Q3 2023 Dynex Capital Inc Earnings Call

Speaker 1: Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Dinex Capital third quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise.

Good morning, My name is Rob and I'll be your conference operator today at this time I would like to welcome everyone to the <unk> capital third quarter 2023 earnings Conference call.

Lines have been placed on mute to prevent any background noise.

Speaker 1: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press the star one.

After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again prestige Starwood. Thank you Alison Griffin Vice President of Investor Relations you May begin your conference.

Speaker 1: Thank you. Alison Griffin, Vice President of Investor Relations. You may begin your conference.

Speaker 2: Good morning and thank you for joining us today for Dinex Capital's third quarter 2023 earnings call. The press release associated with today's call was issued and filed with the SEC this morning, October 23rd, 2013.

Good morning, and thank you for joining us today for <unk> Capital's third quarter 2023 earnings call. The press release associated with todays call was issued and filed with the SEC. This morning October 23, 2023, you May view the press release on the homepage of the <unk> website at <unk> capital.

Speaker 2: You may view the press release on the homepage of the Dinex website at DinexCapital.com as well as on the SEC's website at SEC.gov.

<unk> dot com as well as on the Sec's website at SEC Gov.

Speaker 2: 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, and similar expressions identify forward-looking statements that are inherently subject to risks and...

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 and similar expressions identify forward looking statements that are inherently subject to risks and.

Speaker 2: 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 or contemplated by those forward-looking statements as a result of unforeseen external factors or risks.

Certainties, 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 or contemplated by those forward looking statements. As a result of unforeseen external factors or risks for additional information on these factors or risks. Please refer to our disclosures filed with the SEC.

Speaker 2: For additional information on these factors or risks, please refer to our disclosures filed with the S.

Speaker 2: which may be found on the Dinex website under Investor Center as well as on the SEC's website.

Which may be found on the <unk> website under Investor Center as well as on the Sec's website.

Speaker 2: Conference calls being broadcast live over the internet with a streaming slide.

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.

Speaker 2: which can be found through a webcast link on the homepage of our web...

Speaker 2: This slide presentation may also be referenced under quarterly reports on the Investor Center.

Slide presentation May also be referenced under quarterly reports on the Investor Center page.

Speaker 2: Joining me on the call is Byron Boston, Chief Executive Officer and Co-Chief Investment Officer.

Joining me on the call is Byron, Boston, Chief Executive Officer, and co Chief Investment Officer.

Speaker 2: Smriti Papano, President and Co-Chief Investment Officer, and Rob Colligan, Executive Vice President, Chief Financial Officer at kidnaps.org Beach Park TV Show

The Pompano, President and co Chief investment Officer, and Rob Collagen Executive Vice President Chief Financial Officer.

Speaker 2: And with that, it is now my pleasure to turn the call over to Byron. Thank you, Allison.

And with that it is now my pleasure to turn the call over to Byron.

Thank you Allison and good morning, everyone.

Speaker 3: I'd like to begin by congratulating my longtime colleague and friend Smriti on her nomination to the Dynex board. Smriti and I have worked together since 1990.

I'd like to begin by congratulating my longtime colleague and friend Tamir T. On her nomination to the Guy next board meeting and I have worked together since 1997.

Speaker 3: In these 25 plus years, we have forged a unique partnership based on trust, friendship, and an uncompromising focus on

These 25 plus years, we afford a unique partnership based on trust friendship and an uncompromising focus on performance I am glad to have here with me on the board as we face a rapidly evolving business landscape.

Speaker 3: I'm glad to have her with me on the board as we face a rapidly evolving business land.

Speaker 3: Over the last few months, I have spent a lot of time with shareholders discussing the macroeconomic environment.

Over the last few months I have spent a lot of time with shareholders discussing at the macroeconomic environment.

Speaker 3: I will share my main thoughts and my comments today before turning over the call to Robin Smear.

Sure My main thoughts in my comments today before turning over the call to Robyn <unk>.

Speaker 3: There are three major factors that I've been focused on as we grow our business here at Dynex.

There are three major factors that I have been focused on as we grow our business here at <unk>.

Number one.

And conflict.

Speaker 3: I have long emphasized the setting of investment strategy in the context of a global macroeconomic environment. For some time now, I've also identified human conflict as an important consideration. We are now seeing it play out around the globe and within our own country.

I have long emphasized the setting of investment strategy in the context of a global macroeconomic environment.

Some time now I have also identified human conflict is an important consideration we are now seeing it play out around the globe and within our own country.

Speaker 3: Number two, global debt. It has risen rapidly to levels that are quickly becoming unsustainable as the cost of financing has risen dramatically. While the need for a global debt is rising,

Number two.

Global debt it has risen rapidly to levels that are quickly becoming unsustainable as the cost of financing has risen dramatically while the need for more financing is also increasing due to human contemplate and demographics among other factors.

Speaker 3: is also increasing due to human conflict and demographics, among other factors. Number three.

Number three.

Balance sheet transition there is a major transition underway globally and central banks ran off their balance sheets private capital needs to take on the risk that was previously housed on government balance sheets.

Speaker 3: There is a major transition underway globally as central banks run off their balance.

Speaker 3: Private capital needs to take on the risk that was previously housed on government balance sheets at an economic price.

Speaker 3: We are witnessing a massive and ongoing price adjustment in assets across the risk spectrum because private capital demands a higher risk premium to hold those same assets.

Now make price levels, we are witnessing a massive and ongoing price adjustment had assets across the risk spectrum, because private capital demands a higher risk premiums to hold those same assets.

Speaker 3: At the intersection of these factors, the probability of accidents increases exponentially.

At the intersection of these factors.

The ability of accident increases exponentially.

Speaker 3: You've heard me say this as the prizes are highly probable in a complex macroeconomic environment.

Heard me say this as surprises are highly probable in a complex macroeconomic handbag.

Speaker 3: What we have done at Dynx is to keep our shareholders in the game by investing in the most liquid asset.

What we have done it dynamics is to keep our shareholders and the gain by investing in the most liquid assets.

Speaker 3: that is yielding an above average long-term return. As the global economy transitions from central banks to private capital, agency mortgage-backed securities have faced the earliest and steepest price correction.

That is yielding an above average long term return and the global economy transition from central banks to private capital agency mortgage backed securities that face the earliest and steepest price correction.

Speaker 3: Our book value has felt the impact of this correction since the second quarter of 2022.

Book value has felt the impact of this correction since the second quarter of 2022.

Speaker 3: We have anticipated and prepared for book value volatility with high levels of liquidity and a flexible position.

We have anticipated and prepared for book value volatility with high levels of liquidity and a flexible position.

Speaker 3: While no one likes to see book value decline, the majority of the impact on book value has been due to spread widening, a risk we believe is organic and acceptable as we are invested in the highest quality assets with a guaranteed return of capital. The bonds in our portfolio are money good.

No one likes to see book value decline the majority of the impact of book value has been due to spread widening.

Risk, we believe is organic and acceptable as we are invested in the highest quality assets with a guaranteed return of capital the bonds in our portfolio are money good.

Speaker 3: As I lead Dynex, my focus remains on generating long-term sustainability.

As I leave dynamics I focus remains on generating long term sustainable returns in that regard our past performance provides a strong foundation to work from as we navigate what is clearly an unpredictable and evolving environment.

Speaker 3: In that regard, our past performance provides a strong foundation to work from as we navigate what is clearly an unpredictable and evolving environment.

Speaker 3: I see a compelling business opportunity in agency mortgage backed securities to earn above average returns adjusted for the risk.

I see a compelling business opportunity in agency mortgage backed securities to earn above average returns adjusted for the risk.

Speaker 3: We have positioned our shareholders to benefit from this in the long term.

We have positioned our shareholders to benefit from this in the long term.

Speaker 3: I know I've mentioned this on previous calls, but I continue to believe experience and skill are the key elements for success in this environment.

I know I've mentioned this on previous calls, but I continue to believe experience at scale are the key elements for success in this environment.

I've been doing this for a long time.

Speaker 3: Extracting the yield spread available in mortgages is complex and requires skill.

Extracting the yield spread available in mortgages is complex and requires scale.

Speaker 3: There's more spread available to earn today than in the last 20 years. And the team here at Dynex is one of the best in the business to be able to accomplish job-uknder for us.

There is more spread available to earn today than in the last 20 years and the team here at <unk> is one of the best in the business to be able to accomplish this.

Speaker 4: I'll now turn it over to Rob to review the quarter. Thanks Byron and good morning.

Now I'll turn it over to Rob to review the quarter.

Thanks, Brian and good morning.

Speaker 4: For the third quarter, the company reported book value of $12.25 and a comprehensive loss of $1.59.

