Q3 2021 Dynex Capital Inc Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by at this time I would like to welcome everyone to the dynamic capital third quarter 2021 earnings results and conference call.
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After the Speakers' remarks, there will be a question and answer session.
I would like to ask a question during this time.
Please press Star then the number one on your telephone keypad.
I would like to withdraw your question simply press Star one again.
I would now like to turn the call over to Alison Griffin Vice President Investor Relations for opening remarks, you May proceed.
Thank you good morning, everyone and thank you for joining us today, the <unk> capital third quarter 2021 earnings Conference call. The press release associated with todays call was issued and filed with the FTC. This morning October 27, 2021, you May view the press release on the home.
Page of the dynamics website.
Phoenix capital Dotcom as well as on the SEC's website at SEC Gov.
As 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 will believe expect forecast assume anticipate estimate project plan continue and similar expressions identify forward looking statements. These forward looking statements reflect our current beliefs assumptions and expectations based on information currently available to us.
[noise] applicable only as of the date of this presentation. These forward looking statements are inherently subject to risks and uncertainties some of which cannot be predicted or quantified.
The company's actual results and timing of certain events could differ considerably from those projected <unk> contemplated by those forward looking statements as a result.
We're seeing external factors or risks for additional information on these factors or risks. Please refer to our disclosures filed with the SEC, which may be found on the <unk> website under Investor Center as well as on the SEC's 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 homepage of our website. The slide presentation may also be referenced.
We report on the Investor Center page.
Joining me on the call as Byron, Boston, Chief Executive Officer, and co Chief Investment Officer, Murthy, Pompano, President and co Chief Investment Officer, and Steve Benedetti Executive Vice President Chief Financial Officer, and Chief operating Officer.
And with that it's my pleasure to turn the call over to Byron Boston.
Good morning. Thank you. Thank you Alison and thank you everyone for joining our third quarter call.
As many of you know were followed us for a long time.
We manage our shareholders capital for the long term.
Our core strengths is understanding the environment in which we operate.
<unk> board and adjusting that position as the environment changes.
At the beginning of this decade, Mark a major change in the global economic and capital markets environment.
It has been a great environment for dynamics to build on our solid track record of industry, leading performance as you can see on slide 12, including a 21% cumulative shareholder total returns since December 2019.
As we finished the third quarter, we continue to be excited about how we have performed during this period and how we have positioned our balance sheet for the future.
We're in a unique moment in history, and we believe every asset management team around the globe will be challenged by unforeseen surprises as we have already seen what we witnessed over the past 22 months.
<unk>, we believe this environment calls for patience discipline and flexibility.
We also believe this is a great environment for our stakeholders and we expect to see attractive opportunities to deploy capital.
<unk> management team has proven time and again that they have the flexible mindset to successfully navigate any operating environment and to generate above average cash dividends and solid economic return for our shareholders and with that I'm going to turn it over to Steve and Smriti.
Far more details around the specifics of the third quarter.
Thank you Byron and good morning, everyone for.
For the third quarter, we reported comprehensive income of nine cents per common share and a total economic return of six cents per common share.
3% for the quarter. We also reported earnings available for distribution of <unk> 54 per common share a 6% increase over last quarter and well in excess of our 39 quarterly common stock dividend on a year to date basis through the third quarter, we have paid $1 17 and dividends.
Book value per common share declined modestly to $18 42 from $18 75, or one 8%.
Primarily from economic losses on the investment portfolio, principally in lower coupons relative to our hedge position.
As Smriti will discuss later in her comments, we have recovered this decline post quarter end with the curve Steepening, which has occurred since then.
Beginning this quarter consistent with others in our industry, we have renamed our non-GAAP earnings measure to earnings available for distribution from core net operating income.
All prior quarters had been re label to earnings available for distribution.
There have been no changes to the calculation of the non-GAAP measures and the adjustments made to reconcile to comprehensive income the earnings available for distribution are identical to those previously used to reconcile to core net operating income.
We believe that the caption earnings available for distribution more accurately reflects the principal purpose of the measure and will serve as a useful indicator, but not the only indicator in evaluating the companys performance and its ability to pay dividends to common shareholders.
