Q1 2020 Earnings Call
[music].
And welcome to Die next capital Inc.'s first quarter 2020 earnings results.
In conference call.
There's time all participants are no listen only mode I could speakers presentation. There will be a question answer session to ask a question during the session you'll need to press star one on your telephone.
If you acquire any brothers please press star zero.
Now with hand accomplish over to your speaker today, I'll think ice President Investor Relations. Thank you. Please go ahead.
Thank you operator, good morning, everyone and thank you for joining us today with me on the call I have Byron, Boston, President and Chief Executive Officer, Murthy, Popping out executive Vice President and Chief Investment Officer, and Steve Benedetti Executive Vice President Chief Financial Officer in Chief.
Operating officer.
The press release associated with today's call. It shouldn't filed with the FCC. This morning May 620, 20, you may be the press release on the home page of the dynamics website at Dionex capital Dot Com as wells on the Fccs website at FCC dotcom.
Before we begin 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 anticipates estimate project plan and similar expressions identify forward looking statements that are inherently subject to risks and uncertainties some of which cannot be predicted or quantify.
The companys actual results and timing of certain events could differ considerably from those projected indoor contemplated by those forward looking statements as a result of unforeseen external factors for breast.
For additional information on these factors are less please refer to the annual report on form 10-K for the period ending December 31, 2019 as filed with the us.
The 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 strict slide presentation, which can be found or a webcast link on the home page of our website.
Slide presentation May also be reference under quarterly reports on the Investor Center page.
I now have the pleasure of trying to call over to our CEO Byron Boston.
Thank you Allison. Thank you all for joining us this morning.
And I think its capital we operate with a long term vision.
In 2019, we celebrated 30 years. They listed company on the New York Stock Exchange, we formed a new 30 year vision for the future.
Such a long term view or management is tied and totally committed to the success of dynamics is very much aligned with the interest of our shareholders creditors in all the stakeholders.
To succeed in managing a mortgage riet over such a long time horizon. It is imperative that we adjust our risk posture as necessary to fit the complexity of the overall global environment that we allocate our capital in a very disciplined manner.
Multiple years ago, we were up in credit and up and liquidity and we maintain that posture today.
Furthermore, we have reduced our leverage in the short term.
As we assess the currently have all been health and economic crisis.
This current global situation is very different done a great financial crash of 2006 to 2008.
The next several months will be extremely important in assessing our best risk and capital allocation strategies.
It is too early to discern the broad based impact the current exhaustion is shocks across the global economy.
On our call today, we will cover the first quarter.
Our macroeconomic view.
Our view on the economy business model and we will give you an outlook for dividend.
I will now I'll turn it back to Elson, who will lead us through a series acuity.
Thank you Byron.
Turning now to Steve Please walk us through the company's first quarter performance.
Thanks, Allison and good morning, everyone.
Our results for the quarter on both the GAAP and non-GAAP basis are highlighted on slide seven in the presentation and in the press release, we issued this morning.
For the first quarter 2020, we reported a comprehensive loss per common share of $1.45 and core net operating income of 51 cents per common share well, we benefited from the lower interest rate environment environment in our repo funding cost during the quarter or periodic swap benefit decline as rates rally and we lifted hedges.
TB a drop income also fell and we had a modestly smaller investment portfolio and lower prepayment compensation on CMBS.
Finally dividends on preferred stock increased due to the timing delay between the series C issuance and the redemption of the series and partial redemption in series B.
Book value per common share declined $1.90, 410.8%, principally as a result of CMBS Io and agency CMBS spread widening during the quarter given the tremendous volatility in prices in yields in the latter stages of March.
As we noted in our call on April 15th we actively managed our duration position, which lessen the impact of the volatility during the quarter on our books right.
We also sold specified pools in early March monetizing pay up gains before spreads widened later in.
The issuance of the series C preferred stock in February reduce book value by 15 cents per share, but should shape saved us approximately 75 basis points in coupon going forward.
On a blended basis, we estimate book value per common share as of yesterday is relatively unchanged from March 31st. So we have not conducted our normal procedures in connection with this estimate.
For the first quarter total economic return was a negative 8.3% versus a positive 2.2% last quarter due largely to the aforementioned decline in book value.
The quarter, we declared and paid a 45 cents dividend per common share.
Average interest, earning assets were modestly lower at 4.9 billion versus 5 billion last quarter and adjusted leverage was 8.8 times total shareholders' equity at March 31st lower than the 9.0 time times at year end.
As we already mentioned on our update call on April 15th we had further reduced our investment portfolio and leverage post quarter end as of April Thirtyth, our investment portfolio asset balances approximately 2.4 billion and leverage is approximately four times total shareholders equity.
Looking forward, we expect our net interest spread on our existing portfolio of 2.4 billion to increase in the second quarters repo financing rates fully reflect the benefit of the fed reductions of March of its targeted fed funds rate.
From an earnings standpoint, much of the prepayment risk to our earnings on our agency RMBS and CMBS portfolios. It's been reduced at this point as our amortized cost basis on these assets or a combined approximate one or two dollar price that said our investment portfolio is smaller today, we have capital to invest and ultimately our net.
