Q3 2019 Earnings Call
At this time I would like to welcome everyone to be doing next capital third quarter 2019 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session.
He would like to ask a question. During this time simply press star <unk>. The number one on your telephone keypad.
If he would like to withdraw your question. Please press the pound Keith Thank you.
This Alison Griffin Vice President of Investor Relations you May begin your conference.
Thank you Simon good morning, everyone and thank you for joining with.
With me on the call today is Byron, Boston, President and CEO , Mary Poppins, <unk> Executive Vice President and CIO, and Steve Benedetti Executive Vice President CFO and see Oh.
The press release associated with today's call with issued and filed with the FCC. This morning October 31, 2019, you may be the press release on the home page of the dynamics web site at Dionex capital Dotcom as wells on the Fccs web site at FCC Dot Gov.
Before we began we wish to remind you that this conference call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995. The words believe expect forecast anticipate estimate project plan and similar expressions identify forward looking statements that are inherently subject to risks and uncertainties some of which cannot be predicted.
Good well quantified.
The companys actual results and timing of certain events could differ considerably from those projected annual contemplated by those forward looking statements as a result, unforeseen external factors or risk.
For additional information on these factors the risks please refer to refer to the annual report on Form 10-K for the period ending December 31, 2018 as filed with the FCC.
Document maybe found in the dynamics website under Investor Center as well as long as he sees website.
This call is being broadcast live over the Internet with a streaming slide presentation, which can be found or webcast link on the home page of our website.
Slide presentation May also be reference under quarterly report on the Investor Center page.
Additionally, I would like to mentioned that we will be attending JMP Securities financing services Conference in New York on November 14, and we are available for meeting.
I now have the pleasure of turning the call ever to our CEO Byron Boston.
Okay. Thank you Allison.
Good morning, Thank you for joining our call this morning.
Well my want to Starwood, a quick message for our shareholders and then I'm going to turn it over to a Allison Stephens murky to give you details regarding our results.
Dynamics capital, we continue to manage our company for the long term.
The long term goals centers around delivering cash dividends to our shareholders Warner two products, either our common stock or preferred stock or common stock offers higher yield what is subject to more book value volatility, whereas our preferred stock golf is lower yield more stable price profile.
And generating dividends for our shareholders. We continue to remain committed to a disciplined top down macroeconomic approach to risk management and investment decisions.
Over the long term, we believe this approach will succeed in creating shareholder value.
First we as a management team and board continued to invest in this year's dynamics.
Several years ago, we identified a more complicated global environment, and we reacted by increasing the liquidity of our assets the credit quality of our of our assets and the overall amount of liquidity on our balance sheet.
We continue to favor this strategy today.
2019 has presented a few unique challenges and opportunities Sutton.
Unusual and version of the yield curve lug led by the long end of the curve has been the largest challenge of the year. Nonetheless, we have made multiple tactical decisions to manage through this period. We continue to believe this is a short term situation as we continue to believe that the federal reserve will need to further reduce short term interest rates ultimate.
Creating an environment, where our financing costs are lower.
Our disciplined approach has resulted in Sato solid quarterly results, which Steve will elaborate on just a few minutes.
One of our decisions this quarter was to take advantage of the mispricing of our common stock by investing in our own shares.
We believe the relative value of our shares was compelling compare to investment alternatives given the continued uncertainty in the macroeconomic environment.
We fully expect to continue to grow our company overtime in a very disciplined manner. When our stock is grossly mis priced relative to our disclosure risk profile, We will act benefit our long term shareholders.
I'll turn it back overdraft Wilson and she's going to lead us through a few questions. So we can give you more specific details Allison.
Thank you Byron.
I'd like to open with asking Steve to walk us through the third quarter results. Please.
Thanks Allison.
Our results for the quarter on a GAAP and non-GAAP basis are summarized on slide five in my comments I'm going to focus mainly on core net operating income at book value per share.
Results were strong for the quarter core net operating income increased $1 million to 11.6 million in core EPS increased five cents to 48 cents per share there were several drivers of the increase including multiple tactical decisions, we made during the quarter.
First we had an increase in net payments received on our interest rate swaps due to hedge repositioning despite a much lower weighted average notional amount of hedges outstanding during the quarter.
