Q3 2020 Dynex Capital Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the dying that's capital Inc. third quarter 2020 earnings results and conference call. At this time all participants are in a listen only mode. After the speakers presentation, there will be a question and answer session.
Last question during the session you will need to press Star then one on your telephone keypad.
Require further assistance please press star zero.
I would now like to hand, the conference over to your calls to your speaker today, Alison Griffin Vice President of Investor Relations. Please go ahead ma'am.
Thank you.
Good morning, everyone and thank you for joining us with me on the call today I have Byron Boston, President and CEO Murthy, popping <unk> Executive Vice President CIO, and Steve Benedetti Executive Vice President CFO and COO of the press release associated with todays call was issued and.
Filed with the FCC. This morning October 28 2020.
They viewed a press release on the home page of the dynamics website, <unk> dynamics capital Dotcom as well up on the Fccs website at Sep 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 anticipate estimate project plan.
Blair expressions identify forward looking statements that are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified.
The companys actual results and timing of certain events could differ considerably from those projected and or contemplated by those forward looking statements.
Result of unforeseen external factors or risks.
For additional information on these factors or risks please refer to our disclosures filed with the FCC, which may be found on the dynamics website under Investor Center as well as on the Fccs website.
This conference call is being broadcast live over the Internet with a streaming slide presentation, which can be found through a webcast link on the home page of our website. The slide presentation may also be referenced under quarterly reports on the Investor Center page.
I now have the pleasure of turning the call over to our CEO Byron Boston.
Good morning, and thank you very much for joining our call today.
As the sole shareholder and seal dynamics capital I am extremely pleased with our exceptional performance. We've continued to build book value, which ended the quarter at $18.25 per share over 1% for the <unk> for the year.
Economic return year to date is now 8.4%.
And economic return for the third quarter was a strong 11.7%.
This performance is especially remarkable given the unprecedented events of 2024 financial markets.
In addition, we generated income that burn we exceeded our monthly dividend payment.
It continues to be an acceptable environment to generate attractive cash flows for our shareholders.
Nancy rates are low and the liquid assets were invested in offer attractive risk adjusted returns while generating strong net interest income.
Balance sheet gives us flexibility to navigate this complex environment.
Philosophy and behaviors remain disciplined.
Well it wasn't a major period of transition and this will be the case for some time.
We have aligned our investment strategy across major relevant elements, such as federal reserve and government policy.
Then the housing finance system, which offers a great opportunity to earn income for our shareholders. We believe this is one of the safest places to invest money versus all other asset classes at this time.
As such dynamics comp capital stock offers a unique opportunity in a world where global yields are low and cash income from high quality assets, it's difficult to source.
Specifically.
The stock is trading at a significant discount to book value on our balance sheet that is 97% agency guaranteed with easy to value liquid securities more.
Monthly dividend of 13 cents translates to a yield of over 900 basis points above the yield of 10 year treasuries.
The risk position is being managed by a skilled team of professionals with extensive experience running leverage portfolios across many asset classes.
[noise] very significant earning power in this balance sheet to make accretive investments as the environment continues to provide attractive investment opportunities and liquid assets.
To drive earnings above the current level of the dividend.
With that I'm going to turn the call over to Steve Benedetti give you more specifics regarding the quarter.
Thanks, Byron and good morning to everyone listening.
Book value per common share increased 9.3% to $18.25 in core net operating income per share increased 69% to 61 cents per common share from 36 cents last quarter.
Net interest spread was flat quarter over quarter, while adjusted net interest spread increased four basis points to 200 basis points for the quarter the widest level for the company in seven years.
Over the next few quarters, we expect our net interest spread to modestly decline given the portfolio adjustments in the third quarter is our recently purchased agency RMBS ramp up the seasoning curve, but the earnings impact could be offset by higher balance sheet leverage.
Total economic return of 11.7% for the third quarter can be broadly explained by three primary reasons first book value grew its investments purchased post the first quarter of this year materially outperform related hedges said.
Second a higher balance sheet of average, earning assets, including TV, a securities and third the low funding cost environment in TV, a dollar rolls in particular, what's implied funding costs at negative levels for the quarter.