Interest spread and earnings will be a function of where and when we deploy our excess capital.
Thank you Steve.
Can you describe our macro economic outlook.
Sure.
We've had a long term economic view that has not changed the global economy is fragile and global risk have intensified. The current EXONDYS shock has only served to increase the probability of future surprises as risk factors at play or increasing complexity and number.
The entire global economic and financial system is currently increasingly leveraging enormously to survive. This crisis as such the post crisis War will continue to see a drag imposed on growth and inflation from global debt demographics technology human conflict and other risk factors.
Global economies and the global financial system cannot stand on their own without the central banks continuing to play a major role.
Policy risk has increased and will be a major factor well into the future.
How are well will evolve is still uncertain in the short to medium term.
This fragile global economy is currently absorbing the impact of multiple shocks and it is too early to fully discern the broad based impact of these negative developments. We are still in the early stages of a health and economic races. The central banks have moved swiftly to avoid a financial crisis and.
Potential policy prices might evolve in the future is a world attempts to manage the side effects of all the new fiscal and monetary programs that have been it.
Since our macroeconomic opinion continues to support our investment thesis being up in credit and up and liquidity.
Thank you Byron turning now to smoking.
Okay can you. Please we discussed the portfolio just we've made its quarterly.
Yes, Allison I'd like you to please turn to slide nine.
We bounced <unk> rebalance the portfolio to focus on agency RMBS on the adjustments, we made post quarter end leave us with lower leverage higher liquidity in a bigger capital position you can see on this slide our cash an unencumbered asset position wasn't $312 million.
I'll discuss our views on redeploying the capital later on in the call.
In March we shifted our thinking on cash flow risk and started to evaluate our portfolio for the increased possibility of delinquencies and defaults.
While we did not and do not assess the probability of default is high we felt it prudent to monetize the $200 million in unrealized gain in aren't agency CMBS dusk portfolio.
First quarter end as liquidity in pricing stability returned to the markets, we rapidly reduced our agency CMBS dust position.
During the month of April we've reduced that position from $2.1 billion to $800 million, we've realized $166 million and games and cut over 80% of our premium exposure.
Great. How are you itself [laughter], thus far we are operating.
And how do you think this plays out for dynamics is the best strategy.
As Martin mentioned Allison this is a health and economic crisis, but its layered on top of the already existing fault lines that we identified before the shock.
Social factors global debt technology, environmental geopolitical on demographic factors diesel already in place before the pandemic in one shot.
So we think right now there are two forces to consider that are working in opposition. The first force is the potential for disruption to cash flow.
Shutdown of economic activity has led to loss of employment for over 25 million American workers, thus far.
Borrowers are seeking forbearance renters are seeking rent relief, we're seeing a lot of evidence that the financial position I state and local governments nonprofit universities.
Compromise against it you haven't opposing forces the rapid and significant fiscal and monetary responses globally GE as sees have responded by providing forbearance for single family and multifamily box.
These actions collectively will probably pushing the economy in the near term and need to lead cash flow disruption in some sectors.
Ultimately the question weren't asking ourselves as we design an investment strategy.
Will the government actions be enough to minimize the disruption to cash flows or not.
How did the structural factor the ball as we see the duration and severity of the health and economic crisis play out.
How does the return on the investments we are considering stack up against these risks there aren't clear answers you have to these questions is still really too early to discern how this crisis will play out but the next several months will be clinical and determined that the direction. This will take.
So are there areas to invest today.
Absolutely, we think that up in credit and up in liquidity is still a place to earn returns if you turn to page 11.
You'll see our view of where we think returns are stacking up at this point.
The agency RMBS sector is the most attractive in our view at this 0.1 of the most important drivers of Levered returns is financing costs, we expect that financing costs will be low and stay low for a prolonged period of time, especially for high quality assets. So that's a major positive for agency RMBS, we can get financing.
For these liquid assets at low low rate.
The agency multifamily sector is also a sector that's can't be supported by government policy.
But the near term extensive cash flow disruption is lesser so until this becomes clearer. We actually think agency RMBS is a better relative relative risk adjusted returns from our general counsel. Please.
Great.
Can you talk about where you see relative value markets today and portfolio construction.
Yeah, we prefer to lower coupon on TB, A's and generic pools versus higher coupons and higher payout pool.
In the near term cash flows are going to be impacted by the forbearance policies of the GE Aziz and the first thing that's going to happen is a delay in prepayments.
A key beyond the near term will be the transition from four Barron.
Either back to performance or to delinquency, and then modification and finally the phone.
Policy risk is a major factor on how this all eventually develop particularly given the G.S. These credit risk transfer programs are CRT front run well now actually get to see how much credit risk was really transfer.
In the near term, we think higher coupons and low balance pools was still offer value. The key on higher coupon is being able to monetize the premium selling the pools before defaulter modification piece has begun.
We're also respecting the we since it'd be a lack of liquidity in higher coupon and especially the highest pant pooled because of the lack of a natural buyer at very high dollar prices that favors the lower coupons as well.