In lower three month LIBOR.
Second we bought back 1.7 million shares of stock.
Third we managed our DNA expenses and fourth we experienced a reduction in our repo borrowing costs by 20 basis points during the quarter.
Also during the quarter, we continue to adjust our portfolio mix shifting towards agency CMBS investments, which combined with CMBS Io now totals approximately half of the investment portfolio up from 40% last quarter, continuing the trend of portfolio diversification and reduction of our prepayment risk profile.
In addition, we adjusted our hedge book during the quarter, resulting in a decline of 50 basis points on our weighted average pay rate.
To 183 basis points for the third quarter, while lowering our average hedge ratio as a percentage of repo and to be announced securities to 60% from 90% last quarter.
At September Thirtyth, our overall pay rate is 1.65% versus 2.04% at June 30 on our interest rate swap portfolio.
Our adjusted net interest spread increased to 114 basis points versus a 103 basis points last quarter. This reverses a trend of declining net interest spread since the fourth quarter 2017.
As we benefited from several important factors as previously noted, including our capital reallocation decisions to less prepay sensitive CMBS a reduction in short term rates and the aforementioned adjustments to our hedge portfolio.
From a book value per common share standpoint, the increase of 2.2% to $18.07 was due in part to the benefit of our buyback of 1.7 million shares at an aggregate discount of 18% the book value and import to adjustments made to change our duration profile through.
Through hedge adjustments as bond yields fell during the quarter.
Total economic return to common shareholders for the quarter was a positive 4.9%.
And as a positive 8.6% for the year through 930, we have paid a $1.56 in dividends per common share.
Looking at our balance sheet, we've reduced our leverage at 930 to 9.1 times from 9.4 times, including our long TBA dollar roll positions and have kept leverage so far lower this in the fourth quarter repo expenses have declined to continue decline as the FOMC reduces the targeted federal funds rate.
Funds rate notwithstanding some of the issues, we have seen in the repo markets.
Murthy will comment on these issues a little later in the call.
That concludes my comments and I'll turn the call back over to Allison.
Thank you Steve now turning this Murphy.
For the please describe in a little more detail what our current macro economic thesis.
Allison as we've said before complexity remains the key theme in the investing environment.
Our discipline and our top down approach have both been invaluable and navigating the markets. This year as we come into the final calendar quarter multiple factors that we track are shifting and priority and focus here's how we're thinking about the near term.
First we believe that recent actions by the fed increase liquidity will eventually be highly supportive of the repo market for agency securities, but this could take time.
We're approaching the market ready for near term funding disruption.
Second in spite of Mr. Paul's comments yesterday, it is not yet clear if we're at the beginning of a longer easing cycle or just ending a mid cycle adjustments.
Either way, whether it's from eases or liquidity from the feds balance sheet.
The feds actions to date will likely improve our financing costs versus today and serve as a tailwind to net interest margin.
Finally in the second quarter, we shifted our thinking Tom more probable range of 1.5% to 2.5% for the yield on 10 year treasuries, that's down from 2% to 3% late last year. We continue to see this as the most likely outcome in the near term with a greater chance of staying at the lower part of that range.
Now in the long term, we believe that without major structural changes, we will have lower global growth and inflation in the future that we have had in the last 20 years.
This is being driven by eating global demographics, and increasing global debt.
We also think factors such as human conflict government policy and climate change will play a greater level and influencing the performance of the global economy. This adds to the complex nature of the environment and given this type of backdrop, we think earning income from high quality U.S. real estate assets is an attractive value proposition.
For dynamic shareholders and in total we believe the mix of these factors are ultimately supportive for dialysis business model and the mortgage we'd industry in general.
Given that you how are we position from an investment and risk standpoint.
So first we've had an opt in credit and up and liquidity investment theme for a while now and that remains our focus.
In the long run being up in liquidity and credit gives us the nimbleness and flexibility to change direction, especially if we start to see some disruptive conditions in the markets and particularly in credit sensitive assets that we have the flexibility to change our portfolio composition.