Other factors that are considered in the dividends to common shareholders include our taxable income total economic return gains and losses, including carryforwards for tax purposes, and our outlook for future performance.
Turning back to the discussion of the performance the increase in earnings available for distribution was driven by multiple factors.
First our earning asset yields improved three basis points, while overall repo borrowing costs were down another three basis point improve.
The improvement in asset yields was largely attributable to slower prepayment speeds during the quarter as we benefited from adjustments to the overall prepayment profile of the pass through portfolio through asset purchases.
Agency MBS prepayment speeds were 11, three CPR versus 19 flat.
Flat CPR in the second quarter.
Secondly, TBA drop income contribution improved by five basis points, primarily from continued dollar roll specialness during the quarter.
The funding cost benefit on dollar rolls versus repo and RMB <unk> was approximately 60 basis points during the third quarter versus 49 basis points last quarter.
And third average, earning assets increased as we deployed equity capital proceeds raised him, but raised in both second and third quarters.
Together these items drove a 4% Inc. Four basis point increase in our adjusted net interest spread to two 1% for the quarter.
Offsetting these items was an increase in G&A expense of approximately $800000. The majority of the increase related to legal fees related to a contingent matter that we have previously disclosed in our SEC filings and which is now has been fully briefed for the court.
We do not expect these costs to repeat going forward.
From a portfolio perspective from quarter to quarter, we reduced our investment portfolio, including TBA is by approximately $500 million, mostly through reducing our investment in TBA, two and a half. This accord occurred towards the end of the quarter and resulted in adjusted leverage declining by nearly a full turn to five nine times at the.
The end of the quarter.
As noted on slide 23, our investment portfolio is approximately $4 8 billion at September 30th with $4 3 billion invested in agency MBS and <unk>.
From a hedging perspective, we reduce the notional balance of our hedges by a similar amount. The overall notional balance of our hedges at September 30th was $4 3 billion as.
As indicated on slide 19.
With the bulk of the hedges protecting book value from increases in rates and the long end of the curve.
Overall total shareholders' capital grew approximately $18 million during the quarter, which includes approximately $28 million of new common equity raise too at the market offerings in the quarter.
Year to date, we have raised approximately $224 million of new capital at a gross price before commissions of $18.80 our market capitalization adjusted for all shares outstanding of $650 million.
Dollars today versus 420 million at the beginning of the year substantially increasing the liquidity of our stock for our shareholders. While at the same time unlocking the operating leverage in our business.
Our stock prices virtually unchanged year to date and our total shareholder return for 'twenty, 'twenty, one and six 9% through yesterday.
That concludes my remarks, and I'll now turn the call over to Smriti.
Good morning, everyone and thank you Steve.
I'll briefly discuss performance drivers for the quarter, and then turn to our macroeconomic outlook and portfolio construction.
We communicated last quarter that the risk of a whipsaw in rates was substantial during the quarter. The 10 year treasury yield touched a low of 1.13% twice and enter it ended the quarter virtually unchanged at 1.46% with a 44 basis points intra quarter trading range.
We also indicated during the quarter that we had maintained our portfolio structure hedge with the long end of the yield curve through July and we continue to hold that hedge position through today.
Book value on September 30th was at $18 42, and thus far as of October 22nd book value is up between two to two 5%.
Our trading discipline and top down macro economic centric approach continues to serve us well and remain the cornerstone of our decision making framework.
Leverage at the end of the quarter stood at five nine times down from six four times at the beginning of the quarter as Steve mentioned, we decreased our exposure to convexity by selling TBA Fannie two fives.
And to add to dry powder to make future investments.
With the recovery in book value quarter to date leverage stands at five six times and the liquidity position is over $500 million.
At this current level of the balance sheet, we expect earnings available for distribution to continue to meet or modestly exceed the current level of the dividend in the fourth quarter with any excess returns, providing a cushion to capital.
Book value will continue to fluctuate with the level of interest rates and mortgage spreads.
Future book value volatility is mitigated by our low leverage substantial levels of liquidity and the dry powder that we have to deploy capital opportunistically.
