to mortgage credit in general. But currently, our first step is non-agency MBS..

Okay.

And if I look at the loan side -- prime, Alt-A, subprime, nonperforming, are those the types of underlying collateral that you're targeting?.

Relative to non-agency MBS, our focus is on primarily legacy loans. Loans originated prior to 2008. Whether they're a legacy securitization, which is the case with most of the prime or Alt-A bonds we bought or a new securitization of legacy loans could be the case with the nonperforming loan securities.

That's been our focus for acquiring securities and utilizing some modest level of leverage through the repo market. I think, if -- we're also looking at certainly, other sectors of the market.

I think as we move into newer origination loans, higher credit quality loans, I think our focus is going to be more on having more alliance on nonrecourse financing through a securitization or similar vehicle as opposed to the recourse financing in the repo market..

As there are no further question, this concludes our question-and-answer session. I would like to turn the conference back over to Lloyd McAdams, for any closing remarks..

Well, thank you very much for participating in today's conference. We are pleased with the results, that we achieved in the fourth quarter. And we -- as I said earlier, we think that there will be positive tangible benefits of all the things we've discussed over the next several quarters. And we certainly look forward to that.

We also look forward to the call the same time -- about the same time next quarter in April to give you an update on all the activities that took place during the first quarter. Thank you, again, and have a great day..

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