Our second portfolio, Siemens diversification and that helps us perform in a variety of scenarios I mentioned, the 1.5% to 2.5% range. We want a portfolio that will be resilience foodie extremes as well as in the middle of that range.
So as you can see on slide seven our CMBS RMBS allocation shifted close to 50 50 over the quarter. We like this mix at the moment and we feel it gives us a lot of flexibility to manage through this range I'd like to highlight some information on slide eight and nine.
On slide eight I, just want to point out the the size of the unamortized premium on the agency RMBS portfolio currently sitting at about 2.3%.
That does says the premium over par as is 2.3 points. It reflects the timing of some of these investments and then secondly on page nine won a point out that the overwhelming majority of our unamortized premium is sitting in assets with explicit call protection.
And we have prepayment compensation in the form of yield maintenance or similar payments and in that in that part of the portfolio and the CMBS side.
I'll now turn over to hedging.
As Steve mentioned, we made some adjustments to our hedge position late in the quarter as the market was pricing and over 100 basis points of ease over the next 18 months, we locked in those rates with plainville vanilla interest rate swaps with a weighted average pay right now at 165.
Covering 80% of our repo financing versus 60 watt, 7% as at the end of last quarter.
So these actions they were deliberate and they were designed to stabilize net interest margin, while still allowing for improvement from actual fed eases as well as any reduction in the repo rate as well.
So at this point, if the fed eases or the repo rate begins to improve these will be further tailwinds to net interest margin.
In terms of book value you can see the impact of our hedging activity on that on page 10, the sensitivity to both parallel and non parallel interest rate shocks has declined quarter over quarter.
But this quarter, we included a new column portfolio duration versus base case, simply showing how our asset portfolio duration changes across scenarios and highlighting the value of diversification within the portfolio.
We've talked about being dynamic in terms of managing the portfolio Alison out we made significant changes to the book last quarter, we've been active coming into this quarter on we're going to continue to be active in managing the position.
There's been a lot of Oklahoma repo market recently, how did that impact dynamics and what's the trend going forward.
Yeah, the repo market still continues to suffer a from a broken transmission mechanism between the fed and the final users of repo market liquidity investors like us and other cash providers and the reason this is happening number one is because of bank regulation.
The second is because the feds quantitative tightening running off of their balance sheet. Once they've now stopped and then the third issue is the issuance of U.S. treasury that across the majority spectrum, but particularly in bill So de suite and combination really have conspired to create the problem that we're in today.
Specifically for Dionex, we did not have much exposure to quarter on repo pressures less than 10% of the portfolios. One month, we pull was rolling during that period.
We are planning to have very little exposure to the year on turn because we still believe there were some unresolved issues and the repo market that will need to be work through before the repo rates really come down more substantially I won't make the point that while repo rates have not declined recently in line with fed eases, we do.
Believed the issues will eventually be worked out and that will translate to lower repo rates versus where we are today, even if not more fetty that's happened.
Thank you what about marginal returns on capital what do you see today.
We are seeing low teens core our OE, 10% to 11% returns in the longer dust paper at <unk> at about 10 to 12 times leverage and mid teens core our OE for pass throughs at 10 times leverage.
Mortgage spreads are wider this year in fact nominal spreads are as wide as we've seen since mid to late 2016.
So we think this represents a pretty good entry point.
But it's not yet clear how they will perform in the second half of this quarter, we're coming up on your end you could see some supply demand imbalances and that might provide a better entry points.
I will say this we're entering this quarter with lower leverage and higher liquidity than where we ended the third quarter. So we expect to be fairly opportunistic and we adding assets when we see good returns.
Thanks Murphy turning back to buy are now.
Can you tell us what all of this means for Dionex and our shareholders.
All right Elton let me sum it up like this in our portfolio husbands constructed in a disciplined manner.
The long term macro economic view in mind.
Obviously, we are very in tune to near term developments, we believe the structural the portfolio allows us to be more flexible and nimble, which is important to navigate this environment.
You can see that our NIM improved over last quarter and the adjustments, we have made as well as a potential repo rates to improve should provide some what's you brought provide support to this trend.
We're making acted tactical decisions managing this portfolio or managing its balance sheet.
On both sides, both the asset and liability side of the balance sheet book value is going to be impacted by several factors demand for spread product as well as the level of interest rates across the yield curve.