What are the returns looking like in the agency RMBS.
We see attractive returns in the sector. We're by no means at these super cheap levels, but still attractive in the 15 year sector hedge net interest spreads around 80 to 90 basis point range and nine times leverage that's 8% to 9% static core Harley.
So to your generic lower coupons, the hedge net interest spreads and the 110 to 150 range, depending on whether you're buying specified pools are more generic pools. So always aren't in the 10% to 15% range at nine times leverage.
And there was a slight improvement there in TV is for dollar rolls.
Okay.
Today is around four times you see.
In the look.
You know liquid sector, how are you thinking about leverage and balance sheet side, and what kind of earning power do you think the company.
Great question Allison I was I was hoping you asked me that we think the balance sheet can be up to $4 billion and assets and leverage can rise to six to seven times up from the four times that we sit today.
This gives us the liquidity reserve and and firepower to navigate any aftershock.
We can be flexible in leverage up or down in the face of new opportunities like a steeper curve or if there's a risk lira. These are guidepost, we're placing in the near term we constantly evaluate these and we'll be ready to take was up or down as we see scenario.
Now, let me walk through our portfolio today and the potential earnings power as we grow the balance sheet.
Our existing portfolio. After all the adjustments we made is a subset of the position on page 10, So let's turn to page 10.
Specifically the agency CMBS portion of the portfolio is down to $800 million with a book yield 2.5%, reflecting the lower premiums in the sector.
The approximate weighted average book yield on the assets as of April Thirtyth is 3%.
Now turning to the financing side, if you would flip to page 25.
You can see on page 25, or repo rates were pretty high at the end of last quarter, because we had roll position through quadrant.
We have already seen these repo rates come down substantially and expect to see these rates.
Around 30 to 35 basis points for one month and three month, we both for agency RMBS and the iOS or financing and around one month, LIBOR, plus 90 basis points on a weighted average basis.
So that gets you to a net spread on the overall portfolio in the low 200, assuming we don't sell or reposition the pool.
As I mentioned earlier, we think leverage can be taken up to six to seven times, one and a half to 2 billion assets at an average spread of 110 basis points. If you include 15 years and the mix should get you to a weighted average net spread in the mid 100 on about for a 4 billion dollar balance sheet. When you combine that you.
So there's significant earnings powering the position today and if they're in about two to three turns of leverage.
It's really a matter of putting the risk on in a disciplined manner, which we feel we can do with the liquidity in the agency RMBS.
Very good.
Our portfolio is predominantly agency guaranteed and you expect the focus on that sector can you discuss the in Boston, We haven't been on agency sector CMBS iOS.
Yes. This is a sector in which we have been long term investors. This is a great investment for wheat, iOS or good returns for a shorter duration well structured cash flow at the top of the capital stack over 90% of the bonds, we own our AAA rated and we see the highest payment.
Already in the cash flow wonderful.
Our non agency CMBS position I O position is currently 7% of the total portfolio by assets and 7% of our total capital is allocated to the sector.
Over the last 12 years, we've had no problems financing this position and we had no issues financing. This position in March the majority of position is funded any committed facilities through June 2021, and there were no changes in financing spreads versus ly bar, even through the disruption in March.
We really like the seasoning in our portfolio seasoning in a credit portfolio is is key 80% of the bond we own our five to six years old with only four to five years left to maturity any significant part of the underlying properties have price appreciation the ltvs in the portfolio.
You are in the low fiftys person, but most of the portfolio.
Remaining average life when the portfolio is about four years and the weighted average credit enhancement isn't the 25% range.
Well at the highest part of the capital stack, where we have structural protection and we own a seasoned portfolio, we're going to be opportunistic in managing this risk. We also factor and the fact that the portfolio pays down about 40 million in market value each year. So that's a tremendous amount of cash flow.
The position at this time next year should be about 25% smaller just from the passage of time.
Well have more detail on the credit and portfolio metrics in our 10-Q.
Okay. So shifting back to our overall strategy then can you put all of that together for us.
Absolutely.
The main point to remember is that our financing costs are low and there was significant earnings power in the company via investments in agency RMBS.
We think we can take leverage up in this environment to six to seven times.
Invested in agency RMBS anesthetic or are we have 7% to 8% for 15 years.
And a 15% for 30 years.
We are respecting that were in the early stages at this economic and health crisis, and we're considering the possible future disruption to cash flow.
Our main objective is to take the appropriate amount of rest for the environment focus on preserving capital and generating what we viewed to be an above average returns.
Great. Thank you Marty.
Now turning to Byron.
There's been a lot of questions about the mortgage Riet business model since March or your thoughts on this topic.
[noise] [noise], if you would turn to slide 13, there's some interesting points on this topic.
General, though the mortgage Riet business model is fine.
<unk> model as a tax efficient vehicle that depends on disciplined risk management and capital allocation.
Simply put liquid assets should always be a core part of your strategy throughout all business cycles.