Turning now to our macroeconomic outlook that is the foundation for our positioning.
The global economy is in a period of transition to a post pandemic environment and as such we expect to see new risks and new opportunities develop over the next few quarters.
In the very short term, we are focused on specific risk events on the horizon.
Including the announcement of the taper Reza.
The resolution of the debt ceiling passage of any fiscal stimulus a possible leadership transition at the fed the composition of the new fed and international risks such as the Japanese elections, and fecal spiking fuel prices to name a few factors in the intermediate term the speed of reopening adjusting to <unk>.
Living with Covid inflation pressures from supply imbalances labor shortages fuel cost spikes are all having dip.
Differing impacts across economies.
Global Central banks are adjusting their post pandemic strategies as inflation and growth trajectories are uneven and desperate.
Cross the globe.
While most global bank policy remains highly accommodative several have begun raising interest rates and have moved to hawkish language as inflation has accelerated.
In the near time U S data points to stronger growth higher inflation, and a tighter labor market, but the durability of these trends remained very difficult to parse out.
On the strength of this information it is very clear that the fed is planning to taper later this month that looks very likely to happen.
In our assessment it is still too early to arrive at conclusions on long term transfer inflation labor market and growth and for this reason the timing the pace and the number of fed hikes is less clear.
I must point out that the levels of inflation that we're experiencing and inflation expectations are among the highest in the last 20 years and we are truly entering uncharted territory as a global central banks attempt to exit their emergency interventions in the financial markets trying to balance growth and maintain them.
Inflation fighting credibility.
Our team at <unk> is navigating the coming months by preparing for elevated uncertainty.
Volatility and the increased probability of surprise factors were.
We are also preparing for the impact of a more complex turbulent and evolving domestic and international political situations.
These factors lead us to maintain an up in credit up in liquidity position to position most of our hedges on the long into the yield curve and to hold significant amounts of dry powder for investment during bouts of volatility and most importantly to hold a very flexible portfolio and to have a flexible mindset to re.
Spawn to evolving conditions.
Let me now discuss our market outlook and portfolio construction.
The portfolio today is constructed with lower leverage that reflects the uncharted territory we are in.
Our hedges remain focused on the seven to 10 year part of the curve, reflecting the interest rate risk on our longer duration asset portfolio.
We have selectively added hedges through the year and the five year part of the curve and options remain a core holding.
Page eight in the slide presentation shows our current sensitivity to interest rates.
From a financing perspective, we expect that front end rates will remain low close to zero through most of 2022, providing a solid base from which to generate returns.
However, we're not taking this for granted we are selectively and strategically locking in.
Lower financing levels by taking longer term repo.
On slide 20.
Our weighted average.
Actual days to maturity of our repo book was about 169 days at September 30th as we targeted longer tenor for our roles between three months and 12 months roughly 50% of the book had a contractual maturity that fell in the six to 12 month range, we continue to target longer term roles at opportunistic levels.
Turning now to agency MBS spreads, it's really a mixed story between fundamentals and technicals and we believe spread volatility will be driven by macroeconomic events versus factors specific to the MBS market.
The fundamentals for agency MBS are still challenging as we see many factors that will keep refinancing levels higher and net supply elevated.
The structure of the mortgage finance industry is drastically different today, there are more public nonbank mortgage companies subject to quarterly profit metrics now than any other time in the last 20 years.
This will be a major factor in driving competition to keep mortgage rates low despite higher nominal treasury yield and this will keep the pressure up on that supply.
Government policy also favors broader access to refinancing with potential modifications from the gse's to loan level pricing adjustments, therefore, lowering the mortgage rate that's available to consumers once again, meaning that higher coupons remain vulnerable to prepayments and lower coupons susceptible to supply.
<unk>.
The technicals for our MBS are also challenging as the fed begins to exit and it is unclear whether bank demand will continue at the same level as early on 2020 one.
Market Psychology, and agency MBS spreads is bearish with many investors holding underweight and strategist recommending neutral or underweight positioning.
With this backdrop, we believe agency MBS spreads could widen up to 10 to 20 basis points as the taper begins to be implemented but we think this is more likely to happen during bouts of volatility.