We continue to believe there are strong supportive overall trends in place for dynamics capital and mortgage Reits in general there continues to be a growing global demand for high income stocks, we expect opportunities to evolve for dynamics to create value.
Yeah to our shareholders by being an active participant in these markets. We remain focused on generating long term value for our shareholders and we appreciate your engagements so let's open.
But its lines were good question, though.
Operator.
Ladies and gentlemen at this time I would like to remind everyone that in order to ask a question. Please press Star then there number one on your telephone keypad, we'll pause for just a moment to could both acuity roster.
And your first question comes the line of Doug Harter with Credit Suisse. Your line is open.
Oh, sorry, I, just wanted to get into a little bit more about the swap of repositioning that but the you undertook this quarter.
No. It seems like those were clearly favorable to the kind of the to the to the current period earnings and also your ability to kind of still benefit from the fed actions I guess can just talk about kind of what were the well for the trade offs and the other side of that or is it just kind of a no positive all around repositioning.
Yeah, Let me first say, Doug that we start repositioning this swap book.
Earlier this year and we have any macro view, we've always said for multiple years, we said the fed would do a round trip.
Presenting on to try to do something is going to look just like to 90 them back to them, maybe two or have years ago. When it first started we put charts up in our quarterly reports from 1990 495, We said is gonna be round trip just like that so we started the repositioned. This book of business in a year ago. We started to say the fed is going our financing.
Costs are going to come down we had a really near pause. So all we did really we started to reposition the swap book to reflect that macro view do we expected rates come down and as far as the I'll. Let you chime in if you want to talk about some of the more specific detail, but it all gets a disciplined approach we have a macro view a we express it in.
Both our hedges and in our assets Pittsburgh.
Right I I think I think there's two two pieces of it Doug one as I don't think without a macro view you could really make this work in your favor you know as.
In terms of getting the timing right and everything else. So part of it is is simply us feeling like 100 basis points of east that the the market had price then was was fair compensation to lock in those financing rates and that really was a big driver.
The decision.
And and that's been you know so far it's been it's been the like all I will say that you know all of our repositioning and this is why keep saying it call. After call is that you know we're gonna be dynamic we're not married to you know any specific position for any any particular any particular time, so things will change.
Right.
And then let me ask that it's a little piece.
So we talked about a round trip what we've done a round trip here. We are we're back below 2% on the tenure, but short rates are falling what next the entire global markets or stock trying to understand and figure out. What's next because then you want to know about dynamics is that we are nimble.
We had shifted it is more liquid position so we'd have more options to be able to adjust as more information becomes available to us.
We still believe that over the long term.
With this amount of global debt anytime the central banks either tried to exit.
With their balance sheets or raise interest rates. It will create problems there will create a slower economic environment. The board's rigs back down where do we go from here right now I think the entire global markets are locked in a bit about tug of war between multiple factors.
And I think one of the key things we felt was that it wasn't clear that we were at the end of the easing cycle at the you know at the end of the mid cycle adjustment or continuing the easing which is why was kept the optionality.
You know on 20% of the book at the moment.
<unk> benefit from that.
Alright, Thank you for your commentary.
Your next question comes from the line of Trevor Cranston with JMP Securities. Your line is open.
Alright. Thanks.
Follow up question on the on the swap repositioning.
Can you can you say if the you know the new swaps you put on this quarter continued to be LIBOR based and you know if transitioning to a different indexes like oil <unk> or so far are so for or things you guys have looked at and think would have any you know benefits to hedging your book.
Thanks.
Thanks, Trevor Yeah. So the the swaps we have on currently our LIBOR based swaps, which we pay fixed and received three month LIBOR.
That's been a relatively advantageous given that LIBOR has taken some time to come down relative to the paper Exposition. So most of our swaps at the moment or actually positive Kerry.
We actually generate swap income.
From the pay fixed positions.
So to that extent you know those those are beneficial in terms of so for Oh, I guess, where we're very much engaged an active and trying to figure out whether either one of those indices makes sense for us out of the too I would say, probably Oh I asked makes a bit more sense for an investor like dionex so for swaps.