There are times, when liquid assets and balance sheet liquidity should be increased in anticipation of potential surprise corrections and asset price levels.
Example, coming out of the Great financial crisis, we went down in credit and down that liquidity.
That was a great opportunity between 2009 in 2015.
However, we reversed that strategy and adjusted our focus to emphasize liquidity as we watch the global risk intensify.
The events of March 2020, no way imply that there are a fatal flaws in the mortgage riet business model.
Other it expose that your liquidity over leveraged credit strategy at the wrong point in the credit cycle.
The fault lines were parent well before the pandemic.
We've been monitoring them and adjusting our strategy accordingly.
There were environmental factors that uniquely impacted each company differently based on their risk posture, but there are not inherent flaws in the business model.
In fact, we believe there is a strong case to be made for Ernie in cool from high quality U.S. based real estate assets, especially as global interest rates have collapsed to zero or negative levels.
Thanks Byron.
Now the we've covered our questions what's the final message for all of our stakeholders.
[noise] the appropriate process for reopening the global economy is in a phased approach.
This will allow the world to observe whether our situation is getting better or worse.
Likewise, we're reinvesting our capital in a phased approach we will remain up in credit and liquidity, which always gives us the option of increasing our capital deployment rapidly.
Furthermore, with our financing costs anchored at really low levels, we are confident in our ability to generate solid cash flow.
The key at this uncertain phase of this global crisis is to manage risk risk.
Keeping with this approach we anticipate no change in the dividend for the month of May.
As always our dividend what works like the earnings power of the company and our risk posture.
The final thought I'd like to leave you with today is that we aren't internally managed read we already invested dynamics alongside of our shoulders and we continue to manage our company.
Operator, let's open the call up for Julie.
Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad to withdraw your question. Please press the pankey, we'll pause for just a moment to compile acuity roster.
Your first question comes from Doug Harter from Credit Suisse. Your line is open.
Oh thanks.
<unk> can you just talk about how you're balancing.
Kind of the flexibility and sort of a defensive posture.
Yeah, I'm certain time versus kind of possibly waiting too long and.
And missing.
You know some of the attractive opportunities that are available today I'm just trying to think about the those those trade offs.
Let me start with a high level point on this which is there's questions. It's and it's really starts at about again back to the discipline process top down their macro question just <unk> that are still out here.
How many bankruptcies are they going to be.
How many permanent firings or go or they're going to be.
How many people will not pay the mortgage payments in may how many renters will not pay rent in may.
How many by June will get permanently fighter and suddenly now they're joined the ranks about pay.
I mean, do I will not pay.
So there's a lot of questions here and I understand what you're asking in terms of this trade all there's a lot of macro questions that are still there's still need to be evolve how will that the energy sectors and I will be energy sector.
And how much unemployment will come out of that sector.
And and then you take us back as we come down from the macro questions to our individual sector.
Well it up in credit up and liquidity strategy and without financing costs anchor at.
The lowest levels, we've seen really in the last 10 years.
We know we can generate income.
Furthermore, back to the macro with so much debt that's being created a need to be sold unfinanced. It's highly probable that we see a sees a steeper curve.
Every basis point steeper.
That we take our time and invest in our money lets say back to your core goes between you've got some 65 to 75 basis points that adds to our potential future or let's say if it goes from 65 to 85 basis points, that's even better given that our financing costs anchor. So we do have a lot of options and we are trying to put you asked.
I would balancing that we're trying to balance between looking at the macroeconomic environment, depending on which is where you're really I think you're also had the fed has a cushion or award mattress underneath the mortgage the agency mortgage backed securities market. So we could always say hey, well, let's just go all in just got the fed has our back we're being more discipline.
From a from a macro perspective, but we also have in our back pocket. The fact that we can invest money rapidly by having them up in credit.
Strategy smart they want to give some more specifics.
Yeah, I actually I don't think we're at much risk of missing opportunities at this point mortgage oil prices are probably is why didn't they were in early March and then obviously, they're not as wide as they weren't middle of March or late March.
We're seeing we're seeing opportunities to put capital to work and I think you know being nimble, putting the capital and to sectors, where we see real value I think we have that environment right now.
This point the fed is actually reducing how much they're purchasing on a weekly basis, there's some pent up.
There's some pent up demand here in terms of.
Mortgage pipeline coming being able to self board and so on so I think we're going to see some chance is here to put capital to work in a adequate level.
And Doug Let me add one other thing as you as you scoured the landscape and you look at a variety of companies.
There are an enormous amount of people are in positions because they have no choice they couldn't adjusted position.
We're in a position because we want to be here.
We've adjusted our position out of RMBS into CMBS back out of CMBS back in RMBS <unk> adjusted our balance sheet up to 6 billion back down to 2 billion now we're moving it back up again.
That's deliberate.
We're not here because we have so many low balance bonds in kids so.
So we're very often since you know and our current situation, but we do find it very intriguing financing cost currently a low level, we don't expect there to change.
Every every one basis 0.5 basis point 10 basis points deeper into curve will be a huge benefit in terms of all forward return opportunities.
