Q1 2021 Dynex Capital Inc Earnings Call
Ladies and gentlemen, thank you for standing by.
And welcome to the <unk> capital first quarter 2021 earnings conference call.
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I would now like the hand, the conference over to you for Speaker today Alison Griffin. Please go ahead.
Good morning, and thank you for joining us today for the <unk> capital first quarter 2021 earnings Conference call.
The press release associated with todays call was issued and filed with the SEC. This morning April 28, 2021, you May view the press release on the homepage of the <unk> website at <unk> capital Dot com as well as on the SEC's website at SEC Gov.
Before we began and the western 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.
Some of which cannot be predicted or quantified the company's actual results and timing of certain events could differ considerably from those projected and are contemplated by those forward looking statements as the result of unforeseen external factors or risks for additional information on these factors and risks please refer to our disclosures.
<unk> filed with the SEC, which may be found on the day next website under Investor Center as well as on the SEC's website.
This conference call is being broadcast live over the Internet with the streaming slide presentation, which can be found through a webcast link on the homepage of our website.
The slide presentation May also be referenced under quarterly reports on the Investor Center page.
Joining me on the call as Byron, Boston, Chief Executive Officer and cash.
So chief investment Officer, Murphy popping out of President and co Chief Investment Officer, and Steve Benedetti, Executive Vice President and Chief Financial Officer, and Chief operating Officer.
With that and it's my pleasure to turn the call over to Byron Boston.
Thank you Allison.
Good morning, and thank you all for joining us today I'm extremely pleased with our first quarter results, which Steve and Smriti will review and.
And more detail in a minute.
Our current total economic return for the quarter was seven 2% on a quarterly basis and we have generated a total economic return of 44, 8% over the last four quarters, averaging 8% per quarter. We achieved this during an unprecedented time and the markets. Most importantly since this.
New Air and history began in January 2020, we have outperformed our industry and other income oriented vehicles with a 27, 1% total shareholder return as noted on slide five.
Our performance during the first quarter continued to demonstrate the dynamics has the skills and experience necessary to navigate the current environment. The dynamics team relied heavily on our deep experience and managing the embedded extension risk and mortgage backed securities and we use this tactical expertise to take advantage of the environment.
And we created value of doing the first quarter for ways manage the existing portfolio, we optimize our capital structure raise the equity and invested capital to generate and excellent return for the quarter. We had been strategically focused on our investment strategy, our capital allocation as well as simplifying and.
And enhancing our capital structure, we have been executing the strategy to grow the company to drive operating leverage and to improve our common stocks liquidity, while balancing or equity capital.
This quarter was unique and providing us the opportunity and need a raise of 148 billion and new common equity and invest that capital accretive. We also called our higher coupon preferred series B further optimizing the right side of the balance sheet.
Both decisions and it's the earnings and book value and the first quarter and our view and in our.
Our view will strengthen our performance over the long term.
Now from a macro perspective, we're at a critical inflection point and the global economy and it depends then make a ball and of disparate fashion and the impact of government responses and the vaccine take hold.
We are preparing and our usual discipline manner for multiple scenarios and as we.
We have said before surprises are still highly probable given the geopolitical backdrop.
We firmly believe that we can deliver value to our shareholders across multiple market scenarios.
Murphy will elaborate in her comments this remains a very favorable the return environment with funding costs anchored and the curve steeper, we believe the liquidity and flexibility inherent in our agency focused strategy of our essential for a highly uncertain global environment with many complex and interrelated risk.
Now I'll turn the call over to Steve and Smriti to give you more specifics about our returns and of our balance sheet composition.
Thank you Byron and good morning, everyone. The.
The first quarter continued the excellent performance for the company for the quarter. We recorded comprehensive income of $1 76 per common share total economic return of $1 38 per common share or seven 2% and <unk>.
Core net operating income of 46 cents per common share overall total shareholders' capital grew approximately of $100 million or 15% during the quarter as we raised a 128 million and net common equity through two public offerings as Byron noted redeemed $70 million and higher cost preferred equity and add it up.