Right now we don't think have really develop to an extent, where they'll make an effective hedge relative to our financing.
One thing to understand about so for its a backward looking index right now, we're trying to hedge our or our financing in the future on a forward basis. So that's something that still needs to be worked out in that market.
It's also an overnight rate with very little infrastructure in place for short term financing type hedging and we have very little overnight funding exposure. So we haven't yet found that to be beneficial and once the term market starts to develop I think we'll we'll start to really.
I see some activity in that so right now you know we've looked at the so for which we don't think that's that's a great fit just yet the oil swaps there were sort of in the process of evaluating whether or not weakens. We can such that they it is more correlated with our repo financing so at some point.
It might make sense for us to make the switch.
Got it okay. Thank you for that [noise].
And on the on the prepaid side on the agency RMBS portfolio.
Can you comment on kind of where the latest a speed Brent was versus where your average during the third quarter and what your expectations are for where it's likely to come in over the course in the fourth quarter.
I can.
Two page eight on the.
The earnings deck.
We have got actually yeah.
I couldn't find the earnings detector cigarettes are aware, so I guess you see it right now.
Okay.
The three months CPR Trevor was 3.6, 13.6%.
Across the book.
That's on page eight and I will look into why we can't find it and that we've got the coupon stack broken out.
Mark I don't have.
Tober.
Uh huh.
I mean, I'm Oh, yeah, we can follow up with you as Trevor.
Okay, that's fine.
[laughter] Trevor you were specifically, referring to the RMBS book right.
Yes, exactly yeah. So you know I'm going to plug something here since you brought this up yeah, we compare dionex versus other Reits that have basically the 100% agency portfolios or 90% agency RMBS portfolios.
13% prepayment speed is all just half of our book of business.
When you consider what are the prepayment impact of the CMBS book, our net overall prepayment exposure for the entire balance sheet is actually.
Effectively lower.
[laughter] materially more.
Yeah.
For last quarter I know traveler that was it's 9.4 versus 13.6, if that's what you were asking.
Okay got you and then yeah, I guess all related to Byron's comments about the balance of the CMBS portfolio.
Was there any prepayment penalty income from the CMBS a included in third quarter earnings.
Yeah, Trevor as it was a little over 1.2 million.
And that's that's actually that's actually fairly consistent over the last.
Several quarters at least.
Well I wondered if things are happening is is as the prepayment speeds on the RMBS or increasing the prepayment income from.
The penalties as is actually mitigating a good portion of that so you get yield loss on the on the RMB side, that's being compensated with yield maintenance on the CMBS side.
So right, we're getting a good a good mix there.
Okay, and then I'm just a last question.
Since I haven't been able to look through the <unk> can you guys just briefly comment on where your interest rate sensitivity.
Book value perspective stood as of September Thirtyth, Yeah, I I have that that's on page 10, and I'm not sure why the deck isn't downloadable, but we'll fix that.
So as of September Thirtyth, Okay shareholders, so exposure to an up 100 rate shock stood at minus 10%.
Exposure to went up 53 chalk stood at minus 4.7%.
Exposure to eight down 50 rate shock is a positive 2.3% and minus 100, where actually sitting right at positive 1%.
That entire block of sensitivities is down.
Good 3% to 7% from from last quarter.
Okay perfect. Thank you across the board.
Gotcha Gotcha.
Your next question comes on the line of Christopher Nolan with Ladenburg Thalmann. Your line is open.
Hey, guys on triggers question on prepayments I'm, just quite for myself on the commercial mortgage.
So from our phase because it.
We look at it.
You just cut out there for a second Chris.
Yeah, the CNB benefit from her prepays.
Do they benefit from higher Prepays, here's here's the way. It works. So if you do get a prepayment on on the CMBS youre getting compensated for that prepayment because all of the yield you were going to get on that security just comes to you and one big lump it upfront which is fantastic. So.
What we while we don't we don't exactly.
Love, having our higher yielding assets pay off even though we get all the money upfront. That's a nice thing to have when you know when you have to the RMBS prepayments increasing at the same time. So it's just a nice balance but in general you know you're not getting hurt your actually.