And then you've got an entire macro environment with the health crisis economic crisis financial crisis, they were watching the world's here we evolve.
Great. Thank you guys for those answers.
Your next question comes from Eric Hagen from KBW. Your line is open.
Hey, good morning, guys Honeywell and thanks for those really great opening remarks, and congrats all things considered going on a on a great quarter.
[music].
Hey, you guys mentioned being a little bit more [laughter] excuse me.
Little bit more constructive on agency RMBS right.
You guys think you're going to take that position through through more of a specified pool position its or TV is right now.
Thank you so much.
Sure. Thanks, Eric.
So I think well going to favor generic specified pools, you know not extremely high pay up.
And the TV a TV position. That's that's what we feel makes more sense at this point, that's not to say, we want to own any loan balance Arnie any high pay of pools, but the liquidity in the flexibility at this point is really valuable.
And so in the lower coupon by the way lower coupons doesn't mean, you're not taking premium risk the lowest coupon out there. That's trading is a 2% with almost two points of premium on it.
The next highest coupon has almost five points of premium on it. So there's a risk there's risk and all these coupons in terms of premiums, but you know the lower pay up more generic strategies I think at this point offer us more flexibility and the TV as well.
Great. Thank you.
And buyer and following up quickly on your thoughts on on just the mortgage rates and maybe the return that investors can expect over the course of the cycle. I mean, you guys take leverage lower is that your way of saying that investors at certain points.
Hi, good shouldn't expect I'm, a little bit less return, but also potentially much less risk.
Thanks.
[noise] that's the balancing act that's literally again the reason I started off a bit long term vision is very important why startle for the long term vision is because we want you to know that the only way that you make it over a long term is first and foremost you must prioritize risk.
And so when we thought about the 30 year vision, what we told ourselves as we must get through 1998, and we must get through were 2008 scenario no. We've added March 2020 to that so the first thing. We're always thinking is the key for our shareholders that they can stay in the game over over the long term.
So as we continue to.
Evaluate.
Oh the environment as we move forward it is going to be again. This balancing act between ultimately the risk and return, it's very easy lever to pull in terms of leverage.
Oh your four times leverage you five times six seven I'm very easy the adjustment is easy to make its not a complicated process and that said Mark you want to add something.
I think the other thing we taught we think about in terms of returns you know most of the globe has zero or negative yields.
In fixed in the fixed income markets.
And at this point, you've got to consider the risk environment and the return environment to say you know don't reach for yield don't reach out there and take the types of risks that actually you know really damage you in a 98, Oh wait or March 2020 scenario and so that.
Does have an impact on you know I think taking taken returns lower.
Thank you guys for that.
Yep.
[music].
Thanks, Eric.
Your next question comes from Trevor Cranston from JMP Securities. Your line is open.
Hey, thanks.
First question and you guys talk about the remaining agency CMBS portfolio, how you're thinking about that if it's something you might.
Look to Opportunistically continue selling as spreads have tightened door or if that's something you're comfortable continuing hold onto at this point.
Hi, Trevor Yeah. So the book we have left is is nicely split between what I would say are more par or slightly above par price bonds and then you know some more premium price securities were comfortable with that position. We think we can be maybe.
In the stick in terms of taking spread tightening in what's remaining.
So again, you know our big reason to take down that position in March and April was was really driven by the fact that we had a high premium hi gain position in in that portfolio and we wanted to monetize those gains.
You know the risk is there, but we are our thought process was more protect the gains as opposed to really making a big risk statement about agency CMBS.
When we it was sort of unique to our portfolio. Most of the bond. We had purchased in that book or you know we had bought her on par and and they were 15 16 $17 price premiums on those poor on on those position that we thought it was really a good opportunity to monetize.
So at this point, where we feel pretty good about the remaining position if we get chances to rebalance. Our you know it's going to be a relative value decision between that patches.
Okay got it.
In terms of your you're a troubled.
Yeah, you're going to cover for good I think one other second on that last question just the plug.
Oh look a core part of our business strategy has always been capital allocation.
Disciplined capital allocation done it for years.
And in the last six months, we because of the changing risk environment. We've we've had to move up money around a little more than we normally would generally easiest take a theme that we sit there for some time.
But if you look at the end of last year's portfolio versus the portfolio. After the first two weeks of March versus the portfolio at the end of March versus the portfolio today very discipline is or how we're moving the capital capital round Oh in our balance sheet and we're allocating capital so.
We're very disciplined about it we think it's a.
Being nimble.
Being our size at this point is an advantage that we can do that.
And as we look to the future we want to use that.
The same process that we use in the past.
Okay. Thanks for those comes from.
And then in terms of your your interest repositioning.
I think you get the March 31 numbers and the slide deck.
Can you can you say if those changed with the with the portfolio reductions in April and more generally sort of how you're thinking about the rate profile portfolio going forward you know given the interest rates are near zero now.
Right.
How about how much riskier comfortable taking them. Thanks, yeah, Yeah, I think I mean, one of the one of a nice things about be about having me agency CMBS position.
This.
It's just how simple it has to hedge.