Approximately $36 million and capital from excess economic return over dividends paid the excess economic return was largely driven by our hedging strategy as we actively managed our position and timed our hedging adjustments as the curve steepened during the quarter, resulting in gains of $166 million more than offset.
The impact of higher rates and our investment portfolio.
Book value per common share during the quarter rose 99 cents or five 2% absent the cost of the equity raises and book value grew approximately seven and 5% during the quarter.
Core net operating income to common shareholders sequentially improved this quarter to 46 cents from 45, and Q4, principally resulting from lower G&A expenses and the reduction and the preferred stock dividend with the redemption of the remaining $70 million of series B preferred stock outstanding mid quarter.
Average, earning assets marginally increased of $4 3 billion as we opportunistically deploy the capital raised throughout the quarter at quarter and leverage was six nine times shareholders' equity and earning assets were $5 2 billion with the growth and the investment portfolio and the continued favorable conditions for the TBA dollar roll.
Market, we expect sequential core net operating income growth for the second quarter versus the first quarter.
Adjusted net interest income was essentially flat as declines and our MBS pool balances were offset by an increase and TBA investments.
The adjustment adjusted net interest spread was slightly lower at 187 basis points versus 198 basis points last quarter on balance sheet portfolio of asset yields and TBA Specialness were 12 basis points lower during the quarter, which was partially offset by the benefit from lower borrowing costs, which declined five basis.
Points TBA drop income increased 33% during the quarter as we more heavily invested and T be aged but at slightly lower net interest spreads as TBA Specialness was lower in the quarter TBH continue to offer superior returns versus repo borrowings and today, our expert expectations are that adjusted net interest spread would be flat.
The modestly higher for the second quarter, depending on prepayment speeds.
With respect of prepayment speeds, the increase but we're well within expected ranges during the quarter.
The agency MBS prepayment speeds were $18 four CPR for the quarter.
Bush of 17 points.
One CPR for Q4, while overall portfolio of C. P ours, including the C. MBS portfolio were approximately 14 CPR.
That concludes my remarks, and I will now turn the call over to Smriti.
Good morning, everyone and thank you, Steve and I.
We'll begin with a review of the markets our performance and then cover our current macroeconomic view and the outlook star.
Starting with the markets. Please turn to slide 18.
And I'm going to bring your attention to the line at the top of the the the panel and it says 10 year treasuries, we've now completed and incredible round trip and the 10 year Treasury yield as of December 31st 2019, you can see that was at 192%.
And that Youll touch something like 50 basis points and the first quarter of 2020, and we'd come all the way back to 174 at the end of the first quarter. So it's been an incredible round trip I just wanted to point that out the.
The other thing to note here is just the incredible decline and repo rates again, 12, 31, 2019 repo rate stood at 2% and that one month repo rate now is sitting in the mid teens of 14 basis points. So it's the curve is steeper.
And and it's been quite a ride and the markets.
For the quarter.
To your Treasury rates were up four basis points, while 10, and 30 of rates Rose 82, and 76 basis points respectively.
Implied volatility on swaption and broke out of the tight range of 60 to 65 for it traded and the second half of last year. It increased on elevated 75 to 80 basis points per day range, where it remains today.
Shorter tenors and we're even more elevated during the quarter, which prompted us to rebalance our hedges.
If you can see on the sharp MBS OAS is well within our range of about 15 to 20 basis points with even wider range is when you include intra day volatility.
And see repo rates on the quarter declined seven basis points and this reflects significant liquidity and the front and some technical factors that have kept favorable financing costs at record low levels.
We had an excellent quarter and which of the cost of our two equity raises was more than offset with active management of the balance sheet.
As Steve mentioned book value increase of $1 44, or seven and 5% on a gross basis less 45 cents cost of the capital raises we get to the net of 99 cents of five 2% increase reported for the quarter.
Roughly <unk> 65 per cent of the dollar 44 or 90 cents of the book value increase was due to the portfolio of positioning from the existing portfolio.
MBS performed very well and our hedges were positioned appropriately for the move as.