For the third quarter, the company reported book value of $12 25 comp.

Comprehensive loss of $1 59.

Speaker 4: The book value performance plus the dividend delivered an economic loss of 11% for the quarter.

Book value performance, plus the dividend delivered an economic loss of 11% for the quarter.

Speaker 5: The performance this quarter reflects both rate increases and spread wideness.

The performance this quarter reflects both rate increases and spread widening.

Speaker 5: We continued the trend of the second quarter by adding pools and reducing TBAs this quarter.

We continued the trend of the second quarter by adding pools and reducing TBA this quarter.

Speaker 5: Leverage increased this quarter to 8.5 turns compared to 7.7 turns last quarter. As a reminder, our EAD...

Leverage increased this quarter to $8 five turns because it is seven seven turns last quarter.

As a reminder.

<unk> does not include the benefit of our hedging activities.

Speaker 5: We continue to use features as our primary hedging instrument due to the depth and liquidity of the markets, as well as lower capital requirements compared to a similar swap instrument.

We continue to use features as our primary hedging instruments due to the depth and liquidity of the markets as.

As well as lower capital requirements compared to a similar swap instrument.

Speaker 5: In the third quarter, DYNEX had net hedge gains of $217 million and have unamortized net hedge gains of $830 million a quarter-end.

In the third quarter <unk> had net hedge gains of $217 million.

Unamortized net hedge gains of $830 million at quarter end. These.

Speaker 5: These hedge gains help offset increase in financing costs.

These hedge gains helped to offset increase in financing cost.

Speaker 5: page seven of the earnings release provides our estimate of hedge gain amortization over time.

Page seven of the earnings release provides our estimate of hedge gain amortization over time.

Speaker 5: Please also see page six in our earnings presentation, which highlights the components of portfolio returns and recent trends in net interest income and hedge gains.

Please also see page six in our earnings presentation, which highlights the components of portfolio returns and recent trends in net interest income and hedge gains.

Speaker 5: For the third quarter, we recognized $18 million of hedge gain amortization for tax purposes, or approximately $0.33.

For the third quarter, we recognized $18 million of hedge gain amortization for tax purposes or approximately 33.

Speaker 5: Since the amortization of hedge gains are a component of REIT taxable income, it will be part of our distribution requirement along with other ordinary income and expenses.

So as the amortization of hedge gains are a component of REIT taxable income Lv part of our distribution requirement along with other ordinary income and expenses.

Speaker 5: As we discussed last quarter, we expect hedge gains will be supportive of the dividend. As of now, we expect hedge gains will be supportive of the dividend.

As we discussed last quarter, we expect hedge gains will be supportive of the dividend.

As of now we are projecting the fourth quarter.

Speaker 5: to have hedge gains of $24 million or $0.41 per share.

To have hedge gains of $24 million or <unk> 41 per share.

Speaker 5: The total amount of gains to amortize and to reach taxable income can go up or down depending on the edge position and movement and rates in the future.

The total amount of gains amortize into REIT taxable income can go up or down depending on the hedge position and movement in rates in the future.

Speaker 5: Dynex ended the third quarter with an unrealized gain on its hedges.

<unk> ended the third quarter with an unrealized gain on our hedges.

Speaker 6: With that, I'll now turn the call over to Smriti for her comments on the quarter. Thank you, Rob. I'd like to thank Byron and the other members of the Dynex board for my nomination and appointment to the board of directors. I'm delighted to join them in steering our company's growth in the coming years.

With that I'll now turn the call over to Smriti.

Our comments on the quarter. Thank you Rob.

Like to thank Byron and the other members of the <unk> Board for my nomination and appointment to the board of directors I'm delighted to join them and scaling our companys growth in the coming years.

Speaker 6: Signing various board documents in the past month gave me a new perspective on what it means to be a steward of our shareholders caps.

Signing various board documents in the past months gave me a new perspective on what it means to be a steward of our shareholders' capital.

Speaker 6: I feel humbled and grateful for the responsibility and will continue to work diligently to fulfill it.

I feel humbled and grateful for their responsibility and we will continue to work diligently to fulfill it.

Speaker 6: I also want to welcome TJ Connolly to the Dynex team. He joined us in September to head up strategy and research. TJ has a long history with Byron and me, going back over 20 years. He brings a wealth of experience in asset management, macroeconomic analysis, modeling, and technology.

I also want to welcome T J Connolly to the <unk> team.

Joining us in September to head up strategy and research T. J has a long history with buyer lemme going back over 20 years.

He brings a wealth of experience in asset management macroeconomic analysis modeling and technology.

Speaker 6: He will spearhead our thought leadership efforts and you will begin hearing from him directly in the coming months and quarters. His addition greatly broadens our decision-making capabilities and I'm thrilled to have him as part of our team.

Spearhead our thought leadership efforts and you will begin hearing from him directly in the coming months and quarters. His addition greatly broadens our decision making capabilities and I'm thrilled to have him as part of our team.

Speaker 6: Let me start by covering the markets and decisions around positioning, after which I will give you my thoughts on the...

Let me start by covering the markets and decisions are on positioning after which I will give you my thoughts on the outlook.

Speaker 6: Last quarter, US Treasuries resumed one of the deepest and most prolonged drawdowns in nearly 50 years since the inception of major bondage.

Last quarter U S. Treasuries resumed one of the deepest and most prolonged drawdowns in nearly 50 years since the inception of major bond indices.

Speaker 6: Through last week, US Treasury yields have risen some 75 to 100 basis points on the year, the level is not seen since 2007.

Through last week U S. Treasury yields have risen from 75 to 100 basis points on the year to levels not seen since 2007.

Speaker 6: The yield curve has reversed a significant portion of its inversion and has continued to steepen into the fourth quarter, meaning that longer maturity Treasury bonds are moving higher in yield relative to shorter term Treasuries.

The yield curve has reversed a significant portion of its inversion and has continued to steepen into the fourth quarter.

That longer maturity treasury bonds are moving higher in yield relative to short term treasuries.

Speaker 6: These changes represent major shifts in market expectations for the future path of interest.

These changes represent major shifts in market expectations for the future path of interest rates.

Speaker 6: The agency MBS market has felt the impact of higher risk.

The agency MBS market has felt the impact of higher rates.

Speaker 6: Weighted average OASs of our portfolio widened 15 basis points through quarter end, and we are wider by an additional 15 OAS since quarter.

Weighted average oas's of our portfolio widened 15 basis points through quarter end and we are wider by an additional 15 OAS since quarter end.

Speaker 6: The spreads now stand at both year-to-date and multi-year wides on a nominal and option-adjusted.

Spreads now spend.

At both year to date and multiyear wides on a nominal and option adjusted basis.

Speaker 6: Book value declined by $1.95 or 13.7% on the quarter, driven equally by rates and spreads. And as a result, adjusted leverage also increased from 7.7 to 8.5 times.

Book value declined by $1 95, a 13, 7% on the quarter driven equally by rates and spreads and as a result, adjusted leverage also increased from seven 7% to eight five times.

Speaker 6: Year to date, our model attributes the majority of the move in book value to wider.

Year to date, our models attribute the majority of the move in book value to wider spreads.

Speaker 6: Over the quarter, we adjusted our hedge ratios, which were designed for a portfolio that included higher coupons in a heavily inverted yield curve environment.

Over the quarter, we adjusted our hedge ratios, which were designed for a portfolio that included higher coupons in a heavily inverted yield curve environment.

Speaker 6: Our adjustments incorporated more optionality and protected the position from a less inverted or steeper yield curve. You'll see the impact of our position.

Our adjustments incorporated more optionality and protected the position from a less inverted or steeper yield curve.

You will see the impacts of our positioning on page 14.

Speaker 6: The net result is a position that is less exposed to changes in the level of rates. Our focus remains on the net spread between agency RMBS and our Treasury.

Net result is a position that is less exposed to changes in the level of rate. Our focus remains on the net spread between agency MBS and our treasury hedges.

Speaker 6: The recent moves in agency RMBs spreads are happening for several...

The recent moves in agency MBS spreads are happening for several reasons, you've heard me discuss in the past of how the native balance sheet for mortgage risk in our country is changing for much of the last 15 years. The U S. Federal reserve was the largest holder of agency MBS and before that the Gse's retained portfolios.

Speaker 6: You've heard me discuss in the past of how the native balance sheet for mortgage risk in our country is changing. For much of the last 15 years, the US Federal Reserve was the largest holder of agency RMBS. And before that, the GSEs retained portfolios were the largest holder.

The largest holders these entities crowded out private capital and removed a risk premium from the asset class.

Speaker 6: these entities crowded out private capital and removed a risk premium from the app.

Speaker 6: private capital must now replace these government balance sheets. And in agency RMBS, that risk premium has now returned.