The latter two points, where the predominant reasons for the strong improvement in core earnings versus last quarter.
In an environment, where interest rates are low and the mortgage refinance index is closing in on its highs for the year. Our agency RMBS prepayment speeds were only 12.4 CPR versus 10.4, CPR last quarter, while overall portfolio CPR is inclusive of the CMBS portfolio were approximately 11 CPR.
Our solid prepayment performance reflects the benefits of our active portfolio management earlier in the year and our diversified investment strategy.
Furthermore, prepayments only minimally impacted earnings given the lower coupon emphasis in the portfolio when the law lower cost basis at which we own these assets.
In addition, any impact on book value from the two CPR increased during the quarter was more than offset by the increase in pay ups in higher dollar prices on these assets.
As a reminder, our prepayment amortization is reflect the true pre pre payment performance of the assets that do not include any catch up amortization or similar adjustments.
Toward the very end of the quarter, we sold approximately 382 million in recent issued DUS Securities. We recorded a gain of approximately $20.8 million on the sale and lifted corresponding hedges at an economic loss of 2.1 million.
The sale had the effect of reducing our investment assets and leverage at the end of the quarter to approximately 4.2 billion and 6.2 time shareholders equity respectively.
Smriti will be giving more details and an outlook for our near term investment plans in her comments.
Average interest, earning assets, including TV a securities were approximately 4.4 billion for the quarter versus 3.2 billion last driven largely by increases in TV a securities funded through the dollar roll market.
As it relates to our hedges, we continue to utilize a treasury based options and future strategy and this quarter, we added 500 million and Swaptions at the end of the quarter. We had approximately 2.8 billion and interest rate hedges versus 3.8 billion and borrowings and TV a dollar rolls on.
Approximately 75% coverage on a notional basis.
With that I'll turn the call over to Smriti for her comments on the quarter.
Good morning, everyone and thank you Steve.
I'll cover the factors cover driving third quarter performance discuss the current environment, how were positioned specifically with respect to our risk profile dollar rolls and prepayments and how we expect the managed to position in the near term.
Regarding third quarter performance, our strong book value gains reflected the tighter spreads on investments that we had made early in the second quarter across the agency market in both CMBS and RMBS. They also reflected tighter spreads on existing positions and agency and non agency CMBS iOS.
Towards the end of the quarter, we further reduced our allocation to agency CMBS stuff as spreads tightened in to all time lows in that sector, we have not yet redeployed the gain or the original capital.
Means as dry powder.
Second factor driving book value was the investment in specified pool pay ups [laughter].
These improved for less popular stories path for state specific and fight going LTV pools increased in lower coupon as mortgage rates hitting new lows. This is shown on slide 27 in the appendix.
Quarter to date book value is about 1% lower than our reported number at the end of the third quarter given wider MBS spreads in the last few days.
Turning to the environment, our macroeconomics focus top down process remains an important cornerstone of our investment strategy. We are highly respectful of the environment, which we still assess as an evolving health and economic situation.
While central banks have cushioned, the near term impacts medium and long term consequences of the pandemic are yet to be fully discernible. They may not be readily apparent for several more months.
Our view is that the injection of liquidity by central banks may actually be masking the true underlying picture and we find this a particular issue and lower rated credits.
Add to this the current domestic political uncertainty with many of the future economic pads highly dependent on government policy and what you have is a very large number of scenarios to plan for as an investor.
We therefore see capital preservation and liquidity as key to navigating this environment.
We are approaching the situation with lots of scenario planning.
[noise] leads us to maintain a high level of liquidity, hi allocation to very liquid positions on both the asset on the hedging side and this gives us the flexibility to respond to any event as it unfolds.
In terms of earnings and economic return.
Due to our sales have done at the end of the quarter, our portfolio balance and leverage on lower versus June thirtyth.
Even at this lower leverage level of assets and leverage.
With the current level of mortgage Reits unexpected prepayment speeds.
We expect to be able to comfortably out on the dividend in the fourth quarter EPS.