So our our our book actually from a from a net duration position.
He is not that different and you know in the since we sold since we sold the bond. So we've actually stayed fairly duration neutral.
The positioning at this point I would say again is is really going to reflect our broader macro view and the broader macro view is that.
At this point things could go in a more in a number of different directions right. A lot of people think the curve is going to steepen and so if that occurs then you know you push your hedges in the back into the yield curve. We have some of that thought process going on you also have the the idea that.
You know the front end of the curve is fairly anchorage. So there's really no point in having hedges in the front end, we agree with that so you know as we're adding assets in growing the balance sheet, we're going to have a bias for.
Adding hedges at the long or end of the curve and probably.
You know having that front end opposition family a fairly open.
Okay Gotcha.
And then last question can you provide a brief update on whether or not you guys have actually you know how did any portfolio broker or started adding agencies. So pardon me.
We have.
We've been able to find we've we've actually found that mortgage spreads are wider.
In in mid May here as as we've come into the month, so alone we've been adding assets.
And expect continued to do so.
Hey, Trevor you know the other interesting thing and I'm not sure.
I'll clear this points come across so far.
You know it did that fed is adjusting the amount that they're they're purchasing and you know we're still watching to see.
Oh really is the mortgage Mark we don't believe the agency sector will fall out a bit but we definitively believes spreads could widen in certain circumstances, especially as I said brings down their purchases and it's not a bad widening that's good what it means if prices are just moving work toward private capital like dynamics capital in our sure.
Holders are willing to assume the risk of instruments such as this so there's optionality in the future and I'm just taking a second it's just a pile on topics murkier and ER and makes a point.
Okay. Appreciate all the comments thank you yes.
Trevor.
Your next question comes from Christopher Nolan from Ladenburg Thalmann. Your line is open.
Hey, guys.
Hi, Chris.
Can you give an update to book value.
Since March 31.
Hey, Chris Yes, we commented it's it's not that's not materially different from from the into the quarter.
Great. Thanks to the then I'll follow up why shouldn't be given.
Your guidance in terms of leverage and spreads and so forth.
I'm sorry.
Ballparking it looks like you're targeting a return into high single digits.
For the company.
A return equity is that fair.
No I knew what I would say, Chris is going to depend on the risk environment.
And so if you look back at the end of what we are seeing though is if you look at what we work into last year and you think about my commentary over the last call a year or two were I mean really strong cases for taking higher leverage in liquid assets and one of the main reason was because you have the ability to adjust your portfolio.
Well, we are telling you here think about us short medium and long term. The short term is the next 40 weeks. The medium term is through the end of year and the long term is after the end of year and little we're thinking short any cost you got a short medium and long term approach.
In the short term the world is evolving.
And so we're not going to lead to where we were at the end of of December, let's say everything's, okay, because everything but okay. The world is evolving and we're taking a phased approach to a reinvest in our capital.
So I couldn't give you that this is somebody get exacttarget, what I can tell you. This approach short medium long term.
We're evolving outweighed back to a still philosophy would that we have which is that up in credit and up what did he is a good strategy and I still rather be off I'd, rather have more levers on highly liquid assets that lower leverage on less liquid.
And that's just an argument we've been making.
Sounds good clarification.
Well.
Thanks, Chris.
Your next question comes from Paul Stewart from Jones trading your line is open.
Hi, its Jason.
Also today off today I wanted to follow up on the question about agency MBS and taking leverage up there. It sounds like two of the markers, perhaps could be yield curve steepening earned and fed involvement how willing are you to dial up and down.
That's correct me if I'm wrong, if those are not market what are the markers and how long are you to dial up and down based on on factors like that.
Yeah, I think hi, Jason.
It is it's really it's really an interesting trading environment.
The.
If you look at how mortgages are trading every day.
Before the fed comes in.
You don't really they sometimes cheap then they sometimes there's sometimes tighter but really the fed has an impact on the prices of of MBS during the trading day.
And then immediately after.
The fed comes in and does their operation the market has been sort of subject to the whims of originators and other investors and so on so as we see the trading develop on a daily basis, we're finding pockets of opportunity, where you know, there's nobody else providing liquidity for the sector and you can.
Actually going there and buy buy bonds. It really good levels. So it's kind of a micro micro trading days strategy type of environment. At this point. So we are finding good good windows to add assets, even know broadly you might say, yes. The fed is then mortgages are tightening.
Probable there's still but there are still these windows that are being created because of the microstructure market. So so we are absolutely willing to take the to the leverage up and you know we follow this stuff on a minute to minute basis and if it meets levels the off price levels, only yes spread levels that we like Oh Wow.
Jump in and and put the capital to work.
You know, we're talking about the steepness in the yield curve, we only more.
He more broader long term thought process again here right. So if the curve steepens, we do expect to see extension in mortgages. We do expect that at that point, there will be an opportunity to take a more duration risk because you can really say, okay look I'm, taking I'm, taking the young taking that.