Page nine in our slide presentation shows our portfolio sensitivity to changes in credit spreads.
We also expect agency MBS spreads to be more volatile and directional widening in rallies and tightening and sell offs. We do expect to increase leverage in these situations and we are always looking for a good window to make this adjustment.
We expect to make an initial adjustment and leverage back up to eight times.
And when appropriate up to 10 times.
Longer term, we believe there will be good support for MBS spreads the fed's balance sheet will create a powerful stock effect that will limit spread widening dimmed.
Demand from money managers is M. B S become a high quality alternative to corporate bonds and lower net supply from potentially higher rates will also provide an additional buffer against wider spreads.
We believe that holding a flexible liquid high credit quality position, even as spreads widened we.
We can manage both sides of our balance sheet to position for solid long term return generation.
So to wrap up the.
The steep yield curve and low financing costs support our opportunity to generate solid returns for our business. We expect this to continue well into 2022.
Book value is higher versus quarter end by 2% to 2.5%.
Portfolio is well positioned for returns to cover or exceed the current level of the dividend today.
The low leverage that Cushing is book value and dry powder to drive forward earnings growth provide a solid foundation for return generation.
Specifically, we are entering the next few months with over $500 million in liquidity.
Almost an all time high for <unk> relatively low leverage of five six times that puts us in a solid position to navigate the environment and limits the risk to the existing portfolio.
We have dry powder for at least three turns and up to five turns of leverage each turn of leverage invested at 11% return adds roughly 1% or 24 cents per share incremental return annually. This is significant upside to the 9% dividend yield on our common shares that are trading.
Somewhere between 94, and 95% of book value today.
The most important principles for the environment. We're in right now and this is how we're operating.
Our discipline and patience, while continuously assessing the environment as it will take time for the economic picture becomes clearer.
We stand prepared for the risks and were ready for investment opportunities as they arise.
I'll now turn it over to Byron.
Let me wrap up with a couple of comments.
<unk> capital is the oldest REIT focused solely on financing real estate assets in the United States, we've encountered and navigate in every market environment for 33 years. Today, we are building a resilient organization to last the next 33 years and beyond.
We're making investments in people processes and technology that will allow us to rapidly adjust to a world that is destined to change. We're also focused intensely on maintaining your trust by how we manage our risk how we treat our employees and how we positively impact our community at large we are.
<unk> for this environment and we're excited about our opportunities through our years of experience. We have learned that the best opportunity is going to appear at the most uncertain moments in the capital markets. Please.
Please look at our journey on slide 11, and join US as we continue to build our company on the foundation of ethical stewardship and excellent performance over the long term.
Thank you and operator, we're open for questions.
Thank you ladies and gentlemen, the floor is now open for your questions.
As a reminder to ask a question. Please press star one on your telephone keypad.
Your first question comes from Doug Harter of Credit Suisse.
Hi, This is John co Chelsea on for Doug Harter first thanks for the color around the leverage.
Leverage here and I see us where.
Five six turns now you mentioned that <unk> seem to me that target what would you need to hear from the fed does start to take that up and kind of what would be the pace of taking it up to get towards that eight times target.
Hi, Hi, John.
Thank you for the question.
So I guess I'm not necessarily waiting to hear from the fed I think it's it's really a question of finding the right moments.
A volatility and the market reaction to.
<unk> potentially things that the fed says.
That would help you know that would help us to make those investments you know, we're really expecting the next six months to to give us those chances.
There's a lot of factors in play here between now and end March of next year.
Curve volatility would be something that we would use as an opportunity to.
To invest so I think what you can you can think about US is yes, you know we do want to take the leverage up to eight times.
We do think we'll get the opportunity to do that selectively over the next six months.
And then just to just to put it in context of where returns are today, it's not that returns today are bad.
It turns today are actually quite good. It's just that we believe that we'll get a chance to to really enhance existing returns during periods of volatility so existing returns and low coupons are really quite solid.
So we always have the option to take this leverage up and we're just looking for that extra ability to put the alpha back in and in the portfolio. So I.