As a result, we also have significant earnings power in the balance sheet, we have the flexibility and liquidity and we stand ready to redeploy capital rapidly in the agency RMBS sector, which continues to offer attractive returns.
We fully expect to take leverage up we have currently respecting the U.S. election, and Brexit as notable events on the horizon.
The earnings and economic power from one additional turn of leverage is significant versus the current level of the dividend, which stands at 39 cents per quarter, one times leverage at 11% total economic return generates seven cents, a quarter or 28 cents additional value per year.
This would be an additional tailwind to book value and total economic return in the coming quarters.
Turning now to how we're positioned and how we expect to manage the portfolio.
I'd like to emphasize the need for flexibility in this environment as well as active management.
In agency RMBS, we have been and continue to be active in hedge an asset selection, specifically to address prepayments and duration extension both of which we believe can be actively managed.
We're addressing prepayments were they down in coupon position that is hedged with treasury futures and options to protect duration extension.
This type of portfolio hedge positioning is respectful of the many possible outcomes.
And the high dependence on the issuance of U.S. government debt.
Economic Stabilisation stimulus and recovery.
Our hedge portfolio is currently composed of Treasury futures treasury options and swaptions on longer dated tenors.
As you can see on slide 12 the.
The portfolio profile shows the impact of rising rate scenarios, and steepened ours as well as lower rates the model to equity at risk is fairly contained.
We used treasury futures because of their liquidity flexibility and we used treasury options and swaptions to hedge convexity.
Treasury features give us 24, seven trading capability with liquid and transparent markets for options.
We currently view that the benefit of options greatly outweighs the costs to total economic return, especially when interest rates rise ops.
Options also have less liquidity draw an impact your book value less compared to swaps or futures hedges when interest rates fall.
Turning now to dollar rolls on dollar sales versus specified pools. Our current assessment is that the incremental return for specialness in the TV, a 32% coupon is far superior to owning high pay up specified pools.
We see several scenarios with especially on this remains in the 2% coupon at least into the first few quarters of 2021, and some scenarios where last much farther into 2021, it's important to know the specialness in twos takes what is currently an 11% return asset.
To a 16% to 18% return on assets.
All else being equal if the Specialness fades you can choose to remain in the T.V.A. at whatever return they offer at that point or switched especially specified pools.
Finally, a word on prepayments.
Our view is that pre payments or a manageable risk and we actively manage them using asset selection premium management timing of Reinvestments and options hedges.
I want to make the point that the greatest prepayment risk in the market isn't the cheapest to deliver securities and into loans backing those securities.
These bonds and loans are not on dynamics its balance sheet.
As Steve mentioned, our portfolio average speed was 12 CPR for the quarter.
First is the average in the universe of 33% CPR.
Bonds of greatest concern, mostly sit on the fed's balance sheet as well as on the balance sheets of mortgage servicers in the form of MSR sales.
At Dionex, 90% of our pools have some form of prepayment protection. So we are not exposed to the cheapest to deliver prepayment experience that you read about and hear about in the broad press.
So what does this all mean for dining shareholders.
The environment remains extremely favorable to earn returns from high quality liquid assets with the portfolio at 6.2 times leverage we still expect to out on the dividend for the fourth quarter 2020.
We believe the target leverage is higher one and a half to two times higher than today's levels.
That gives us significant upside potential for us is the dividend.
Our posture of flexibility and liquidity enables us to rapidly deploy capital to add to earnings and to drive outperformance versus the current level of the dividend.
One times leverage at 11% or are we is 28 cents inquiry P.S. annually.
The portfolio is currently positioned with hedges to protect book value in a variety of scenarios. The return environment supports accretive investments in <unk> that will likely exceed hurdle rates, even as implied financing from dollar rolls moves closer to repo rates.
We continue to believe that active management of the portfolio is essential in an environment with many known and unknown unknowns.
As we are co investors with you we remain highly attuned to market developments and attractive opportunities for value creation I'll now turn it over to Byron.
Thank you Smriti.
Let me close my comments by emphasizing a few key points.
We believe the key to successful long term strategy of managing a mortgage rate is risk management first followed by effective capital allocation across multiple asset classes. We.