Private capital must now replace these government balance sheets and in agency MBS that risk premium has now returned.

Speaker 6: Spreads are historically wide and they compensate private capital appropriately for the

Breads are historically wide and they compensate private capital appropriately for the risk.

Speaker 6: This is why I have been saying we are in the middle of a persistent investment opportunity for our share.

This is why I have been saying we are in the middle of a persistent investment opportunity for our shareholders.

Speaker 6: As we show on slide nine, agency RMBS spreads to a blend of treasuries are likely to trade in the 120 to 200 basis points.

As we show on Slide nine agency MBS spreads to a blend of treasuries are likely to trade in the 120 to 200 basis point range.

Speaker 6: We are currently near the wide end of that range, and we expect that returns from owning hedged agency mortgages will be sustainably high over time.

We are currently near the wide end of that range and we expect that return from owning hedged agency mortgages will be sustainably higher for some time.

Speaker 6: While volatility and spread widening has caused pockets of stress, the best managed mortgage reads like Dynex remain a source of stability for the U.S. housing.

While volatility and spread widening has caused pockets of stress the best managed mortgage Reits like dynamics remain a source of stability for the U S housing system, we see them in the financing markets, which continue to function in an orderly manner. Our counterparties have access to liquidity and haircuts are stable. They report that they are.

Speaker 6: We see that in the financing markets, which continue to function in an orderly manner, our counterparties have access to liquidity and haircuts are stable. They report that their customers' liquidity profiles remain solid. Our hedges are in the most liquid part of the global financial system, the exchange-traded U.S. Treasury futures market. …

Customers liquidity profiles remained solid our hedges are in the most liquid part of the global financial system and the exchange traded U S Treasury futures market.

So what does this mean for <unk> shareholders. We are invested in money good assets trading at historically low prices that offer accretive forward returns.

Speaker 6: We are invested in money good assets trading at historically low prices that offer a creative forward

Speaker 6: Agency RMBS return projections look about as robust as I've seen them in my 10 plus years at DynX and nearly 30 years as a fixed income investor.

Agency MBS return projections look about as robust as I've seen them in my 10, plus years at <unk> and nearly 30 years as a fixed income investor.

Speaker 7: With that, I'll turn it over to Byron. Thanks, Mirki and Rob. I would like to leave you with the following thoughts.

With that I'll turn it over to Byron Thanks, Rob.

I would like to leave you with the following thoughts.

Speaker 7: The opportunity to earn a compelling return owning mortgages on a hedge basis is as attractive as I've ever seen in my 40 plus year career. Our portfolios mark to market daily and while there can be periods of volatility, lower prices mean higher future returns on bonds like ours that are money good.

The opportunity to earn a compelling return owning mortgages on a hedged basis is as attractive as I've ever seen in my 40, plus year career, our portfolio's mark to market daily.

While there can be periods of volatility where oil prices mean higher future returns on bonds like ours that are money good.

Speaker 3: Our management team is extremely skilled at earning his returns, and our portfolio is well positioned to earn outsized returns going forward.

Our management team is extremely skilled as Ernie has returns in our portfolio is well positioned to earn outsized returns going forward.

Speaker 7: Very important for you to understand, we, the management team and the board, own our stock.

Very important for you to understand.

We the management team and the board.

All in our stock.

Speaker 7: Management has a material interest in the company, and our focus is on extracting the historic returns available in the market today.

Management has a material interest in the company and our focus is on extracting the historic returns available in the market today.

Speaker 7: With that, operator, I will open the call to questions.

With that operator, I will open the call for questions.

Speaker 1: At this time, I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. And your first question today comes from the line of Bose George from KBW. Your line is open.

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

And your first question today comes from the line of Bose George from K B W. Your line is open.

Speaker 8: Hey everyone, good morning. Actually, first I wanted to ask, you guys noted book OAS is at 15 basis points this quarter. Can you just give us an update on what that means for book value?

Hey, everyone. Good morning.

First I wanted to ask you guys noted book OAS has added 14 basis points or 15 basis points. This quarter can you just give us an update on what that means for book value.

Speaker 6: Yeah, hi, Boaz. The number I quoted was actually as of a couple of days ago. So the number since quarter end is closer to 25 OAS on our portfolio. And the book value has been volatile somewhere between 10.50 and 11.50 as of last week per share. So that's where it's been in range.

Yeah, Hi Bose.

The the number I quoted was that as of a couple of days ago.

The number since quarter end is closer to 25 OAS.

Our portfolio.

And the book value has been volatile somewhere between $10 50, and $11 50 as of last week per share.

So that's that's where it's been ranging.

Speaker 6: I do want to say a couple things just on what's been happening in the last week. One of the main observations we have in terms of why OASs are wider is it's been a technical widening. This is not a widening that's based on the credit quality of the asset or that the money isn't coming back at par. These are money good assets.

So I do I do want to say a couple of things just on what's been happening in the last week right.

One of the main observations we have in terms of why OAS has a wider is it's been a technical widening. This is not a widening that based on the credit quality of the asset or the money isn't coming back at par right. These are money good assets.

Speaker 6: It's been really a factor of technical selling.

It's been really a factor of technical selling.

Speaker 6: one of the most interesting things that has happened in the sector.

One of the most interesting things that has happened in the sector.

Speaker 6: is that money managers very wisely went overweight mortgages earlier this year. That's because they were the cheapest asset out there. They were cheap versus corporates. We like to make a joke internally, they were cheap versus Bitcoin, they were cheap versus everything. So that was the appropriate trade to do. And what's happened with the sell-off in the last few weeks is that they have been receiving redemptions. And when those...

Is that money managers very wisely went overweight mortgages earlier this year and that's because they were the cheapest asset out there they were cheap versus corporate we like to make a joke internally they were cheap versus bitcoin they were cheap versus everything right. So that was that was the appropriate.

Paid to do.

And what's happened with the sell off in the last few weeks is that they have been receiving redemptions.

And when those redemptions come.

Speaker 6: they choose to sell the most liquid asset. We felt this last year at the same time in October , where the most liquid asset got sold, that happens to be the asset that we own. And that's actually one of the biggest drivers of why mortgage spreads are sitting out here in the past.

They choose to sell the most liquid asset we felt this last year at the same time in October where the most liquid asset got sold that happens to be the asset that we own <unk>.

And that's actually one of the biggest drivers of why mortgage spreads are sitting out here.

In the past week. So this is technical selling the selling is happening as money managers get redemptions.

Speaker 6: So this is technical selling. The selling is happening as money managers get redemptions. And for that reason, we just want to be cognizant that this isn't a judgment on the quality of the asset. And our level of comfort with holding this asset class is the idea that these are money good.

And for that reason, we just want to be cognizant that this isn't a judgment on the quality of the asset and our level of comfort with holding.

This asset class.

Is the idea that.

These are money good.

Speaker 8: Yeah, absolutely. That definitely makes sense. Thanks. And then, actually, just given the declining book value since quarter end, obviously your leverage is higher, all else equal. How are you guys just thinking about leverage? Would you let it ride up a little bit just given this uncertainty and hold the assets? Or is there a situation where you might have to reduce the size of the portfolio to get your leverage back in a range where you're more comfortable?

Yes, absolutely so definitely makes sense. Thanks, and then actually just given the decline in book value since quarter end, obviously your leverage is higher all else equal how are you.

Just thinking about leverage is would you let it ride up a little bit just given this uncertainty and hold the assets or is there a situation where you might have to reduce the size of the portfolio to get your leverage back into a range, where you become more comfortable.

Speaker 6: Yeah, look, one of the nicest things about the way we have been positioned coming into this environment is having a massive amount of liquidity.

Look one of the nice things about the way we have been positioned coming into this environment is having a massive amount of liquidity.

Speaker 6: So we've closed the quarter with $450 plus million of cash and unencumbered assets.

So we've closed the quarter with 450 plus million dollars of cash and unencumbered assets.

Speaker 6: That leaves us in a very flexible position here as we look at what's going on in mortgages. You guys know us to be very astute risk managers.

That leaves us in a very flexible position here as we look at what's going on in mortgages.

You guys know us to be very astute risk managers, we're sitting here reevaluating exactly all of those decisions every day for on behalf of our shareholders right. One thing that that gives us a lot of conviction in.

Speaker 6: We're sitting here evaluating exactly all of those decisions every day on behalf of our shareholders.

Speaker 6: Right? One thing that gives us a lot of conviction in our position and anything that we do to manage it. Number one, we're sitting here with a very liquid acid.

In our position and anything that we do to manage it number one.

We're sitting here with a very liquid asset.

Speaker 6: Number two, we're sitting with a big pile of liquidity.