As we explained the last quarter's call. We came into this quarter with a view that a steeper curve was highly probable given the vaccine development and deployment fiscal stimulus treasury supply and inflation dynamics.
Hedging positions and the long and and options reflected this view and this view largely played out over the quarter.
The other 35 per cent of the book value increase came from the timely deployment of capital from the two races. As we mentioned last quarter, we expected curve volatility to create opportunities to add assets at attractive returns and we were able to capitalize on the spread widening that accompanied the large moves in interest rates.
We're ending the quarter with leverage at six nine times up about half a turn from euro and it's important to understand the numbers behind the leverage earning assets actually ended up quarter over quarter, almost 1.1 billion higher including TBA.
The decline and leverage.
And also includes the fact that book value increased.
And the equity raise also reduce leverage peak month and the leverage joined the quarter was 7.7 times. So you know the balance sheet is actually larger even though the leverage it doesn't seem to have been affected as much.
So this last quarter, we were active in managing all aspects of our balance sheet. Both of the left and right hand side as Byron mentioned, our option based hedges on the long end of the yield curve performed very well and we actually book gains and rebalanced and to more futures based hedges the navigate the coming quarters, you can see that on page 11.
In terms of repo management, our focus on the technicals was essential this quarter to position our book to be more short term.
Take advantage of falling repo rates, and we're now locking and much lower rates into the second and third quarter.
Post quarter, and we took some profits on a 30 and 15 year MBS TBA positions, we're expecting to reinvest at wider levels.
Leverages about six one times and book value was flat versus quarter end.
Turning now to our near term macroeconomic view and outlook, we expect a range bound environment to support M. B S valuations with the ability to invest during bouts of volatility.
Specifically declining pay ups on specified pools, and historically low repo rates and unprecedented of dollar roll specialness and our unique potential opportunities and our focus.
In terms of rates and the curve the front and is still anchored the.
The fed has defined itself as being very patient, having and outcome based response function for this projection based and our view. This means prepare for a more volatile set of outcomes and the longer end of the yield curve as the data begins to flow and the environment has shifted from rates, just moving steeper and higher to more range.
And with possible surprises and both directions.
While we think the market eventually evolves into a steeper curve and higher rates, we think it'll chop through some range bound action and the interim and the implications for dynamics are range bound environment, It's really a great environment to earn carry and so we spend time on disciplined preparation for more volatility and surprises we folk.
On the data and we believe will have chances to add assets at low double digit returns just as we did last quarter and eventually the steeper curve will lead to a higher return environment and wider net interest spreads.
In terms of mortgage spreads and returns and agency MBS have been very well supported by both bank demand and fed demand coming into this quarter. We've also had lower net supply slower prepayment speeds and now we have slightly higher mortgage rates, we expect strong MBS performance to continue support.
And by these technical factors and the implication for <unk> is that book values will be supported by this performance.
Any discussion of the taper or technicals.
And where demand starts to fall away from mortgages, we believe creates an investment opportunity.
And we're well positioned to take advantage of that.
In terms of prepayments and they remain the driver of returns, particularly in higher coupons and and specified pools.
And the winter seasonal slowdown and that typically comes was actually very modest interest rates and mortgage rates, specifically were lower during the season and the responsiveness of borrowers to low rates now appears to be really strong.
So the implication for dynamics here is that our coupon selection and flexibility from moving between T. B, a and pools will still be a major differentiation differentiating factor and creating returns and we believe again provides the opportunity to add.
Assets Accretively.
Turning to the specified pools on page 19, we have a pricing matrix that just goes through by coupon what happened to various types of specified pools over the quarter and the first quarter unequivocally was a a bad quarter for specified pool pay ups of interest rates Rose you can see are theirs.
And a dramatic decline and spec and pay ups sincere and particularly on the higher coupons.
And in our opinion this offers the opportunity to be very strategic and shifting between T b and pools, which.
Which is also supported by you know lower repo rates at this point.
And finally, just to comment on dollar roll Specialness, we expect to see continued specialness and the two and two and a half coupons are well into the third quarter and the decline and repo rates that we've recently seen is actually made pools.