We've been consistent in our approach to the market and we want to be as transparent as possible for you our shareholders. So you have confidence and leaving your money with dynamics.
We're really excited about our prospects, but we take most comfort in our disciplined process of scenario planning and preparation.
We continue to believe surprises are highly probable as we settle into the fact that global central banks and other government policy makers are now big undisputed king patterns in determining the winners and losers in our economy and financial markets.
We think dying its capital stock offers tangible value in that regard.
I will repeat what I said at the beginning of this call.
Our stock is trading at a substantial discount to book value for liquid balance sheet.
The monthly dividend offers compelling yield in a low interest rate environment.
You have an experienced team of professionals run into balance sheet with significant upside earnings power versus the current level of the dividend.
If you want cash income plus total return over the long term.
We believe dynamics capital is a great place to invest your money.
My teammates and I have managed leverage the portfolios through every crisis since 1986.
Were internally managed in a material amount of our personal net worth is invested in buying excess capital stock.
We're all shareholders here Dinesh capitals, not just want to make funds that we manage dynamics is the only fund that we manage.
So please join US on this journey, we remain committed to our long term vision and being good stewards of your capital.
And with that operator, we will open the lines up for questions.
At this time, if you'd like to ask a question over the phone lines. Please press Star then one on your telephone keypad.
We will pause for a moment to compile the two one day roster.
Your first question comes from the line of Doug Harter of Credit Suisse. Your line is open.
Oh, thanks, so barring in Turkey can you talk about how you are thinking about the dividend level. You know given that you expect to continue to cover that you know with the lower leverage and then have that upside potential from.
Yeah from a getting leverage or backup.
Sure. This is all again backdrop process. It all starts with a macroeconomic view the month to month issue for us regarding how we oh manage our Gibson, especially in this environment, we have multiple events in front of us U.S. election, we've.
Got a Brexit situation in Europe. So we're navigating through a period of time, what we need to be month to month in terms of how we think about the different but we're excited about is we've got the earnings power, we've got flexibility and we've got options.
And that's what I'm really trying to convey to our shareholders is that we do have options and but I tell you. We're a month I like to hand them off the dividends versus your old and I think it's important but it is a month the mom bought decision. What you do know we look at the numbers you can always say look you guys have the ability to raise them and if they want but we're trying to be.
Mark we can give you that a you don't want to as you know.
The rushing on a dividend and then putting ourselves on awards risk position, we're respectful of the environment. We always start with the macroeconomic you are likewise in terms of how we allocate the capital well between keeping the capital internal versus distributed to shareholders. Smart you are thrown in there I mean I think the.
And the other thing I would say is you know in the meantime, the dividend is a tailwind to book value and has that positive total economic return I mean, the stock already yield close to 10% so.
So you know.
At this point, we feel like having having that capital is also a nice option to have.
And Doug you bought Yep, Doug you known us a while we've always been respectful of all the overall environment.
No.
Smartly just to follow up on one of the comments you made about you know the different scenarios for for TV, a special unless wondering if you could just kind of go in and kind of what news or go into a little more detail there and kind of what you see as kind of the key factors as to kind of how long that special misled.
Sure Yeah, I think that's the question on everybody's mind [laughter] first off I think one of the things. If you just go back and look over over history.
In any given environment, there's always one or two coupons that end up being special I either their implied financing rate is lower than the repo market and that's true in in all markets.
So if you go back to 2012 2013 2011, you know that was that the three and a half or <unk> percent coupon that 3% coupon.
So in every given environment, there's always one of these coupons out there.
Now [noise] there are certain factors in todays environment that make it unique and the number one factor to that is the demand from investors the biggest investor right now with demand as the fed the second biggest and best group of investors, our banks, So bank demand and fed demand is dry.
I think I'm a big piece of this Oh, we don't think the fed demand is going away. We don't think bank bank demand is going away and that's that's going to be persistent over the next you know.
468, 12 month, you know go as long as we're sitting here at these levels of interest rates.
The second piece is production.
So interestingly production and the fans in the two 2% coupon. It is it is being it is the largest coupon that's being produced but the demand for that coupon has outweighed the production and that continues to be the case I'm looking into December January and.