Number two we are sitting with a big pile of liquidity.

Speaker 6: Number three, we have the scale to manage through these volatile environments, right? And the last thing, as we make these decisions, we're always going to be thinking about the cycle through the cycle return.

Number three we have the scale to manage through these these volatile environment right and and the last thing as.

As we make these decisions, we're always going to be thinking about the through the cycle.

Speaker 6: The returns here are very accretive for our shareholders.

Returns the returns here are very accretive for our shareholders. So we're not and I've said this a few times, we're not invested in agency mortgages, because we expect spreads to tighten day after tomorrow.

Speaker 6: So we're not, and I've said this a few times, we're not invested in agency mortgages because we expect spreads to tighten day after tomorrow. We're invested in them because we generate an accretive rate of re-

<unk> invested in them, because we generally and accretive rate of return versus our cost of capital and that's true today.

Speaker 6: versus our cost of capital, and that's true today. And that's really the underlying tenet with why we're comfortable holding the positions that we have.

And that's really the underlying.

Tenants with why we're comfortable holding the positions that we have.

Speaker 6: So we're gonna risk manage the position, Boaz, and I think our shareholders have come to expect us to be very good at that. But that's kind of our thinking behind it.

So we're going to risk manage the position Bose and I. Thank our shareholders have come to expect us to be very good at that.

But that's kind of our thinking behind it.

Speaker 3: Okay, let me let me both both one other thing which is this is very simple. This is really quick We came into this decade with an opinion about surprises

Okay.

Okay.

One other thing, which is and this is very simple. This grille quick we came into this decade with an opinion.

About surprises and about global risks.

Speaker 3: And I think a year ago or so we talked about having a ship that's built for this type of environment.

And I think a year ago or so we talked about having a ship that's built for this type of environment.

Speaker 3: That's basically Smirky gave you the details. I'm just giving you a little history to know that we came into this decade prepared for this type of environment.

It's basically smart and gave you the details I'm, just giving you a little history to know that.

Came into this decade preparing for this type of environment.

Okay, Great. That's helpful. Thanks, guys.

Rob: Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Dynex Capital 3rd quarter 2023 earnings conference call.

Speaker 1: And your next question comes from a line of Trevor Cranston from JMP Securities. Your line is open.

Yes.

And your next question comes from the line of Trevor Cranston from JMP Securities. Your line is open.

Speaker 9: Hey, thanks. Good morning. Just to follow up on that last question for my own clarity. Have you guys made any significant changes to either the portfolio or the hedge position since Perdyn since quarter into?

Hey, Thanks, good morning.

Operator: All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one.

Just to follow up on that last question.

For clarity.

Clarity.

Have you guys made any significant changes to either the portfolio or the hedge positions since great and since quarter end.

Yeah.

Speaker 6: So, Trevor, I think we've managed the position actively since quarter end. I can't comment on significant changes or not significant changes. I will tell you that we managed the position actively. You can see the risk position on page 14.

So travel I think we've managed that position actively since quarter end.

Alison Griffin: Thank you, Alison Griffin.

I can't comment on significant changes are not significant changes I will tell you that that you know we manage the position actively you can see the risk position on page 14.

Alison Griffin: Vice President of Investor Relations, you may begin your conference. Good morning and thank you for joining us today for Dynex Capital 3rd quarter 2023 earnings call. The press release associated with today's call was issued and filed with the SEC this morning, October 23rd 2023.

Alison Griffin: You may view the press release on the homepage of the Dynex website at Dynex Capital dot com as well as on the SEC's website at SEC dot gov 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 and similar expressions identify forward looking statements that are inherently subject to risks and uncertainties.

Yes.

Speaker 6: That's sort of the beginning part of how we've adjusted the position.

That's that's sort of the beginning part of how we've adjusted the position.

Speaker 6: Rob, can you tell me how much I can disclose in terms of post quarter end?

Rob can you tell me how much I can disclose in terms of post quarter end.

Alison Griffin: 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 or contemplated by those for looking statements as a result of unforeseen external factors or risks for additional information on these factors or risks.

Actions.

Speaker 5: Sure, and I think, you know, Trevor, good question. We've had over $100 million worth of hedge gain, you know, since quarter ends, given the move in rates. And as Smriti said, and you can see it in some of the slides,

Sure and I think Trevor.

Trevor Good question, we've had over $100 million of the hedge gain.

Since quarter end, given the move in rates.

And as far as that you said and you could see it in some of the slides.

Speaker 5: Hedged at some different points on the curve, you know, we've been out a little bit longer. There's some 30 years in there now and. You know, with the move in the yield curve, we'll continue to actively looked at where we want to be and where we want to have our edges. But if you want to add some more color in terms of. Where you've been recently that.

Hedged at some different points on the curve.

We've been a little bit longer there are some 30 years and Theyre now and.

With the move in the yield curve will continue to actively looked at where we want to be and where we want to have our hedges.

Alison Griffin: Please refer to our disclosures filed with the SEC, which may be found on the Dynex website under investor center as well as on the SEC's website this conference calls being broadcast live over the internet with the streaming fly presentation, which can be found through a webcast link on the homepage of our website.

I think if you want to add some more color in terms of.

<unk> been recently.

Speaker 6: Yeah, so I mean we've been hedging in the back end of the yield curve. That's been our focus. We've used a combination of options and futures. And one of the hard things about giving a lot of detail on this is that it changes quite a bit.

Yeah. So I mean, we've been hedging in the back end of the yield curve that's been our focus we've used it.

Combination of options and futures.

And one of the hard things about giving a lot of detail.

Byron Boston: The slide presentation may also be referenced under quarterly reports on the investor center page joining me on the call is Byron Boston chief executive officer and co chief investment officer.

On this is that it changes quite a bit.

Speaker 6: So if we had a very substantial update, in the past, we've actually been willing to give out a disclosure that reflects that substantial update. I think if we do that, we'll be willing to do that in the future, like if that's something that we think is appropriate. But for now, I think we feel really good about what we've just said.

So if we had a very substantial update.

In the past, we've actually been been willing to give out a <unk>.

A disclosure.

Byron Boston: And with that, it is now my pleasure to turn the call over to Byron. Thank you, Allison. Good morning, everyone. I'd like to begin by congratulating my longtime colleague and friend. Myrty on her nominations is the Dynex board. Myrty and I have worked together since 1997. These 25 plus years, we have forged the unique partnership based on trust friendship and an uncompromising focus on performance. I'm glad to have her with me on the board as we face a rapidly evolving business landscape.

That reflects that substantial update.

If we do that we will be willing to do that in the future like if that's something that we think is appropriate but for now I think we feel really good about what we've disclosed.

Okay.

Speaker 9: Got it. Okay, that's helpful. Then, you know, you guys talked about the technical picture for MBS, which seems kind of weak, at least in the near term....And also...

Got it okay. That's helpful.

And then you guys talked about the technical picture for MBS, which seems kind of weak at least in the near term.

And also.

Speaker 9: You know, you mentioned the sort of ban. Do you think spreads could trade in?

As you mentioned.

Ben do you think spreads could could trade in.

So I'm curious.

Speaker 9: You know, how much how much conviction or confidence do you think there is around sort of the upper end of that band, particularly if rates keep moving higher? Just given the fact that it seems like at least in the near term, there's kind of an absence of many buyers in the market.

How much how much conviction or confidence do you think there is around sort of the upper end of that band, particularly.

Byron Boston: Over the last few months, I have spent a lot of time with shareholders discussing the macro economic environment. I will share my main thoughts in my comments today before turning over the call to Rob and Smirty.

Rates keep moving higher.

Just given the fact that it seems like at least in the near term.

Byron Boston: There are three major factors that I have been focused on as we grow our business here at Dynex. Number one, human counseling. I have long emphasized the setting of investment strategy in the context of a global macro economic environment. For some time now, I have also identified human conflict as an important consideration. We are now seeing a play out around the globe and within our own country.

Kind of in absence of many buyers in the market.

Speaker 6: Yeah, yeah, I mean that's interesting. So let me give you some fundamental observations about the mortgage market here. The Fed is basically coming out and telling us that they're pretty much done raising rates. Now the argument is, are they going to raise in November or December ? Either way, you're looking at maybe one more hike, and then they're going to stop for some time.

Yes.

It's interesting so let me let me give you some fundamental observations about the mortgage market here.

The fed is basically coming out and telling us that they are pretty much done raising rates now. The argument is are they going to raise in November or December .

Either way you are looking at maybe one more hike and then they are going to stop for some time.