More attractive than than they were before compared to the T. B A's and so we continue to look at that trade off and invest selectively and and spec pools.
Over the next few quarters you know the.
Last quarter of flexibility and nimbleness was really important and I think they both remain very key to our success and managing the portfolio.
At the current leverage which I mentioned, we had deleverage post quarter end and balance sheet size, which is about 1 billion higher for us this quarter and versus a year and we still expect core net operating income to continue to exceed the level of the dividend and as Steve mentioned and the second quarter of will include some accretive benefits.
The really good dollar roll levels that we have locked in through June.
We are looking ahead.
And the next few quarters the actual data.
The potential for a fed discussion of tapering possible technical reduction and demand away from the fed so perhaps back stepping away and overall volatility and the long end of the yield curve to offer opportunities to add assets. We're also watching carefully the evolution of credit Mark.
And particularly the transition from forbearance to foreclosure and residential and commercial sectors, and we think that there might be some opportunity there, but believe that develops closer to the second half of the year.
In terms of leverage I mentioned, we'll continue to manage the portfolio composition and size based on the opportunities and the market.
At this point, we're estimating again another two to three turns of capacity that offers the additional total economically turn power of anywhere between 1% to 3%.
And just and as an example, you know one turn of leverage invested at 10% economic return of is 24 cents a which.
Which represents a meaningful upside to returns from today.
I'll now turn the call back to Byron.
Yeah.
Okay. So first.
Let me finish with a couple of thoughts our team has always operated with great integrity and the unwavering commitment to our values and our focus on supporting our community.
And given our fiduciary responsibilities are highest priorities are to be reliable stewards of capital true.
<unk> parent and our actions and good corporate citizens.
<unk> has a strong diverse organization and building on a 30 year vision to create a multi generational organization that continues to stand the test of the time.
And our annual report this year. Please take a look we shared our purpose core values and vision.
We live and breathe of these elements and our daily work and believe this is a distinguishing factor for our company. This is reflected in our long term industry, leading performance as shown on slides five and six.
And it says the highest three and five year returns along with the best sharp ratio of one of my 15th the peers comprising agency and hybrid hybrid mortgage Reits.
Our management team our board of directors and I are personally committed to investing alongside our shareholders as we disclosed and the proxy together we are among the top five shareholders on a percentage basis and our common stock.
Let me leave you with this thought.
As it continues to be a great environment to generate strong economic return and we remain optimistic about our future and our prospects for 2021 and beyond and.
And with that operator, I'd like to open the call for questions at this time.
At this time, ladies and gentlemen, if you would like to ask a question. Please go ahead of the press star and the number one on your telephone keypad and.
Again, Thats star one to ask a question.
So our first question today comes from the line of Bose George. Please proceed with your question.
Well good morning.
The first can you give us and update us on the book value of quarter to date.
Bose the book values flat quarter to day.
Okay.
And then twists and turns of leverage and can you just talk about what you need to see.
That'd be the poorly.
Moving.
And also just wondering from normalized.
Yeah, I mean, we're we've been in a range over time, you know or leverage was as high of 7.7, as I mentioned and the first and the first quarter and it's step back down here post quarter and because we took some profits.
And on average I'd say, where we over the last four of five quarters. If you look back and see we've operated at a leverage of about seven and seven 5% seven five times.
And and what it takes to get US back up there is really a wider spreads and better returns and so we saw an opportunity to buy bonds at really great levels and the first quarter.
We had a tremendous run you know just even within the quarter and coming into this quarter on some of those purchases are we felt like that had that had run its course and you know we were we're we're reloading at this point to see if returns get better and.
And in the coming quarters, so returns have to get to that you know.
Double digit.
ROE.
For us to get back and and I and I'll just make the point that even at this lower.
At this lower leverage level, we still expect to to exceed them you know of core EPS to exceed the level of the dividend and the second quarter significantly relative to even the first quarter.
So at this point you know, it's just really of risk return.
Tradeoff and and we'll get our way back to.