Receiving the full proper economic benefit as if you held that CMBS asset over the life won a pre payment on the CMBS occurs.
And as well.
And.
Leather Jimmy.
I'm sorry.
Please go ahead one of the main reason the one one of the main designs of the portfolio is for that type of diversity.
For a one side of book offsetting the other side and a high prepayment environment.
And then the other part B one side of the book as a negative convexity versus a positive feedbacks young inside book.
Correct.
There's no leverage should we have you guys would we get leverage because your leverage ratios slipped below and your normal range.
Yeah, and then post quarter on as we mentioned you know we were coming in to enter this quarter with even lower leverage and higher liquidity and we're comfortable with that if the at the moment, Chris I think you know we want to be really ready for any type of disruption coming into the end.
Order here, we feel like we've stabilized the that that net interest margin would that would the activities. The actions that we put in place last quarter and now you know we're going to.
We're really going to see when it's gonna be time to to reinvest some of this capital that's that's come back.
That we have on the balance sheet right now.
Great and filing to applaud you guys for the uncomfortable management of the by that we did it was really well done so congrats on that.
Thank you Chris Thank you.
Your next question comes from the line of Jason Stewart with Jones trading your line is open.
Thank you a one more on prepayment activity.
At a very high level, you could comment on the interplay between mortgage capacity that you're seeing out there today and how that's going to impact the prepayment cycle, maybe longer term any impact on specified pools, whether we're going to see a longer.
Lead time, so those are impacted just any high level comments on how you see the interplay between those two factors going forward would be helpful.
Right, Yeah, Hi, Jason So completely saying this is a very apropos topic at the moment, there's a number of things that are going on capacity is definitely an issue at the moment with mortgage rates, where they are you're starting to see.
Mortgage pipelines get relatively full.
So what that actually does it if it it lengthens the the prepayments cycle, but it doesn't mean that it stops it right. So that's that's that's one issue. So that just means things that would take two to three months to process now, it's taking four to five months or five to six month.
Having said that we're coming into the period of time now where there's slower seasonals. So lets people are moving less people. There's the holidays. So you will see some slowdown.
Prepayments, we actually in our modeling we don't we don't tend to 'em, we don't tend to give ourselves credit for those things, but that is actually and observable phenomenon in terms of lower seasonals.
The bigger factor right now that we're seeing in terms of you know something that's.
Offsetting the impact of the of the the lower capacity is appraisal waivers. So people you know the G.S. ease have now put in this policy whether waiting appraisals.
In order to get through the timeline much faster.
Those things are all contributing to sort of offset potentially any type of.
Any type of you know slow down I would say from capacity. So there's a number of different factors and at this point and in our assessments, it's really kind of a wash with maybe seasonals, helping to slower speeds down a little bit.
In terms of in terms of specified pools, you know we think the specified pools at this point in terms of prepayment performance have performed.
Well relative to their TV counterparts, I think the.
The pay ups on specified pools, maybe ran ahead, a little bit of the intrinsic value a few months ago and that's what are going to come down to earth hearing and in a couple of months, but I'm.
So the value was there and the cash flow I'm you know the whether you know what people end up paying for it has has really moved around a fair amount, but the cash flow value is a is unquestionable.
That's very helpful. Thank you and then just generically given that the leverage how long would you'd be willing to set a say lower.
The lower end of the range to wait for a better opportunity. If you thought seasonals would produce greater supply in a weaker.
Technical or spread outlook in the say the middle of next year. How long are you willing to sit at the lower leverage levels to take advantage of that.
I think I think the.
There's two factors that are going to drive that one is how quickly repo rates start to come back down towards you know, reflecting the actual studies is that about that have occurred.
At this point you know I'm very comfortable staying at this level at least for another quarter or two before we feel like we have to Ah to get anything anything done so weve positioned ourselves right now with with the stuff that we did in the in the third quarter, you know really to stabilize the margin and.
And then you know waiting for a good opportunity to put put money to work.
Great. Thank you.
Your next question comes on the line of Matthew Howlett with Nomura. Your line is open.
Thanks for taking my question it and congratulations on some great results [noise].
Last quarter, you talked about the margin you're the trend what sort of moving back at some point, maybe two or three Q1 8 type level, just curious the hedging and the changing environment.