Byron Boston: 2. Global debt. It is risen rapidly to levels that are quickly becoming unsustainable as the cost of financing has risen dramatically. While the need for more financing is also increasing due to human conflict and demographics of one of other factors. Private capital needs to take on the risk that was previously housed on government balance sheets at un-economic price levels. We are witnessing a massive and ongoing price adjustment in assets across the risk spectrum because private capital demands a higher risk premium to hold both same assets.

Speaker 6: So this limits how much front end rates can rise from here. Alright, so you now have the front end a little bit peg.

So this limit how much front end rates can rise from here alright. So you now have the front end a little bit pegged.

Speaker 6: The second thing is the biggest bank selling that we had, you know, this year is done, right? Now there might be some shadow banking, bank stuff, you know, bank supply stuff out there, but by and large the act of selling is over.

The second thing is the biggest banks selling that we had.

This year is done there might be some shadow banking bank staff bank supply stuff out there, but by and large the active selling is Oliver.

Speaker 6: The third thing that's happened here, which is really important, is the yield curve is substantially steep.

The third thing that's happened here, which is really important is the yield curve is substantially steeper.

Speaker 6: And for the first time now, you actually have agency mortgage yields at a positive yield spread versus Fed.

For the first time now you actually have agency mortgage yields at a positive yield spread versus fed funds.

Speaker 6: So the yield on current coupon mortgages is around 6.5%, 7%. Fed funds is at 5.5%. That's a lot of carry in mortgages. It's very positive in terms of just sitting here and keeping on owning the asset.

The yield on current coupon mortgages is around 657% fed funds is at five 5% that's a lot of care in mortgages.

Byron Boston: At the intersection of these factors, the probability of accident increases exponentially. You've heard me say this as surprises are highly probable in a complex macroeconomic environment. What we have done at Dynex is to keep our shareholders in the game by investing in the most liquid asset that is yielding in above average long-term return. As the global economy transitioned from central banks to private capital, agency, mortgage-backed securities have paced the earliest and steepest price correction.

Very positive in terms of just sitting here and keeping on owning the asset right.

Speaker 6: Another point, the net supply picture for the first time is actually starting to look positive.

Another point the net supply picture for the first time is actually starting to look positive. The feds one off from their balance sheet is going to shrink from lets say, 15% to $20 billion a month.

Speaker 6: The Fed's runoff from their balance sheet is going to shrink from, let's say, $15 to $20 billion a month. It's going to go down to maybe $13 to $15 billion. So there's a few less mortgages that the market's going to need to absorb from the Fed.

It's going to go down to maybe 13% to $15 billion. So there's a few less mortgages.

Market is going to need to absorb from the fed.

Byron Boston: Our book value has felt the impact of this correction since the second quarter of 2022. We have anticipated and prepared for book value volatility with high levels of liquidity and a flexible position. While no one likes to see book value decline, the majority of the impact of book value has been due to spread widely. Our risk, we believe, is organic and acceptable as we are invested in the highest quality assets with a guaranteed return of capital. The bonds in our portfolio are money good.

Speaker 6: And with mortgage rates around 8%, supply is really going to start to taper off here, especially in the winter. And then the last piece of this is that you are starting to see credit trends deteriorate. There's headlines about auto loan delinquencies rising, corporate bond delinquencies rising, percentage of bonds that could be downgraded rising. All of those things eventually make your money good asset.

With mortgage rates around 8% supply is really going to start to taper off here, especially in the winter and then the last piece of this is that you are starting to see credit trends deteriorate right. There's headlines about auto loan delinquencies rising.

Corporate bond delinquencies rising percentage of bonds that could be downgraded rising all of those things eventually make it.

Make your money good asset worth more so.

Speaker 6: In general, right, is that 200 basis points upper end of the range, you know, intact solid?

Byron Boston: As I leave Dynex, my focus remains on generating long-term sustainable returns. In that regard, our past performance provides a strong foundation to work from as we navigate what is clearly an unpredictable and evolving environment. I see a compelling business opportunity and agency mortgage-backed securities to earn above average returns adjusted for the risk. We have positioned our shareholders to benefit from this in the long term. I know I've mentioned this on previous calls, but I continue to believe experience and skill are the key elements for success in this environment.

In general right is that 200 basis points.

Upper end of the range.

<unk> solid.

Speaker 6: I can't say that to you. I can't say that there are many factors in play today.

I can't say that to you I can say that there are many factors in play today.

Speaker 6: that really limit how much further that those spreads can go. Now, because we're cognizant of the technical picture, we're prepared for whatever, you know, for it to blow out past that. But, you know, in general, there are many things we see in place right now that say, okay, look, even if we get out there, there's a reasonable, there's a reasonable thought process around why you could quickly come back to.

That really limit how much further.

Those spreads can go now in because we're cognizant of the technical picture, we're prepared for whatever for it to blow out past that.

But in general there are many things we see in place right now that say, okay look even if we get out there there is a reasonable.

Byron Boston: I've been doing this for a long time. Extracting the yield spread available in more uses is complex and requires skill. There's more spread available to earn today than in the last 20 years, and the team here at Dynex is one of the best in the business to be able to accomplish this.

There is a reasonable thought process around why you can quickly come back to.

Speaker 6: more tighter levels of spread from those extremely wide levels.

More more tighter levels of spreads from dose extremely wide levels.

Okay that makes sense. Thank you.

Sure.

Speaker 10: Your next question comes from a line of Matthew Erdner from Jones Trading. Your line is open. Hey, good morning guys. Smriti, congrats on the board nomination and thanks for taking the questions. So you mentioned the spread range and I'm gonna kind of follow up on the question before. What do you think drives them tighter? Is it...

Rob: I'll now turn it over to Rob to review the quarter.

Your next question comes from the line of Matthew <unk> from Jones trading your line is open.

Rob: Thanks, Byron and Good Morning. For the third quarter, the company reported book value of $12.25 and a comprehensive loss of $1.59. The book value performance plus the dividend delivered an economic loss of 11% for the quarter. The performance this quarter reflects both rate increases and spread widening. We continued the trend of the second quarter by adding pools and reducing TBAs this quarter. Leverage increased this quarter to 8.5 turns compared to 7.7 turns last quarter.

Hey, good morning, guys and congrats on the board nomination and thanks for taking my questions. So you mentioned that the spread range and I'm going to kind of follow up on the question before what do you think drives them tighter as the other.

Speaker 10: Other people getting in the market to kind of absorb some of the supply and stop the technical selling or is it the Fed kind of hinting that they're going to start to cut rates or Just kind of figure out the duration of how long that they will hold

Other people getting in the market to kind of absorb some of the supply and stop the technical selling or is it.

Fed kind of hinting that there can I start to cut rates or just kind of figure out the duration of how long that they will hold.

Speaker 6: I think it's all of those things, Matthews, and I appreciate the congrats. Thank you for that. Look, I wish I could say, hey, these are the these are this if this happens, they're going tighter, right? One of the things that's happened right now is that you've got a technical situation where money managers have become net sell.

Yeah.

Rob: As a reminder, our EAD does not include the benefit of our hedging activities. We continue to use features as our primary hedging instrument due to the depth and liquidity of the markets, as well as lower capital requirements compared to a similar swap instrument. In the third quarter, Dynex had net hedge gains of 217 million and have unamortized net hedge gains of 830 million at quarter ends. These hedge gains help the offset increase in financing costs.

I think it's all of those things Matthews and I appreciate the congrats thank you for that.

Look.

I wish I could say hey. These are the these are this is if this happens there going tighter right one of the things that's happening right now is that you've got a technical situation where money managers have become net sellers.

Speaker 6: One thing that keeps me very disciplined about my view on mortgage spreads is what happened to mortgages in January of this year.

One thing that keeps me.

Sort of like very disciplined about my view on mortgage spreads as what happened to mortgages in January of this year.

Rob: Page 7 of the earnings release provides our estimate of hedge gain amortization over times. Please also see page 6 in our earnings presentation which highlights the components of portfolio returns and recent trends in net interest income and hedge gains. For the third quarter, we recognize 18 million dollars of hedge gain amortization for tax purposes or approximately 33 cents. Since the amortization of hedge gains are a component of re-taxable income, it will be part of a distribution requirement along with other ordinary income and expenses.

Speaker 6: This year, once retail and RIAs and basically, you know, the investor universe decided that it was going to be the year of the bond, mortgage spreads tight until like 120.

This year once once retail and <unk> and basically the Investor Investor Universe decided that it was going to be the year of the bond mortgage spreads tightened until like a 120 bps.

Speaker 6: That's a very positive outcome when you go back and see what happened to mortgage spreads this year. That can definitely happen again. Now, why do I say that? The yield curve is almost flat like a pancake at 5%. So now for the first time, investors can look out the yield curve and say, hey, I can earn a 5% yield for taking duration.

That's that's a very positive.