To to seven acts here and it's it's a it's gonna be a matter of what what opportunities we see.
Okay, great. That's non central of luck, Hey, Bose I didn't quite hear all of your your and your comments, but you know I I could.
The break it up a little bit on my end, but I just want to emphasize that when we say this is of great environment one of the things behind the word great is.
What we saw in the first quarter was some intra quarter volatility that you have and analysts or even other investors may not see a lesser in the mortgage market. The gives you great opportunities.
To to invest and.
And I think from the macro perspective that are of the markets will continue to give us the opportunities.
And with a great environment of our.
Financing costs fixed the markets are going to continue to give us great opportunities.
Two of the us and manage our leverage so we are very tactical and very strategic about.
Every decision, we make and we will continue to be that in the future.
Okay, great. Thanks, Dan.
Okay.
Your next question comes from the line of Doug Harter with Credit Suisse. Please proceed with your question.
Thanks, and smoking and you talked about and specified pools declining and the pay.
The declining in the quarter can you just talk about.
And how they performed versus hedges and versus expectation.
And yeah.
Just kind of.
Moving to a little bit more detail as to maybe where you see opportunities there.
And I'm sure other pbms.
Yeah. It's it's a it's a great question because again and performance is all about your hedge ratio and with specified pools. There's there's a couple of different nuances.
One is that when rates do go up.
You have the TBA underlying that is going to extend and the specified pool pay up.
Which also quote unquote extends by declining when when rates go up so your duration on specified pools, which helps you a great deal when rates go down can actually hurt you. If you don't have it modeled correctly and think through all the components of.
How the cash flows change as interest rates rise and and the curve steepens.
You know in general I would say that specified pools and moved in line with with their duration.
Pay ups on higher coupons specified pools came down.
Right, but the dollar price of the underlying TBA did not come down as much and so that was an offsetting factor so and in general I would say the surprises.
You know and and and spec pools was simply the magnitude of the decline and and payoffs I mean, you can see the and the 3% coupon.
And there were pay ups and and the 6.6.
The points above TBA and these things were trading at 110 dollar price.
And they are now substantially lower.
So hopefully you know the one those of you who you were running them to a very long duration and you have that hedged correctly.
And you know our our spec pools have been lower pay up spec pools, and the two and 2.5% coupon.
We've always thought of those as as longer duration instruments and you can see the hedge performance of the first quarter was very good and and that hedge ratio was sort of captured accurately.
In terms of where the opportunity is at this point right.
You know theres opportunity and the 2.5% coupon.
And if that's where we see the biggest you know.
Area here because you can see for example, and New York only pools have come down substantially.
And you know the one and 10-K, Max which we don't show on here, but those are areas and which we find attractive returns relative to repo.
And then finally I will say you know just in terms of returns for themselves.
You know the TBA still offer very good returns and when you include the role.
And you know I've mentioned this on calls and the past.
It's not just your level of financing relative to repo rates that matters as rates go up the yield on the underlying cheapest to deliver also goes up and so the nominal carry being offered by Tba's right now or are of higher you know relative to two year and so all of that factors in.
The only thing I would say is that it's just it's just a.
Because repo rates are so low and pay ups have come down the relative attractiveness of specified pools now starts to become a good option.
For us to diversify away from from Tvs.
And I appreciate that.
And then just one one last if you think about your.
And construction today.
And it seemed like you guys increased the <unk>.
Treasury futures positions.
How do you weigh.
That versus swaps.
Versus options and in today's environment.
Yeah.
No. We we we really prefer treasury futures and in terms of the flexibility we have not yet wandered back into swap land given the uncertainty around LIBOR and the show for swap market is still a developing market. So we have that on our rate.
With respect to the ability to sort of lock and financing rates, but still don't believe that that's necessarily.
Our liquid and flexible and.
And now option for us at this point.
And the option side very interestingly, we saw implied vol really pop and the first quarter. So that allowed us to sort of take some of the the hedges and rebalance out of the options and put on more plain vanilla duration based hedges.