Well, how you see the outlook today versus.
Those comments last quarter.
So Matt I'll take the first part and then I'll have Steve tackle the second part.
At this point again, you know, it's really about the the repo rate is driving a good a good portion. It's it's really the tail that's wagging the dog.
And and that's at the moment with its not with the adjustments that we made in the quarter, we feel very good about the trend and the margin just to give you an and an idea of sort of where repo rates are now versus you know lets even though the adjusted cost of funds that we reported at the end of at the end.
Last quarter.
We had it up to 47, I think our marginal repo rate at this point is around 210.
That we're locking in for the next.
Month to month three month, so there's an improvement in in that rate and that's really you know the the the tail that's wagging the dog here so.
I hope that gives you some idea of just the trend there.
And Steve Madden.
Yes.
Right.
I remember go ahead.
I just said I think the port third quarter last year was was 141 on an adjusted net spread basis, we had 114.
That reflects a 20 basis point decline and repo rates. The feds. He is now three times. So that suggest there's if the repo market settled down there's there's plenty more room to for the net interest spreads to to increase and then particularly back to the prepay question.
Unhappier book is Ah prepay protected.
Even if rates go down from here you you've got the potential for for spreads to widen the or even a prepay speeds pick up a little bit on the RMBS book. So there's a lot of Ah I think a lot of momentum if repo market settle down here over the balance of the year well that's spread wide.
And on that note <unk> capital management, you bought back a lot stock I want it clearly the get this the core numbers above this dividend rate do you have.
This is biased.
It looks like it's to the upside you've talked about being you know obviously managing capital what do you think in terms of of next year would I mean do you think you'd just continue to buy back stock we look to raise the dividend at some point get you know if you get more aggressive when you want to reenter the market just some more dust that have appreciated just curious we just sort of waiting to the end of the here just curious.
If there's some type of cadence on how you see this playing out because it.
You know, it's even more stock here.
Isn't as you see more Matt.
This was unique opportunity, we really feel our stock was mis priced.
We felt like Bill was the sentiment around prepayments on a macro level for the industry as a whole have gone too far there were some oh there there were some capacity issues that originators and we saw a lot of short sellers come into the entire sector.
Can you hear somebody's old guys. You are used to like still thinking about S and l's in the 1980, there just a touch so right. We felt our stock was very much so mispriced, especially given what we had told everyone. During our second quarter <unk> when the adjustments that we have made it would've been very clear and can.
Consistent about a macro view so we thought this was a major mispricing.
And well, we then assess the macro view over multiple global factors. It that are moving in a risk along with the returns that were available to take that capital invested bonds birds invest in our stock. It was a wonderful opportunity. So it is reflective of the unique opportunity there.
As presented to US we feel is a we've made took actions that support the long term shareholders short terms year olds.
Your inner outer short sellers or whatever but the long term guys are here with us, but we do have a solid base of long term shareholders. We felt that that was the right thing to do and that's the principle, which we operate.
We say, we can have an opportunity to do something for our long term shareholders because were long term thinkers in terms of running this business model, we're always going to do it but think of that as a principle.
Yeah I appreciate that just falls off do you look I mean, you cut costs do you you've got some dry powder do you look you're still at a 10% discount to book in these and even bigger just some of your core internally managed core peers.
Look I'd, just say well get a buyback more stock until we get too you know to book to Bill raised the dividend and reward our shareholders that way.
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Overtime, we believe we want to grow our company.
We're not anxious to be one of the largest reach in the second we don't believe that's right thing for us, but we do believe that we want to over the long term goal our company.
We do believe that there are shareholders, who were involved with us because they do want cash income.
Oh, but we're also trying to balance cash income versus a stabilizing our book value and the overall success of the company in a total economic return perspective over the long term.
So I don't know, there's really a black and white or easy decision say if this then that as much as we do have a principle, which we acted upon this quarter, where it was clear we could do something for our long term shareholders by buying back that stock.
And Oh more again, we're again think of US is always thinking over the long term.
Even if we buy back more stock will still be it'll be a long term decision will ultimately.
Our goal is ultimately global company overtime, but in a more disciplined manner.