And well into early 2021.
Third piece is just the dynamic between the two and a half coupon and a one and a half coupon. So you've got you know the fed was big and buying twos and two and a half there's a big speculation out there whether they are they're going to get out of two and a half and buying by wanting to have either way they still have to buy.
And so that persistent demand is going to continue for some time.
So one of the things you know when we think about markets. We think about fundamentals technicals psychology. The fundamentals are driving the production of twos. The technicals are saying that the demand for twos is greater than the production and D. These two factors make it.
A more persistent phenomenon, a especially in this type of interest rate environment than than in previous times.
Scenarios, where you don't have.
Again like if if rates go up from here years, you're still gonna have Fannie twos being produced and they're still going to be in the production mix you'd have to see rates go significantly above 1.5% for Fannie to stop being created.
Great I appreciate that that's right.
Sure.
Your next question comes from line of Bose George of KBW. Your line is open.
Hi, everyone. Good morning.
Let's see first I just wanted to ask about the lift in Staten Island census expenses spread on the TV position, whereas that in October just compare to what you did last quarter.
Sure Yeah. The the implied what we're seeing today for November December December January is implied funding rates between minus 50 N minus 60 basis points with reposed trading and the positive 25.
Fiveish area.
So it's a significant benefit.
Benefit.
Great. Thanks, and then just a question on the Lepage, So went down quarter over quarter, but is there a way to just think about the average leverage in the quarter just given the timing of sales.
Yeah, Hey, Bose its Steve see.
Yeah, if you.
Our average assets, earning assets for the quarter were a little over or right around 4.4 billion.
So I would think of it in that sense, you know that we generated the earnings this quarter based on a $4.4 billion balance sheet size, which is really just a hair higher it's not too much higher than where we are right now.
In terms of clever.
Okay, Great and then actually just one question just on the.
The hedging.
Yeah. They are doing it with 'cause it futures and swaps and you just sort of conceptually without the benefits of the you know versus swaps.
Yeah.
So futures there they're extremely liquid on it you have the ability to trade them.
I said 24, seven but really you can't train them on Saturdays, but you know starting Sunday night, all the way through a Friday. So it is it is a 24 hour trading platform. The options are also quoted a and able to be traded 24 hours. So that that make because we wanted liquidity and flexibility we like the idea of.
Having having to do that.
At some point and it will make sense for us to get back into swaps. That's it's not something that we're rolling out. This is just what it what it feels like the right thing in terms of liquidity and flexibility at the moment.
The reason we have options, though that is that's a big you know if you look at if you look at our ours, our futures position the swaptions positions plus the treasury options position.
Our hedge percentage is about 75% of the portfolio. So we our hedge ratio is is actually pretty high but the nice thing about it is that keeping that a big portion of that and options makes it so that when interest rates fall you don't have the liquidity drain from that.
Swap position, that's going against you and that's hitting your book value.
That's the that's the really nice thing about having having options and the position option prices were actually dipped.
Fairly significantly in the third quarter and so we were active buying options in that period, you know they've obviously appreciated since then.
So that's that's the benefit of having the option versus.
Versus versus the actual swapped swap hedges, but in general we don't really see a huge difference in in futures and swaps were trying to use instruments that will help us hedge and generate the economic return.
You know most of the market is now sort of thinking about hedging mortgages with treasuries. So.
So that is up the correlations are slightly better but you know we we expect that we will have all of these instruments in the quiver. If you will you know as as we think the liquidity in them and any other factors that we want to have in flexibility and in those in those structures [noise].
At the right time will be back in house.
Okay, great. Thanks sure.
Okay.
Your next question comes from line of prefer Cranston JMP Securities. Your line is open.
All right. Thanks.
Other question on the TV series and the dollar Rolls you know.
Sounds from your comments like that's where your bias to deploying dollars incrementally.
I was curious if you do get the opportunity to move your heart liver tire at some point in the near term <unk>. You know how is that how we should think about the sort of practical limit in terms of how large the tubular sales trinkets relative to the overall portfolio and what the considerations are there. Thanks.