And that's a function of two things one is that you know we took profits on something that went up that was that was that was great for us to do the second thing was you know from here on out we've had a massive steepening of the yield curve and from here and out. We're just our macro view is that the the markets and author and of wait and see mode mode to be able to.
You know range bound trade for the next few quarters until we see real data and we start to see what the next direction is and terms of how the yield curve will evolve. So at this point, we feel we can be somewhat patient and and looking at that of that positioning and the last piece on that.
Doug.
Is that from at the you know we have been using options and futures and swaps and to do a lot of the movement.
And our portfolio to rebalance for rate moves, it's now shifting to an environment, where we might actually be able to start to do rebalancing on the asset side. So you know you could go up and coupon you could have more specified pools, there's other ways in which you can adjust your your hedge ratio if you will to manage the market.
And for that reason, we've we've been okay. You know, having the futures position on and then working our way and to into either options or a different of coupon profile of those or some other ideas.
And that we have you know going into the into the next few quarters.
Great. Thank you.
You're welcome.
Your next question comes from the line of Eric Hagen with P. T. I D. P. I G E T. I D. Please proceed with your question.
Hey, good morning, guys. Thank you. So when we look at slide 18, and we see the negative Oh, yes, and the two and two and a half per cent coupons. How do you think of investors should square that.
With the really healthy return that you guys are generating with seven times leverage like in other words, the where are you guys. Maybe not hedging that allows you to earn that higher spread and then second question can.
Can you just maybe hone in on some of the rebalancing that you expect.
If rates do backup further like whereas there may be some more extension risk and the coupon stack and can you share of what types of specified pools, you guys are buying two effects share.
Sure.
Yeah. So.
I I always have of saying, which is you can't eat OAS. So yes, you've got this OIS, but you can't eat it and and I think the the Big difference you know just in terms of where returns are just nominally.
The yield on Fannie Twos started the year at 1.4 per cent and we're now at one 9% on Fannie too. So just the nominal yield is 50 basis points higher.
The other thing that the OAS doesn't show you is the specialness and the role. So that's an additional you know.
20 to 40 basis points of.
Return that you're getting.
So our our performance and.
And two and a half and how how we how we performed and the first quarter is less a function of the OAS and more of a function of.
The mortgage mortgages performing well due.
Due to the technical factors from fed and banked them and some mortgage prices didn't move as much.
Didn't move as much as OAS or duration, even suggested right and.
And the second piece of just our hedge positioning so our hedge positioning.
It was in the back end of the yield curve.
And we had options on the back end of the yield curve and that's what we were hedging. So you asked the question why weren't we hedging we were hedging the back end of the yield curve and that's where we expected most of the most of what we weren't hedging was the was the the zero to five year part of the yield curve, which didn't move as much right.
So the back of the yield curve and thought we were hedging that's that's that's how the return and got generated.
In terms of twos versus two and of haves and.
No again the.
The important thing to remember on on these two coupons and twos I would say look to us more like of duration or curve.
Trade and two of the haves and have more convexity and prepayment risk so you're combining those two things and that and by investing and those coupons.
And you know at some point the.
The the.
The risk and two and a half and especially with lower dollar prices and that coupon has shifted.
And to where that prepayment risk and that coupon has actually come down right. So so that's another reason for us to include two and of haves and the mix of our.
Of our of coupon selection at this point the.
The spec pools that we're purchasing they are either state specific spec pools. So new York is a big and it's a big place for US the play Florida.
<unk> is another state that offer something like almost 30% lower speeds than typical TBA cheapest to deliver.
We haven't yet played and the loan bounce space, but you know, we're really looking at the coupons and the and the spec pool areas of work specified pool pay ups have come down substantially and those those are areas, where we think that there's value.
Your second question was about rebalancing and what we expect to do as rates go higher from here Okay.
So I'm going to answer that in two ways. One is you know our macro view from here is that we actually are going to be somewhat range bound until the next catalyst comes through for a move and the markets either higher and steeper are lower and flatter and we think both of those events are actually quite proud.
So we have to be ready to rebalance and either direction.
We're choosing at the moment to have a less less.