Outcome when you go back and see what happened to mortgage spreads. This year, okay that can definitely happen again now.

Why why do I say that the yield curve is almost flat like a pancake at 5%. Okay. So now for the first time investors can look out look out the yield curve and say, hey, I can earn a 5% yield.

Rob: As we discuss last quarter, we expect hedge gains will be supportive of the dividend. As of now, we're projecting the fourth quarter to have hedge gains of 24 million or 41 cents per share. The total amount of gains to amortize and to re-taxable income can go up or down depending on the hedge position and movement and rates in the future. Dynex ended the third quarter with an unrealized gain on its hedges.

For taking duration risk.

Speaker 6: And in mortgages, you can actually earn a spread over the financing costs. These are very positive, sort of inherent things in the way the market is structured today. But you've got to get through this technical pressure first.

And in mortgages, you can actually earn.

Spread over the financing costs. These are very positive sort of inherent things in in the way the market is structured today.

<unk> got to get through this technical pressure first.

Speaker 6: So the number one thing that's keeping mortgages from tightening right now is this supply technical. The number one thing that's going to get mortgages to tighten from here is a demand.

So.

The number one thing thats keeping mortgages from tightening right. Now is this is a supply technical and number one thing thats going to get mortgages have tightened from here is a demand technical not demand technicals datacom from a marginal buyer that marginal buyer right. Now is is really the investors.

Smirthy Popenoe: With that, I'll now turn the call over to Smirthy for our comments on the quarter. Thank you, Rob.

Smirthy Popenoe: I'd like to thank Byron and the other members of the Dynex Board for my nomination and appointment to the Board of Directors. I'm delighted to join them in steering our company's growth in the coming years. Signing various board documents in the past months gave me a new perspective on what it means to be a steward of our shareholders capital. I feel humbled and grateful for the responsibility and will continue to work diligently to fulfill it.

Speaker 6: That demand technical has got to come from a marginal buyer. That marginal buyer right now is really investors. Any investor that's basically willing to take that duration.

Any investor Thats, basically willing to take that that duration risk and all and investors will make that decision. We think when they believe the fed is done which the fed is kind of telling us we're close to being done right and when they feel like they're being adequately compensated for taking on that risk, which.

Speaker 6: And all investors will make that decision, we think, when they believe the Fed is done, which the Fed is kind of telling us we're close to being done, right? And when they feel like they're being adequately compensated for taking on that risk, which the curve has steepened and that risk premium has been built back into the curve. Now, whether that's enough or not, yet to be seen. But the factors are here for that switch to.

Smirthy Popenoe: I also want to welcome TJ Connolly to the Dynex team. He joined us in September to head up strategy and research. TJ has a long history with Byron and me going back over 20 years. He brings a wealth of experience and asset management, macroeconomic analysis, modeling and technology. He will spearhead our thought leadership efforts and you will begin hearing from him directly in the coming months and quarters. His addition greatly broadens our decision-making capabilities and I'm thrilled to have him as part of our team.

The curve has steepened and that that risk premium has been built back into the curve now whether that's enough or not.

It's yet to be yet to be seen but the factors are.

Here for that switch to occur.

Speaker 10: Gotcha, that's helpful. And then one quick question on the portfolio, you guys have trimmed the TBA position for the past couple of quarters. Should we expect that to continue going forward?

Got you that's helpful. And then one quick question on the portfolio you guys have trimmed the TBA position for the past couple of quarters should we expect that to continue going forward.

Smirthy Popenoe: Let me start by covering the markets and decisions around positioning, after which I will give you my thoughts on the outlook. Last quarter, U.S. Treasury has resumed one of the deepest and most prolonged drawdowns in nearly 50 years since the inception of major bond indices. Through last week, U.S. Treasury yields have risen some 75 to 100 basis points on the year, to levels not seen since 2007. The yield curve has reversed a significant portion of its inversion and has continued to steepen into the fourth quarter, meaning that longer maturity treasury bonds are moving higher in yield relative to shorter term treasurer.

Speaker 6: We like the TBA position where it is. We believe that having a mixture of TBAs and pools is a very smart thing to do here and this kind of an environment TBAs are very easy to trade.

We like we like the TBA position, where it is.

We believe that having a mixture of TBA and towards is a is a very smart thing to do here in this kind of an environment TBA is a very easy to trade.

Speaker 6: So I don't think we'll be moving that exposure much higher here from this point on.

So I don't think we'll be we'll be moving that that exposure or much higher here from this point on.

Got it thank you.

Speaker 1: Your next question comes from Alina Verakagan from BTIG. Your line is open.

Your next question comes from the line of Eric Hagen from <unk>. Your line is open.

Speaker 11: Hey, thanks, good morning. I think a couple here. I mean, follow up on leverage and maybe just how you think about your own stock valuation, just where you could trade and the cost of maybe raising incremental capital and light of that leverage. And then the second one here, I mean, just how sensitive are you to additional realized gains?

Hey, Thanks, Good morning, I think a couple here.

A follow up on leverage and maybe just how you think about your own stock valuation, just where you could trade in the cost of maybe raising incremental capital in light of that leverage and then the second one here I mean, just how sensitive are you.

Smirthy Popenoe: These changes represent major shifts in market expectations for the future path of interest rates. The agency and BS market has felt the impact of higher rates. Weighted average OASs of our portfolio widened 15 basis points through quarter-end, and we are wider by an additional 15 OAS since quarter-end. Spreads now stand at both year-to-date and multi-year wide on a nominal and option-adjusted basis. Book value declined by $1.95 or 13.7% on the quarter, driven equally by rates and spreads.

So additional realized gains.

Speaker 11: from the hedge portfolio. If rates are expected to keep on rising, what is the offsetting benefit to maintaining that structure of the hedge is if there's this realized gain to think about on top?

From the hedge portfolio if rates are.

I expect it to keep on rising.

Like what is the offset offsetting benefit to maintaining that structure of the hedges if theres this realized gain.

Think about it on top of that thanks.

Speaker 6: Hi, Eric. I let Rob answer your second question first, and then I'll take the leverage question.

Hi, Eric I'll, let Rob answer your second question first.

And then I will take the leverage question after that.

Smirthy Popenoe: And as a result, adjusted leverage also increased from 7.7 to 8.5 times. Year-to-date, our model attributes the majority of the move-in-book value to wider spreads. Over the quarter, we adjusted our hedge ratios, which were designed for a portfolio that included higher coupons in a heavily inverted yield curve environment. Our adjustments incorporated more optionality and protected the position from a less inverted or steeper yield curve. You will see the impacts of our positioning on page 14. The net result is a position that is less exposed to changes in the level of rates. Our focus remains on the net spread between agency RMBS and our treasury hedges.

Speaker 5: Great, thank you guys. Yeah, Eric. So can you clarify your question a little bit on realized gains?

Great. Thank you guys.

Yes, Eric So can you clarify.

Your question, a little bit on realized gains.

Speaker 11: Yeah, we're just like how sensitive you guys are to taking additional realized gains from that head support folio if rates are rising. And, you know, just explain and kind of like with the offsetting benefit is to maintaining that structure of hedges if we have to think about this realized gain component too.

Yes.

Like how sensitive you guys are to taking additional realized gains from that hedge portfolio if rates are rising.

<unk>.

Just explain and kind of like what the offsetting benefit is.

Maintaining that structure of hedges, if we have to think about this realized gain component too.

Speaker 5: Got it, got it. Yeah, you know, I think we come in today and every day.

Got it got it yeah, I think we come in today and every day.

Speaker 5: trying to figure out which direction we should go in and how to best position in the short term, right? So that's one of the focuses, as I mentioned earlier, we've had over $100 million of realized gain, or I'm sorry, of gain, our futures roll quarterly. So they haven't been realized, but if the quarter ended today, we would have over $100 million of gain that we will have. So that's one of the focus.

I'm trying to figure out which direction, we should go and then how to best position and.

The short term right. So that's one of the focuses as I mentioned earlier, we've had over $100 million of realized gain or I'm sorry of gain.

Smirthy Popenoe: The recent moves in agency RMBS spreads are happening for several reasons. You've heard me discuss in the past of how the native balance sheet for mortgage risk in our country is changing. For much of the last 15 years, the US Federal Reserve was the largest holder of agency RMBS. And before that, the GSEs retain portfolios with the largest holders. These entities crowded out private capital and removed a risk premium from the asset class.

Our futures role quarterly so they haven't been realized but if the quarter ended today.

We would have over $100 million of gain that we will.

We will have.

Speaker 5: And, you know, if you were looking at this in terms of an equivalent swap, you know, that would be coming to us over time. The nice thing about the features we have that cache in our pocket today, and can be very flexible with that and can make adjustments very quickly.

And.