Long and risk on I know the front end is anchored but then again I think what we're going to be fighting with like 99% of other investors in the in the globe at that point. So whenever you know so we're cautious not that just sit around and wait for for something like that to happen I'm. You know if we see good good good opportunities to put the money to work.
Oh, we're gonna do it.
Okay, that's fair and between now and the achievement of for medium term are we target how willing are you to let core analyzed sort of snake around the dividend and how does that relate to a cutting the dividend.
You know I'll take the the you know my level question, then I'll turn it over to Byron, but you know again I think at this point right, we were going to be putting the capital to work in a disciplined manner and so core income could be below the dividend for some.
Time, and then you know maybe.
Work its way out I I think at this point, we're just trying to be.
Focused on capital preservation, making sure we're not.
Running out over our skis and then finding those good opportunities to buy the assets. We think we have a we're going to have a chance to do that in here.
The other point here is if you have you recognize the two separate.
And there's no steel rod attached between the core.
And it's a smart decision.
For risk management.
Managing for the long term, it's a smart decision our job is to generate core income cash income for shareholders.
There are there there are options or earning cash income or dwindling globally. So we're well aware of that and when you read into what you read into the older dividend and maybe you should read anything really into its a bit respectful of <unk> or by stakeholders and remember again back to what I, just said short medium and long.
Okay renewed short term makes for eight weeks, we're going to digest, an enormous amount of information show you and so every other market participant globally the virus evolves.
Economy evolves more bankruptcies of fall this et cetera, we can come up with existing questions, but we're being very disciplined in our risk management process that includes what level do you have your dividend versus what all than you have you calling from positive for US is a financing costs are anchored at the lowest levels. We know we can make.
Money now we need to be very disciplined this managers, so our shareholders to stay in the game over the long term.
Got it thanks for taking the questions a nice shopping a tough environment.
Thank you.
Your next question comes from Matthew Howlett from Nomura. Your line is open.
Thanks for taking my question good morning bearing.
First of all the congratulate.
For the job in the quarter, they really stands out you're probably going up the best performance of any mortgage rates. So I want to lead off by asking you about capital management.
Obviously, the dry powder.
I'll talk about buyback stock.
She whether you're like are not your group in this you're in this mortgage rates stay is dislocated everyone that big discount to book, you guys, including even with the performs outperformance.
How do we think about buybacks and then you've got a habit.
It was different policy that is yield so much higher than everybody else I mean piece, what we can tell.
What's the.
How long are you willing to do that if you're not could be rewarded by the capital markets for it with you I'm, assuming you'd like to grow overtime to just talk a little bit about capital management and being group in this space here that.
You know really dislocated.
Yeah first off the whole the dividend made but is not not that much money. Good thing about having a monthly dividends is you're getting up to date information we could be more precise about our adjustment shareholders can get a multi payment, but it's just not that.
A much bigger deal from a capital management perspective, we're not necessarily holding it here to get some type of well reward for what we are though is as we said earlier phased approach and analyze the current risk environment. So that's literally what is it do reflects we're in this phase approach in terms of analog.
Oh, you overall risk environment. So buybacks, we have the ability to manage as we said sometime ago. We are we look at both sides of the balance sheet, we'd like to aggressively manage both sides of the balance sheet, we make a decision to invest.
A dollar into an agency mortgage backed security we will also be evaluating what should we take that dollar buyback saga buyback preferred so we're pretty disciplined in our process in terms of how we think about that and really think about if you think about dionex capital think about the fact, we have.
Long term vision, which.
Absolutely is essential that were very very disciplined risk managers and so we're in a period for the short term every what happens to be.
In a period, where we are assessing the old wall global environment, and what's the overall best risk reward and positioning of our portfolio that we should take.
It's worth of Steve you want to add any more specifics around this.
Yeah, I think the only other thing to say your math is just the the performance is the foundation on which we build our feature ability to grow and then the second thing is just that business model itself as Byron mentioned, there just long term positive factors here.
That you can put together a nice stream of income.
Well when you know one that we think is an above average returns.
And overtime.
That is that is something that's still in demand in the globe. So lots of fundamental long term positives.
I think that will be good for the business model in the near term it isn't going to be clear to everybody.
But overtime I think that that starts to differentiate and.
And probably will drive.
And my point was just on the capital markets. The cost of capital you internally. Ron you are we focus clearly you know clearly would like to grow long term or says the company as we do Chris.
Good.
That's the yeah, we would like to go over the Walker.
And any I've just what your structure you should be able to remember calling the financial crisis.
Lot of mortgage that raise a lot of money grew significantly.
Just going to gone x's opposition to that but you're going to the equity works on cooperating remarks are cooperating it seems like buybacks really stands out here today and.
And on that note I mean with it.
Yes gains or is there going to beat is taxable income.
We're quite a bit where somebody gains or is that can offset gonna be upset by some of the March in one acuity derivative losses on Q, just just curious on taxable REIT taxable income, which everyone Rcs will buy but.
Yes, so Matt let me take that one last year, we did have some return of capital. This year, the first quarter for a dividend character would be all capital gain.