The less hedges and options because of options prices have gone up a lot and there's a lot of demand for puts and so we think that that's maybe not as efficient a way to buy upright protection. We think we can actually manage the asset side of the balance sheet of little bit more flexibly to address you know any kind of rates up.
The scenario and then we have to be ready and this is why we have futures.
To be able to withstand the rates down so.
You know the hedging is is going to be more of a day to day quarter to quarter type thing and and any purchases of options from here.
And we'll probably be more balanced in terms of both.
Call options, and and put options and quite frankly.
Because.
And so that's kind of how we're seeing the macro environment.
And then and then you asked the question about extension you know at this level of rates Fannie twos are probably pretty fully extend it to and of halves have the most negative convexity between the two of the two of those coupons and then obviously the 3% coupon is a very.
Negatively convex coupon as well so those two coupons and in our opinion will be where most of the duration drift occurs.
And that's why you need to be ready to.
To be very flexible on the on the hedging side.
Thank you for the very complete and the detailed response as always thanks.
Sure.
Your next question comes from the line of Trevor Cranston with JMP Securities. Please proceed with your question.
Hey, thanks.
A question on the and the portfolio composition and.
And see the TBA position, becoming a larger part of the portfolio.
Can you talk about any considerations with respect to.
Retest.
And if TBA or to remain kind of the.
More than half of the portfolio over the balance of the year is that does that bump up against any issues with them either income or as the test.
For something you'll need to consider and of course of the year.
Hey, Trevor its Steve.
We've looked at that and we're comfortable with the T.
T B as at this at this level versus the <unk>.
Or if you will and retest for compliance with REIT tests, and the 40 Act.
We don't we don't see that as an issue at this point.
Okay got it thanks.
And then yes.
You guys think about.
And as the fed potentially.
<unk> taper at some point, maybe later in the year.
Can you share your thoughts around sort of how you think the the MBS market is likely to react to that.
Obviously, we've already had.
Pretty significant movement in rates and.
Sort of extension.
But I guess just in terms of MBS performance can you guys kind of talked through.
And how you see that playing out once the once that tapers as announced.
Yes, yes. Thanks.
Thanks, Trevor that's it that's actually a really good question.
So again I think you know people think back here of the word taper and they think back to 2013.
We don't believe this is anything like 2013, because you have of fed that is much more focused on forward guidance and telegraphing.
And what it is they're going to do and and if they are even thinking about thinking about thinking about it you know, we're gonna know well in advance.
So the biggest factor on the taper is actually what percentage of the market. The fed is buying relative to the net supply and the marketplace right.
Right now of the fed is absorbing a significant amount of that and you also have incremental demand from banks and other and other investors so and in our view of the way the the <unk>.
<unk> itself is.
Now won't be a surprise necessarily.
And what is going to end up driving mortgage returns is going to be technicals.
You know good old supply versus demand and one of the favorable things for mortgages coming into this into this quarter has been higher rates slower speeds.
And and less supply. So you really have to see two things happen as the fed starts to step away from the market. The net supply will start to get bigger.
And in our opinion that should naturally make mortgage spreads wider if if I'm, if theres nobody else the step in and taken that demand.
So that's an opportunity right, but we don't see unless you know we have a really significant communication screw up from the fed were to where it's a market surprise just a knee jerk you know spread widening crazy.
You know widening out.
That's not the the highest probability scenario here the the highest probably scenario on the paper and our minds. This is literally you know.
How does the fed gradually extract itself from the market what is the impact on net supply what other investors step in to take that that incremental and <unk>.
Slack and and quite frankly, we think we think that's of great time for us to be positioned for to take up that slack.
Okay that makes sense. Thank you.
Sure.
And again, ladies and gentlemen to ask the question. Please press star one on the telephone.
Your next question comes from the line of Christopher Nolan. Please proceed with your question.
Hey, guys nice quarter Hum on the strategy front for capital given where your share price is where are you.
You're thinking about raising additional capital and I realize that your leverage ratio is low but given the comments you know theres the potential attractive market opportunity out there.