If you were looking at this in terms of an equivalent swap, yes that would be coming to us over time. The nice thing about the features we have that cash in our pocket today.

Can be very flexible with that and can make adjustments very quickly.

Speaker 5: But, you know, we've done a very good job of managing rate risk really from early 2020 to now. And you can expect us to continue to do that. Thank you.

Smirthy Popenoe: Private capital must now replace these government balance sheets. And in agency RMBS, that risk premium has now returned. Spreads are historically wide and they compensate private capital appropriately for the risk. This is why I have been saying we are in the middle of a persistent investment opportunity for our shareholders. As we show on slide 9, agency RMBS spreads to a blend of treasuries are likely to trade in the 120 to 200 basis point range.

But we've done a very good job of managing rate risk.

Really from early 2022, now and you can expect us to continue to do that.

Okay.

Thank you.

Speaker 6: So I think on the leverage, there are really two big considerations, okay? One is what's causing the leverage to go up.

So I think I think on the leverage there are really two big considerations okay.

One is.

What's causing what's causing the leverage to go up right.

Speaker 6: Right now we have the number one thing that's causing our leverage to go up is wider spread. Period.

Right now we have the number one thing that is causing our leverage to go up as wider spreads period.

Smirthy Popenoe: We are currently near the wide end of that range. And we expect that returns from owning hedge agency mortgages will be sustainably higher for some time. While volatility and spread widening has caused pockets of stress, the best managed mortgage reads like Dynex remain a source of stability for the US housing system. We see that in the financing markets, which continue to function in an orderly manner, our counterparties have access to liquidity and haircuts are stable. They report that their customers liquidity profiles remain solid. Our hedges are in the most liquid part of the global financial system, the exchange traded US treasury futures markets.

Speaker 6: And wider spreads is an inherent risk that we take. It's a native risk to our balance sheet.

And wider spreads is an inherent risk that we take it's a native risks to our balance sheet.

Speaker 6: And I think that's something that we evaluate every day to be able to say, is this risk a risk that we want to cut? Or is this risk a risk that we want to continue to take?

And I think thats something that we evaluate every day to be able to say is this risk.

Our risk that we want to cut or is this risk a risk that we want to continue to take alright.

Speaker 6: When you have high levels of leverage, if you will, let's just say when we're calling this high here, wherever we are, the number one consideration is how much liquidity you have. Now we want...

When you have high levels of leverage if you will let's just say when we're calling this high here wherever we are.

The number one consideration is how much liquidity you have.

We walked into this month.

Speaker 6: with $450 million of unencumbered assets and cash.

With $450 million of unencumbered assets and cash.

Smirthy Popenoe: So what does this mean for Dynex shareholders? We are invested in money good assets trading at historically low prices that offer a creative forward returns. Agency RMBS return projections look about as robust as I've seen them in my 10 plus years at Dynex and nearly 30 years as a fixed income invest.

Speaker 6: And we consider that with put it in position, a position.

And we consider that liquidity position.

A position of strength.

Speaker 6: So we want to use our liquidity position to

So we want to use our liquidity position.

Two.

Buffer.

Speaker 6: further increases in spreads. And we only do that, obviously, if we believe that risk is worth taking. So I'm giving you the framework with which we use to think about risk versus return.

Further increases in spreads and we only do that obviously, if we believe that risk is worth taking so I'm, giving you the framework with which we used to think about risk versus return.

Byron Boston: With that, I'll turn it over to Byron. Thanks, Smriti and Rob.

Byron Boston: I would like to leave you with the following thoughts. The opportunity to earn a compelling return, only mortgages on a hedge basis is as attractive as I've ever seen in my 40 plus year career. Our portfolios mark to market daily, and while there can be periods of volatility, lower prices mean higher future returns on bonds like ours. That are money good. Our management team is extremely skilled at earning hedge returns, and our portfolio is well positioned to earn outside returns going forward.

Speaker 6: and how we've thought about whether it's good or not good to take the organic risk that's within our balance sheet. We have a very high conviction that the forward we turn on these assets is outstanding relative to our cost of capital. So all of those things are sort of in our minds right now as we evaluate what to do going forward.

And how we've thought about whether it's good or not good to take the organic risk within our balance sheet right. We have a very high conviction that the forward return on these assets is is outstanding relative to our cost of capital.

So all of those things are sort of in our minds right now.

As we evaluate what to do going forward.

Speaker 6: I know that's not a clear answer. People are looking for us to say, ah, we're cutting risk or we're taking on the risk. We're managing the risk.

Byron Boston: Very important for you to understand, we, the management team in the board, own our stock. Management has the material interest in the company, and our focus is on extracting the historic returns available in the market today.

I know thats not a clear answer yet people are looking for us to say, our cutting risk taking on the risk.

We're managing the risk.

Speaker 6: You know, our shareholders have become very accustomed to us.

Our shareholders have become very accustomed to us doing the right thing in these circumstances I will remind you guys in October November of last year. When we got to these types of spread levels I will remind you guys we cut risk.

Speaker 6: doing the right thing in these circumstances. I will remind you guys in October , November of last year, when we got to these types of spread levels, I will remind you guys we cut risks.

Operator: With that operator, I will open the call to questions. At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad.

Speaker 6: We weren't afraid to do it. And I'm going to tell you, I think it was the right call, given everything that's happened this year, that was the right call. Okay, so we're going to manage it actively when we have...

We weren't afraid to do it and I'm going to tell you I think it was the right call given everything that's happened this year that was the right call.

Bose George: And your first question today comes from the line of Bose George from KBW. Your line is open. Hey, everyone, good morning. Actually, first I wanted to ask that you guys noted OAS is at 14 basis point, 15 basis points is quarter. Can you just give us an update on what that means for a book value? Yeah, hi Bose. The number I quoted was actually as of a couple of days ago, the number since quarter end is closer to 25 OAS on our portfolio.

So we're going to manage it actively when we have.

Speaker 6: A disclosable event relative material change in our position, you know, we will disclose it. You have also a tradition of transparency and disclosure.

A disclose a bull event relative to a material change in our position we will disclose it.

<unk> also a tradition of transparency and disclosure from us.

Speaker 3: Let me add one other thing for Eric, which is, because you've listened to us over the years, and these moments like these are evolving. They're changing.

Mark Let me, let me add one other thing Eric which is.

Because you've listened to us over the years and these moments like these are evolving their.

Bose George: And the book value has been volatile somewhere between 10, 50 and 11, 50 as of last week per share. So that's where it's been ranging. I do, I do want to say a couple of things, you know, just on what's been happening in the last week, right? One of the main observations we have in terms of why OAS is our wider is it's been a technical widening. This is not a widening that's based on the credit quality of the asset or that the money isn't coming back at par, right?

They are changing rapidly.

Speaker 3: And in some situation like March of 2020, we just didn't take questions at one point because it was just changing into

And in some situations like March of 2020.

Didnt take questions at one point because it was just changing too much.

Speaker 3: So I understand some of the things we asked some questions about our position change of destiny.

I understand some of the things we asked all my questions about admission changes adjustments et cetera.

Speaker 3: It is changing, it is evolving, and we've talked about that. And we are prepared as a company to withstand what we said in the past, if you use a sailboat in the example, to shift in the changes in the market. Boy, I can't tell you everything. We sold this, bought that, sold that bit, bought this. So that's, as you want to emphasize, for you just the moment in which we are right now in the markets, the team is prepared, and I think Smurther wants to jump back in here too with a couple of other thoughts.

It is changing it is evolving and we've talked about that and we are prepared as a company to withstand what we said in the past you've used a sailboat. An example, the shifting and changes in the market Boy I can't tell you everything we sold as Bob Thats, all that'd be about this so I just want to emphasize just the moment in which we are.

Bose George: These are money good assets. It's been really a factor of technical selling. One of the most interesting things that has happened in the sector is that money managers very wisely went overweight, mortgages earlier this year. That's because they were the cheapest asset out there. They were cheap versus corporates. You know, we like to make a joke internally. They were cheap versus Bitcoin. They were cheap versus everything, right? So that was that was the appropriate trade to do.

Right now in the markets. The team is prepared and thanks Martin wants to jump back in here too.

Any other thoughts.

Speaker 6: Look, with regard to raising capital, all right.

Look with regard to raising capital alright.

Speaker 12: This as a class is cheap.

This asset class is cheap.

Speaker 12: period. It's the cheapest asset class out there. It's the asset class that every the student investor should be looking at because the forward returns are extremely compound.

<unk>.

It's the cheapest asset class out there, it's the asset class that Ed.

Every astute investors should be looking at because the forward returns are extremely compelling.