Yeah. So there's there's really two things.
I think in the near term you know where there's value that's where the capital goes and I think we have significant room, you know from a taxable.
Income perspective to be able to do that so that that ends up being the binding constraint.
At this point, so we feel pretty good about our ability to take that position up to 35, 40% of the of the full balance sheet.
To the extent the opportunity is there.
We obviously have that as a as a as a guidepost or a governor you know for the full year traveler. So it ends up being a full year type of thing that you have to manage.
But at this point, we don't see that as a as a as a real binding constraint.
Okay got it.
And then thinking about prepay risk or I guess, the the coupon that stands out to me in your portfolio is due to two and a half so I was wondering.
You know how you guys think about the sensitivity you prepay speeds. There for example, if we were to see like a modest rally in rates and continued.
<unk> primary secondary spreads.
Just curious about the Kupol yeah I.
I mean that coupon is is a vulnerable coupon we do have.
Prepay protection in that coupon so that the the bonds, we own have had some form of prepayment protection.
The other piece in there is the basis that which we own those assets. If it's fairly low so that that protects us to some extent in terms of degradation to core earnings. If you will but you know we are expecting prepay speeds to rise and one of the interesting things that happens is we forecast prepayments speeds.
And where we are actually actively reinvesting that capital when we see wider spreads are better returns right. So that's another way to manage that risk. So we know that that prepayment speeds could rise we've got low bases in this in these assets.
And the way to generate value and then in IRI in an era of rising prepayments is making sure that.
As the prepayments are coming in or even before they come and youre, making not accretive investment when spreads are wider and managing your leverage for that you're making back some of that some of that return by pre investing that capital. So yes, you know.
We do own two and a half we own two and a half we own twos. We think it gives us a very good you know base from which to work in a range of interest rates.
We we accept that there's there's prepayment risk in those and we're managing that risk.
Okay makes sense appreciate the color. Thank you.
Sure.
Your next question comes from the line of Christopher Nolan of Ladenburg Thalmann. Your line is open.
Hey, guys. Most of my questions have been answered all summer can you provide any update in terms of CPR quarter to date for the fourth quarter.
Mm I believe we are we I need to get back to you on that give you. The exact number okay. Great and my follow up question is previously you guys had a core or we target of 8% to 10% I mean.
Any update to that.
You know in general, let's talk about that because over the long term you think about long term returns.
8% to 10% over the long term is great, especially with the vehicle where we our goal is we have a lot of shareholders who need cash income.
Now what they don't need us trying to do is swinging for the fences and trying to generate 30 40, 50% because in a business model like this that takes a lot of risk.
So we keep in our minds they could simply we know when we're above 8% to 10% we're happy when that type of environment. So this is a good environment right now.
And over the long term.
We keep that as an anchor because generating cash income and I'm, having a focus on a 10% is a smart move.
You want to try to say I'm going to try to generate cash income and my goal is gonna be 15% to 20% fine you do that that's done that's not dying examples that we can take a 15% we'll take it.
Well, we've got a fear we gotta principle here to shop, and we start with risk management first and foremost we know bars. We also know our shareholders most or all looking for cash income. Many are retirees millette burst that I want them to do would be comfortable that we are disciplined risk managers, so having an 8% to 10% target is a is a good thing.
Ah Chris over the Walker.
Does it make sense say, oh, probably pretty good it's I'm just trying to see where the thinking was on Oh, yes. It for me. Thank you.
[noise] I can if you would like to ask a question over the phone lines. Please press Star then one on your telephone Keypad. Your next question comes from line of Jason Stewart of Jones trading your line is open.
Good morning. Thanks.
Back on prepayments I was wondering if you could elaborate or talk about your view on that the additional capacity in origination Oh I guess, what's come on line in the last six months and how you view that more broadly and then specifically as it relates to spec pools.
Yeah.
No I think I think that most originators have been behind in terms of capacity, but that that is changing rapidly.
You're seeing a lot of people add.
Add capacity, you're seeing a lot of people put technology to work I think in the cheapest to deliver a loans and securities. Jason you do see the impact of that on the timelines at the moment. So the timelines are still you know 45 to 60 days out there. So it's.