I would say you know in the next in the next six months, we're expecting volatility to help us.
You know make that investment decision to get us back up to that eight times target.
Great. Thank you and just sort of on the comment you made about returns and low coupons.
Could you just give me an idea of how attractive.
T B A's versus spec pools are and what those returns are the levered returns are in each of those sure yes.
So you know again, the low coupons are still really the place in which.
We find the most attractive returns to us in two and a half.
Unadjusted for unadjusted for the role you are seeing sort of low double digits 10 to 12 per cent types of returns depending on where you hedge on the yield curve.
Once you include the role you're adding another three.
3% to 5% a returns based on on the dollar role at this point, so roughly minus 30 to minus 50 basis points on the role for implied financing in 30 years.
We're actually seeing outstanding.
Financing costs, and the 15 year market as well in the TBA position. So that's really providing an incremental 3% to 5%, but look you're already adding that onto a double digit returns on you know even without that.
On the Ppas.
Got it thank you.
Okay.
Your next question comes from Trevor Cranston of JMP Securities.
Alright. Thanks.
And then another question on the leverage.
I guess in the very near term.
As you guys look at the market.
If we see spreads on MBS and roughly stay stay flat over the short term or even grind a little bit tighter.
Are you guys looking to reinvest paydowns or and that type of environment would you.
Potentially what leverage you're going to continue to drift lower.
Lower from where it is today.
Yeah.
That's a good question Trevor.
So we we have tended to to allow the leverage to drift down having said that I think I think you know again in bouts of volatility.
We would expect to make some type of of investment decision either either on the asset side or the hedging side to add to returns.
So I think I think the idea is you know five six times is a relatively good position it might drift down a little bit lower but really not looking to delever a whole bunch from this level.
Okay. That's helpful.
And then to follow up on the comments you just made about the <unk>.
Incremental returns that roll financing is providing and low coupons.
Can you talk a little bit about how you expect the roll specialness to.
Behave and evolve.
Once the fed actually starts to implement paper.
Sure Yeah.
Yeah. So so there's really two different components to that one of you know one of the reasons there.
There's a supply a factor in that demand factor as well as you know the overall level of the asset yield itself and typically what you'll see here as the fed tapers, we should see the specialness and dollar roll financing decline.
And what the current coupon is at the time so there.
There are situations, where you have coupons that are not being created for example in the 2% coupon not really being.
The major supply coupon for the moment.
The specialness in that coupon could persist for a little bit longer you know the fed owns a lot of that coupon and their balance sheet, but.
But you should see that level of Specialness decline and and really we anticipate as.
As the Specialness declines the asset yield both typically adjust.
Higher to reflect the lack of that specialness. So there's there's a little bit of a push me pull your type type scenario, but once again don't forget you know you're already looking at relatively solid returns without the specialness in the in the dollar roll market at this point so that is somewhat icing on the cake at the most.
Which we expect to decline over the next six to 12 months.
Alright, okay. It won't be immediate it is the main point is it's not gonna be like tomorrow as soon as the fed papers, we don't expect the royalty really like collapse.
Sure. Okay I appreciate the color. Thank you sure. Thanks.
Thanks Trevor.
Your next question comes from Bose George of K B W.
Hey, everyone. This is actually Mike Smith on for Bose.
My first question.
There's one kind of on the macro backdrop, when you think about the taper some fiscal policy uncertainty and what's going on with inflation and how that all relates to interest rates and volatility I was just wondering kind of high level what scenarios keep you up at night and then what scenario is kind of the best case for agency MBS investors.
In terms of in terms of interest rates you mean.
Yes.
Yeah, well you know everything I have to say.
You know the environment is such where I think.
There's there's not much sleep to be had period.
We are in a very unique environment as Byron mentioned.
This this type of scenario has not been really experienced by the globe ever.
And so you know we are up at night, a lot of thinking about the risks and where the surprises could come from so.
One of the key ways in which we manage our position is we're not here trying to predict what's going to happen, but instead, what we do is actually prepare for different scenarios to make sure that we're ready with a game plan in the event X Y Z happens. So that's a that's a real key.