In a way to tax rules work on derivative transactions. Your hedges that you a lift a they are amortized over the original period of the hedge. So yeah. There are some carried forward amortization from prior years that will offset.
Some of these gains that we may be taking so I would I would think about it as.
The character for the first quarter is capital the character for the balance of the year will depend on sort of further transactions from this point forward.
You know that depending on sort of the size of what we might sell going forward.
Got it got it well I appreciate it congrats and thanks, everyone.
[laughter].
Your last question comes from Jay Weinstein from about spire is your line is open.
Alright, I always like because the last word.
[laughter] [laughter] quick so.
This company in its current form is really as you mentioned earlier built.
At a rapid kind of build up of the portfolio in 2009 in 2010, I haven't gone into that 2008, I remember correctly about two thirds to one levered or something like that.
And then you really became a much more normal right yeah in a very at a pretty quick fashion.
It's hard.
At a low leverage position.
One, but quite low compared to the industry. It's hard for me to proceed both your comments and with the world.
Any kind of catalyst or trigger that would say okay.
Trigger buyer in smartly to say, okay, we're actually going to pick up asset size take up.
Go down liquidity down in credit like you mentioned.
It can you see the anything like that.
In that environment happening there anyway that comes that comes no.
Let me start I'm less Merck chime in so let's compare let me make a comparison to what happened in no way.
So let me tell exactly what we did in a way.
So we do we start rebuilding its portfolio in January 2008, we're in the middle of a crisis.
We deployed and agency mortgage backed security strategy for the first.
Year to year and a half.
Now, while we did that we always made it clear, though we were not an agency only right.
We felt given that risk environment, not only do we deploy an agency only strategy. We deployed a short duration agency only strategy lenient arms now what was the big difference between then and now huge difference the curve was deeper.
The fed took rates to zero, but there was an enormous amount of steep thats in the current back you should run on Bloomberg, There's a pullback run 2008 versus today run the yield curve, it's amazing when you see that huge differential.
No there's still plenty of money that can be made today, but that is a big big big difference here's the other issue with the 2008 situation and I think if you go back to that first annual meeting that I remember I spoke at at that point because prices have blown up we knew what the situation was we knew they were bad loans being made we knew they.
We were in the subprime arena and it it blown up and because it was in Dodge is shock that means the change from inside of the system.
We could actually make predictions from that.
So the other big difference in Dod universe, the exaggerated shock we haven't it shocked that is happening outside of the system, It's a health crisis.
Which nonetheless happens to be a doctor or scientists or research professional. So it is a huge difference in terms of how you perceive the risk today versus at that point in time, but again, let me go back and recount history. We went into an agency strategy were bought a year and a half and then we moved in.
To a CMBS strategy using really only AAA securities.
Then a few year couple of years later, maybe a year or two we were starts to go down in credit we went down into the triple B sector. We went down to some non eight rig rate or and rated securities and there will phenomenal opportunities. In fact, we were the only wants purchasing at points in times in terms of Io multifamily.
These securities we Didnt have any competition it was unbelievable.
This time around the fed stepped in immediately they stepped in with the Ginormous bazooka a lot of those opportunities have literally been notified because they put up the border and torque enormous matches on any of the corporate market. They put it underneath the loan market. They put it underneath the the a there's still some lingering areas and some non agency.
But on rated CMBS or or RMBS, but it's still not enough yield for the overall macro vis that you're still taking is with this examining the shocked is still creating this uncertain all global economic events.
So I'm open let him give you give me some real play by play of what the differences now versus the strategy that we deployed in 2008 that strategy was absolutely designed for 2008.
This strategy is designed for today and what are the big issues. Today is for the next four to eight weeks, we're going to find out about this virus.
We're going to find out about the economy. All we know now is that we tried to stop the economy, but do we really know how many people are going to be permanently fired.
How many are not going to pay rent how many are not going to pay the mortgage so we take our leverage up the Nymex times leverage you know what we would be telling you right right now we do that tomorrow, we know exactly what's going to take place.
And we just don't think we should do that for you Jay your long term shareholder in Dionex, you've been around a long time, we believe the key to this business model is longevity. So I'm glad you asked a question about is a direct comparisons between 2008 today.
I could keep going I could tell when you do every single investment in every thought process, we had back in 2008 versus what we're thinking today.
[noise], Irene and keep telling people. They said they are totally different so that was the financial crisis.
We ended the day had a much less of the effect on the real economy for shorter period of time, while they build out the financial system. This time the financial system has worked incredibly well given the stress on it but as you say this is Raj is for so we don't really have any ability to forecast much of anything.
Yeah, I mean, I figure I agree with everything you just hey, thank you as always.
Thank you Jay we appreciate it.
We have no further questions I turn the call back over to the presenters for closing remarks.
Thank you all so much for joining us on our call today.
And so there's a lot to talk about it simple really fascinating moment in history again, a dinesh capital we're playing for the long game, we believe a oh the best success will be we get fan again, our shareholders conveying the game Accreditors can stay in a game in all of our stakeholders and again. Thank you again, we'll look for do you joining aside our next conference call.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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