Is the thinking to raise more capital and would it be preferred or common.
Great.
Okay.
Oops, sorry, I was muted and Chris.
This is byron.
Understand we're very thoughtful about how we raise capital so and just reiterate I think Steve It's murky assembly of the great first quarter to raise capital to have capital and our pocket because the opportunities were fantastic and we still believe the opportunities are a fantastic and and we have.
The long term strategy for building our company, so I'm going to be a little long winded, but I'm going to make sure you understand the principle with which we operate we have no desire to mimic the largest companies and the business.
Very very opinionated about being a nimble company and there's only so large and we want to grow. So we're not reckless we're not just running the graph capital we don't earn fees because we.
The charge you spoke of will be on the capital we have under management. So we're very thoughtful about this.
And we're being very opportunistic.
Which is what you saw in the first quarter, we saw phenomenal opportunity to raise capital. So we raised capital and we were in position to take advantage of what I call. The second of image in the second of all of this kind of intra quarter volatility, whether it's the spreads and the hedge.
Yeah.
The valuations of whether it's in specified pool levels of TBA levels Theres enough wallets intra quarter volatility volatility right now of course guilty to give us opportunity to really generate returns for our shareholders. So from a long term perspective, we are thinking still to grow our company, we would like to give our shareholder.
As more liquidity and our stock we would like to attract those shareholders, who want to see more liquidity have not invested in dynamics capital to date.
We believe the.
And every investor should have an opportunity to own this management team.
We believe we have the most skilled and experienced management team, we'd like to make ourselves available to every shareholder to do that but to do that we need the continued to add more liquidity to our stock that's what we've got and the feedback.
And from some of the largest shareholders and say, what we'd really like you, but you and liquidity and your stock is not that great. So although the some of the principles of.
All of them.
Debt, we had all of that Oh, we that will drive us and our decision, making and we look forward into the future.
Great and.
The dividend given that you guys are.
Oh, earning the dividend quite handily.
I would think the dividend would have to go up just because of your REIT status as a share and.
Look at it.
Well, let me I'm going to.
The get some of the technicals on the the REIT rules, but let me just say this we are a dedicated management team for generating cash income for our shareholders that is the key focus of dynamics capital. However.
We're also very focused on the total return experience what we don't want to do is attempt to pay a dividend that is not and aligned with our macroeconomic outlook right now and.
Very uncertain economic environment. The world is evolving so I know, we're like 15 months since the whole pandemic started with the fact of the matter is this is still and evolving health crisis, it's still evolving economic situation and as such the macroeconomic view will be at the core of our thought process around.
The dividend at this point, Steve you can jump in here and just give us the the real technicals around how much were forced to pay out of how much should we have to pay and we've got flexibility the <unk>.
Most important message I want to leave you and our shareholders, we are committed to generating cash and cash for our investors.
Well will flow committed not trying to give generally too much cash income that we blow your way.
The decline in book value of major book value correction. So we're managing our risks the do you Wanna get them the technical's around what what limitations and we may have in terms of the dividend yes sure.
Chris the.
<unk>.
Just thinking about the first quarter.
I mentioned $36 million and excess economic return over the dividend some of which was realized and some of which is not realized and you think about that as potential.
Taxable income we have cash.
Gary forwards from many many years ago.
Distribution requirement at this point, so we have the flexibility as we sit here today to be able to from a technical read.
Test compliance distribution requirement perspective be able to manage.
The excess earnings and retain those and to grow the capital base. So we have that flexibility. It becomes then a strategy as Byron just alluded to.
Great that's it for maintenance quarter.
Thanks, Chris.
And there are no further questions in queue at the time I turn the call back from the tobacco for any closing remarks.
Thank you operator, thank you all for joining the call and for those of you who are investors. We really appreciate you oney and <unk> stock along with US at the management team and of the board level and we.
We look forward to seeing the next quarter or two.
And our second quarter conference call. Thank you have a wonderful day.
And this concludes today's conference call. Thank you for your participation you may now disconnect.
And.
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Yes.
Yes.
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And our clients.
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