It's not like the capacity has come online and more more loans are going through the pike than before in a in large quantities I do think it's there I think it comes on line over the next six to 12 months. So it's going to be a slow grind rather than a fast you know big Spike and you can see that in in the refined excess.
Kinda, reflecting a little bit of that as well.
So capacity, it's been added it's going to continue to be added I feel like the work from home I situation is is making it harder for some of that capacity to come online, but that just means it's just a matter of time.
You know in terms of the primary secondary rate, that's what's keeping the SEC primary secondary kind of sitting out there at this point, but that also I think over time makes a slow grind a comeback in and I agree with you on the higher coupons you know the specified pools start to become.
A little bit more of dangerous are tricky territory.
As you start to see the lowest hanging fruit you know get taken out of the game and then the originators focus on the next block of the in the money loans. That's when you start to see the spec pool, you know speed start to.
Speed up and and and you've got to be careful in the higher coupons.
So so I think that's a.
You know in general if you ask us about what our view is on prepayments. We tell you that you know more with mortgage rates being between 2.5% to 3% pre.
Prepay speeds are going to go up they're going to go up because of two reasons.
It was incentive in the market because 90% of the loans are in the money.
And the originators are gonna methodically find their way through all the bond all voluntary and the money the ones that are left behind will be credit impaired borrowers. Those you know there's value in all of those things as a as an investor, but you know by and large we need to be ready for for higher prepay speeds in general.
Got it it makes sense. Thanks for the call appreciate it sure.
There are no further questions over the phone lines at this time I turn the call back over to the presenters.
Okay. Let me let me make just a couple of closing remarks here based on the questions. Chris Nolan. Thank you. So much for that question about 8% to 10% because you gave me an opportunity to do just emphasize the dynamics capital we are long term investors.
And we're looking to Shepherd your capital as our shareholders over the long term.
And so when we can get above average dividend or above average returns we want to be very thoughtful and represent use their shareable shareholders and taking that above average return.
But over the long term risk management is first.
The next point is on the dollar roll we've gotten a ton of questions about dollar rolls over the last few months at the risk of a revealing my age I started trading mortgage backed securities. In 1986, we were in the middle of a big reply wave at that time, we were refinancing 18% coupon 17% 16%.
And for the last 34 years, we've had multiple rewalk by waves, there's nothing unusual here.
Mortgage originators create a lot of product in a refi wave and they sell them in the back month that means 30 days out the future 60 days 90 days in the future the demand for the product as being driven by the fed. This year is in the front month. It creates this dollar while opportunity. It was there in the eighties. It was there another.
Indeed was there 10 years ago. So it's not a new phenomenon that has oh come on come along regarding the dollar rolls.
When we say where an experienced management team we've traded in managed portfolios through rules prior you beds.
There's not a lot of new or different here, what's the big difference is the fed is bar is the largest buyer you go back in history that buyer might have been Freddie Mac might've been Fannie Mae you go back to the Eightys. It might have been the threats. There may have been bags, but there were a large buyers in the front month, while mortgage originators sold a ton of products in the back bonds.
That creates a great opportunity in terms of dollar rolls a lesson contrast to what the dynamics capital do 10 years ago, where you've been long term shareholders. We shepherded your capital through the old Oh, a crisis similar to March 2020, but.
But let me tell you what the difference was 10 years ago, we didn't really.
Run to the dollar roll there must have been a smorgasbord of opportunities CMBS was probably trading 500 basis points off the kirks nonperforming loans provided a great opportunity. There was a smorgasbord of opportunities presented to us. The difference. This year is the federal reserve stepped into the market in March and basically took a.
Well all of those opportunities. So we have wisely in a disciplined fashion found ourselves and what I consider to be a phenomenal opportunity now to generate cash flow.
For our shareholders.
So with that Murtha, Steve I'm not sure if you want to make any other points, but ER with that we'll we'll end the call and I. Appreciate you all are tuning in and we look forward to our year end call sometime early next year. Thank you.
This concludes today's conference call you may now disconnect.
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