And in terms of how we position ourselves and how we respond to what happens in the market.
You know from here.
Significantly flatter yield curves or inverted yield curves.
<unk> would be would be scenarios that would be challenging for fixed income securities in general mortgage securities in particular, right. So anytime the curve flattens or inverts I think you'll have that that challenge that's not that's not in the necessarily the base case expectations in the market, but but that.
It would be a scenario I think that would be challenging for agency MBS.
Other than that I I think in general you got to think about agency Army is a very liquid asset.
Just because the fed is tapering does not necessarily mean lack of support for agency MBS, because if the stock effect of that balance sheet.
So you will really see longer term good support for MBS spreads until you until the fed basically reduces the.
The balance sheet and and stops reinvesting.
That reinvestment is a very powerful positive.
Factor for for agency MBS.
And again I can't emphasize enough.
How difficult it is to basically say if ask then why in this type of market.
There are so many factors in place that the market could price one thing today in price a different thing tomorrow, and that's where when you know you really have to understand what the underlying factor.
Factors are and make sure that you know what position you're in and why you are in that position sylvinho today. The curve is flattening a few days ago. It was steepening.
We're ready to talk to you to manage through all these gyrations.
And we have a game plan for for these scenarios.
The thing that keeps us mostly at night is just the potential for surprises, which is really massive at this point.
So you know, we're respecting that by having a low level of leverage will.
While respecting that and that's you know sometimes the best way to avoid risk is that if they're not on it and that's how we've expressed that in the in our in our low levered position.
Great. Thank you very much I appreciate the detailed response and then just one more question are you seeing any changes to or hearing any chatter with with regards to.
MBS demand from banks, just given the pickup in loan activity.
Yeah, I mean, I think that is a wildcard as I mentioned the technical factors in MBS, you know, they're not that great right. So you've got a net seller coming back into the market in terms of the fed potential.
Potential you know as the economy starts to pick up in loan demand starts to pick up.
There's going to be less reason for banks to own on this asset class or by this asset class it hasn't happened yet.
But that is a that is a wildcard.
And without that I think that you know that's why.
You're going to you're going to really you're going to see potentially some challenges and an M. B S tightening too much from here. So you know if you look at the balance of risks.
Probably not too much tighter.
A little bit wider maybe not too much wider but you know it's so so spread volatility in the MBS market itself is not what concerns us it's really the macro volatility that concerns us and and and has us in the position that we're in.
Great. Thank you very much for taking the questions sure. Thank you.
Okay.
Your next question comes from Eric Hagen of V. P. I G.
Hey, Thanks. Good morning is there a point at which you guys need to move back into a larger concentration of pools versus TBA is to satisfy the whole pool test can you share how much flexibility you have on that front.
Hi, Eric Yeah, So I'm going to let Steve describe to you.
The the the flexibility around that we we have tremendous flexibility around the whole pool test that is that is actually not the main driver of the percentage of TBA is that we hold.
So we we are willing and in in compliance with that but I'll, let Steve just describe.
How we think about the percentage of T b as in and what the metric is that.
That's the relevant metric for that.
Hey, Eric Good morning.
<unk> right from a whole perspective.
The.
Value of the TBA is the net fair value. So its not a gross notional so it doesn't really count them.
That much against you from a wholesale perspective and managing to the 40 Act.
From a REIT income perspective, you do want to make sure you're managing.
The exposure to your your income test the 75 per cent tests of nine 5% to us in particular in the 75% test.
So we do watch that.
At these levels and I think we've commented in the past on this at these levels, we're very comfortable being able to manage them.
The REIT income test.
For the TBA is there on the balance sheet. These days.
Got it okay. That's good to know that you have the flexibility there okay. So being in the TBA and hedging with futures I guess commands.
You can say a fair amount of attention and fine tuning. If you will can you shed light on how how active you guys are in <unk>.
Flexing in and out of those positions and turning over the portfolio right now.
Yeah, Hi, Eric So again, you know when I look back at this past quarter with the tenure now touching 113, a couple of times. The most important thing we did was actually not doing anything.