To that makes and great.
Makes complete sense I, just want to come Indian on on the buybacks.
And the three quarter it and also the expense reductions there it really looks at deluxe is really focused on on our Lee and I really budget for that but thank you bye.
Thanks, Matt.
[noise] again, ladies and gentlemen, if he would like to ask a question. Please press Star then the number one on your telephone keypad.
Your next question comes from the line of Bose George with KBW. Your line is open.
Hello, and good morning, actually can you just compare the returns on agency CMBS versus agency RMBS and then just to the leverage how you the different leverage for the two groups.
Yes, I can do that Bose.
So on the agency CMBS on a marginal basis, we think of that as something that we can run at 12 times Love Rick.
And the returns on those at this point are between I would say, 10% to 12% and the 10% are more like the standard Bonilla 10, nine and a hobbs and the 12% are more sort of the longer dated 12 11.
The the leverage on the pass throughs, we run those between nine and 10 times.
Depending on on the risk environment. Those are at this point I would say really 14% to 15% core our OE, Okay, and we look at a number of things core our OE and obviously total economic return, which is which is more contingent upon our spread view.
And so if we expect things to widen obviously, yeah, there's always a trade off between buying now versus when things are wider.
[laughter] holding on until things are wider so.
That does that answer your question because that does yes, I'm just curious at this level do you see this agency CMBS could that increase or did you see sort of the value. Similarly in both those buckets.
At this we really like the 50 50 breakdown at this point and and because we're we're coming into the quarter with lower leverage in higher liquidity in general. It's that's just sort of the asset allocation mix we like.
From here and how I would say, it's really a relative valuation like if we if we believe that that 30 year RMBS are cheaper and will offer us the higher totally gone as we turn over time, I mean that mix could change, but at the moment that mix feels pretty good here to run through the next few months.
Okay. Thanks. It is just one let me ask one more on just on the fed yeah. Thanks for the comments earlier just curious if you think the fed will need to do more like potentially add a permanent repo facility at some point.
Yeah, I mean in terms of the liquidity operations, you mean yep Yep.
Yeah, I think at this point they are really looking to the markets to try to find what the what the the the gap in the and the situation is there's clearly a gap I mean these overnight repo operations are oversubscribed, so even though they're pumping a lot of money in its just not.
Not getting to the final the final use or the end user I'm. So ultimately that repurposed facility or something of that nature is going to have to put in place that those types of things take time.
You know we haven't heard that they are working on it and what we haven't heard that they aren't either but those are the types of things I think ultimately the feds gonna have to consider a in order to in order to make this type of adjustment you her time and Paul yesterday, basically say the you know changing the capital rules was out of the question.
So something else is obviously going to come into the works in order to to to clear up this issue and our people standing repo facility would do that.
Okay, great. Thanks, a lot.
Your next question comes on the line of Edgar moral who is a private investor Your line is open.
Good morning, I got a younger the last quarter, we got a thought we'd go down.
We ended the year, but since we've had such a good corporate data do you think with.
We're on our way back up or do you still looking there was some downside.
In terms of.
Right to the stock.
The price of the stock.
You know what when you look at the we don't well first off we don't give out projections in terms of direction of book deal or price and stock, but what we will say is when the reason we emphasize the long term is we believe this business in this business model in general is a cyclical business.
Model.
And often within dynamics, we use the seasons of the year as an analogy for all the business model and the reason we emphasized that we believe our financing costs are coming down it's kind of.
Being a expressing a view that we believe we're coming out of the winter months heading into the spring and summer months for the business model, so the fed reducing our financing costs and the strong positive.
We do believe that it will be a positive for our net interest margin.
And so we do believe that there is a positive but a lot of positive factors the dynamics capital and other mortgage reserves, we look into the future.
Thank you very much.
We appreciate your very much thank you.
You're welcome.
And there are no that.
No more questions right.
No more questions at this time.
Oh I'm agenda back over to Allison will.
Well. Thank you everyone I just wanted to let you know the presentation is on the website. It was available on the webcast and it's now available under quarterly report.
Let me know is you with like for me to send you a copy happy to do so.
Thank you and we'll talk to you next quarter.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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