It was what it was hard and so that takes discipline. It takes understanding of the market that you're in it takes understanding why the market moves away it moved.
So the only repositioning that we we did and you know last quarter. It was really getting out of that convexity risk and the two in a house.
And then we've methodically started to layer in some hedges in the front end of the yield curve and the five year part of the curve and we've been doing that all you really but beyond that we are we do not want to over.
Over trade or over manage the position. So we do have some very core principles by which we're thinking about you know our hedge ratios and where we had you on the curve.
But again the second the third quarter was a quarter in which you could have really made a lot of mistakes over hedging.
We don't think this is an environment, where you're supposed to make.
You know many many small decisions.
We've chosen to and and we think this is the right strategy, which as you know you really want to have.
Core position and then you make adjustments around around the edges, if anything our biggest expression of the risk that we see in the market right. Now is the level of leverage that we have and how much dry powder, we have to be able to add to that incremental return.
As we see opportunities come in.
That's helpful. Thanks, a lot.
Sure.
Your next question comes from Jason Stewart of Jones trading.
Hey, good morning, Thanks for taking the question.
I appreciate the comments on the elevated prepays and capacity in the industry and I was hoping you could sort of dig into that a little bit more how it sounds like maybe models overestimate burn out in your opinion, but when you look through up in coupon and spec pools do you think theres anywhere to hide or are there any pockets of value that you think remain remain out there.
Yeah, Hi, Jason So, yes, there's always places to hide it's just a matter of what price you're willing to pay and whether or not you.
Get value for the money when you pay that price right. So if you look at loan low balance three and a halves or fours or anything of that nature season paper.
That's already somewhat burned out there are definitely places to hide and people with big positions in those coupons have places to hide if youre trying to enter that trade today I think that's an expensive way to to purchase.
Call protection. So it you know I think that is a lot of Io risk and we've been hesitant to take that risk we feel more comfortable are really keeping keeping our position into lower coupons.
I also think you know structurally.
There are many things that are fundamentally are in play here to destroy returns from iOS are in general right. Because there is that the government policies against you and you know the the the competition in the industry is against you Theres just structural factors in here that over time are just going to Iraq.
These returns it may not show up in the pricing today.
But over time I think you know if you're trying to buy this call protection at the price of day.
It's less likely that youre going to get value for your money over time and for that reason, that's what explains our positioning but there's there's no reason to believe that you know people who are already in the trade or or you now have that position on won't realize value from that it's just <unk>.
<unk> to pay today's prices for that protection and expect that you're going to get value for money.
Right. That's helpful. So it sounds like you believe that whoever ends up being Fhfa's had continues to push the credit box.
At least marginally wider.
Absolutely and it's already happening.
Okay, great. Thank you for that and then Steve I just wanted to clarify a two quick things that I'll make sure I wrote down correctly on the $800000 of increased expenses, how much of that was one time versus the.
<unk> operating platform.
Expansion.
90% of its one time.
Okay.
Perfect. Thank you very much.
Are you taking the questions. Thanks.
At this time I would like to remind everyone again to ask a question. Please press star one on your telephone keypad.
Your next question comes from Christopher Nolan of Ladenburg Thalmann.
Hey, guys a question of operating expenses.
Sort of God.
If you can give in terms of where you think operating expenses will be in coming quarters.
Yeah, I think if you adjust Chris for that that one time, you get a pretty decent run rate.
Okay. So you expect them to be fairly steady yep yep.
And then follow up question, the $27 9 million equity raise is that net or gross of underwriting fees.
That's going to be net of all costs related to that issue.
Got it okay. Thank you.
Uh huh.
At this time there are no further questions I will now turn the floor back over to Byron Boston for any additional or closing remarks.
Last word to our shareholders. This is a complex global environment and you have.
Battery seasoned management team very disciplined and very comfortable operating in a complex environment.
And with that we thank you for leaving US with your savings, but we intend to continue to manage for the long term in an ethical manner and we look forward to you joining us for our call to discuss the entire year.
Early in the first quarter of 2022. Thank you so much have a wonderful day.
Ladies and gentlemen. This concludes today's event. Thank you for your participation you may now disconnect.
[music].