Bose George: And what's happened with the sell off in the last few weeks is that they have been receiving redemption. And when those redemptions come, they choose to sell the most liquid asset. We felt this last year at the same time in October where the most liquid asset got sold. That happens to be the asset that we own. And that's actually one of the biggest drivers of why mortgage spreads are sitting out here in the past week.

Speaker 6: So if we're out there raising capital, the story we're telling is number one, this is the asset class that's gotten the cheapest. We know why it's here, we know why it's cheap, we know why we're getting to earn this incremental spread because private capital now can earn a risk premium that wasn't previously there to earn.

If we're out there raising capital the story, we're telling is <unk>.

One this is the asset class that's gotten the cheapest we know why it's here we know why it's cheap we know why we're getting to earn this incremental spread because private capital now can earn a risk premium that wasn't previously there to earn.

Yeah.

Speaker 6: We have the skill to manage this asset class and that's the premise on which we go raise capital. So our current position, our track record, all of that are nice things to have on the side.

We have the skill to manage this asset class and that's the premise on which we go we go raise capital.

Bose George: So this is technical selling. The selling is happening as money managers get redemptions. And for that reason, we just want to be cognizant that this isn't a judgment on the quality of the asset. And our level of comfort with holding this asset class is the idea that these are money good. Yeah, absolutely. That definitely makes sense. Thanks.

So our current position.

Track record all of that arent are nice things to have on the side.

Speaker 6: The most compelling thing about what's going on in this environment right now is that these things are cheap.

The most compelling thing about what's going on in this environment right. Now is that these things are cheap.

Speaker 6: and they're money good and relative to everything else that's going on in this macroeconomic environment. They're the most liquid thing out there for you to be able to put your money in right now. So that's the premise.

And theyre money, good and relative to everything else that's going on in this macroeconomic environment. There are the most liquid thing out there for you to be able to put your money in right now.

Bose George: And then actually just given the declining book value since quarter end, obviously your leverage is higher all else equal. How are you guys to thinking about leverage is, you know, would you let it write up a little bit just given this uncertainty and hold the assets or, you know, is there a situation where you might have to reduce the size of the portfolio to get your leverage back in a range where you can work on.

So that's the premise on the capital raising.

Speaker 3: And this classic class has made it through every crisis in my career. And I've watched the other one get annihilated for whatever reason investors forget that's a place in the past, but this classic class has made it through every crisis that I've been involved with in my career.

Yes.

This asset class has made it through every crisis in my career and I've watched the other one get annihilated for whatever reason investors forget.

Bose George: Yeah, look, one of the nicest things about the way we have been positioned coming into this environment is having a massive amount of liquidity. So we've closed the quarter with $450 plus million of cash and unencumbered assets. That leaves us in a very flexible position here as we look at what's going on in mortgages. You know, you guys know us to be very student risk managers. We're sitting here evaluating exactly all of those decisions every day on behalf of our shareholders, right?

In the past, but this asset class has made it through every crisis.

<unk> been involved with in my career.

Well. Thank you guys very much we appreciate you.

Thanks, Eric.

Speaker 1: And again, if you would like to ask a question, press star then the number one on your telephone keypad.

And again, if you would like to ask a question Press Star then the number one on your telephone keypad.

Speaker 1: And there are no further questions at this time. I will turn the call over to Byron Boston for some final closing remarks.

And there are no further questions at this time I will turn the call over to Byron Boston for some final closing remarks.

Speaker 3: Thank you all. We appreciate you joining us today. We look forward to you joining us in the future. We'll leave you just with the thought of an environment, an evolving environment. We've been prepared for it, we've prepared for it. We've got a great opportunity. Thank you very much.

Thank you all we appreciate you joining us today, we look forward to you joining us in the future will be just with the saga Zimbabwe involving environment. We've been prepared for it we're prepared for it we've got a great opportunity. Thank you very much.

Bose George: One thing that gives us a lot of conviction in our position and anything that we do to manage it. Number one, we're sitting here with a very liquid asset. Number two, we're sitting with a big pile of liquidity. Number three, we have the scale to manage through these volatile environments, right? And the last thing, you know, as we make these decisions, we're always going to be thinking about the through the cycle returns.

Speaker 1: This concludes today's conference call. Thank you for your participation. You may now disconnect.

This concludes today's conference call. Thank you for your participation you may now disconnect.

Speaker 13: Please wait, the conference will begin shortly. Thank you.

Please wait the conference will begin shortly.

Yes.

Sure.

[music].

Okay.

Bose George: The returns here are very accretive for our shareholders. So we're not, and I've said this a few times, you know, we're not invested in agency mortgages because we expect spreads to tighten day after tomorrow. We're invested in them because we generate an accretive rate of return versus our cost of capital. And that's true today. And that's really the underlying penit with why we're comfortable holding the positions that we have. So we're going to risk manage the position bows. And I think our shareholders have come to expect us to be very good at that. But that's, that's kind of our thinking behind it. Okay.

Yes.

[music].

Yeah.

Sure.

Yes.

Yes.

Yes.

Okay.

[music].

Byron Boston: Let me, let me, let me, let me, both of them, both of them, one other thing, which is this is very simple. This is really quick. We came into this decade with an opinion about surprises and about global risk. And you've been a year ago or so, we talked about having a ship that's built with this type of environment. That's basically smartly gave you the details. I'm just giving you a little history to know that we came into this decade prepared for this type of environment. Okay. Great. That's helpful. Thanks, guys.

Trevor Cranston: And your next question comes from Alina of Trevor Cranston from JMP Securities. Your line is open. Hey, thanks.

Trevor Cranston: Good morning. Just just follow up on that last question for my, my own clarity. Have you guys made any significant changes to either the portfolio or the hedge position since quarter century? So Trevor, I think we've managed the position actively since quarter and I can't comment on significant changes or not significant changes. I will tell you that, that, you know, we managed the position actively. You can see the risk position on page 14.

Trevor Cranston: That's sort of the beginning part of how we've adjusted the position. Rob, can you tell me how much I can disclose in terms of post-quarter-end action? Sure, and I think, you know, Trevor, good question. We've had over a hundred million dollars with a hedge game, you know, since quarter-ends given the move in rates. And as Smriti said, and you could see it in some of the slides, we've hedged at some different points on the curve, you know, we've been out a little bit longer, there's some 30 years in there now.

Trevor Cranston: And, you know, with a move in the yield curve, we'll continue to actively look at where we want to be and where we want to have our hedges. But Smriti, if you want to add some more color in terms of where you've been recently, that's fine. Yeah, so, I mean, we've been hedging in the back end of the yield curve. That's been our focus. We've used a combination of options and futures.

Trevor Cranston: And one of the hard things about giving a lot of detail on this is that it changes quite a bit. So, you know, if we had a very substantial update, you know, in the past, we've actually been willing to give out a disclosure that reflects that substantial update. I think if we do that, we'll be willing to do that in the future, like if that's something that we think is appropriate. But for now, I think we feel really good about what we've disclosed.

Trevor Cranston: Got it. Okay, that's helpful. And then, you know, you guys talked about the technical picture for MBS, which seems, you know, kind of weak, at least in the near term. Sure. And also, you know, you mentioned the sort of band you think spreads could trade in. So, it's curious, you know, how much conviction or confidence do you think there is around sort of the upper end of that band, particularly if rates keep moving higher? Just given the fact that it seems like, at least in the near term, there's kind of an absence of many buyers in the market. Yeah, yeah. I mean, that's interesting.

Smirthy Popenoe: So, let me give you some fundamental observations about the mortgage market here. The Fed is basically coming out and telling us that they're pretty much done raising rates. Now, the argument is, you know, are they going to raise in November or December, either way you're looking at, you know, maybe one more hike and then they're going to stop for some time. So, this limits how much front end rates can rise from here.

Smirthy Popenoe: All right. So, you now have the front end a little bit paged. The second thing is the biggest bank selling that we had, you know, this year is done, right? Now, there might be some shadow banking bank stuff, you know, bank supply stuff out there, but by and large, the active selling is over. Okay. The third thing that's happened here, which is really important is the yield curve is substantially steeper. And for the first time now, you actually have agency mortgage yields at a positive yield spread versus Fed.

Smirthy Popenoe: Fund. So the yield on current coupon mortgages is around six and a half, seven percent. Fed funds is at five and a half percent. That's a lot of carry in mortgages. It's very positive in terms of just sitting here and keeping on owning the asset, right. Another point, the net supply picture for the first time is actually starting to look positive. The feds run off from their balance sheet is going to shrink from let's say 15 to 20 billion a month.

Smirthy Popenoe: It's going to go down to maybe 13 to 15 billion. So there's a few less mortgages that the market's going to need to absorb from the Fed. And with mortgage rates around 8 percent, supplies really going to start to taper off here, especially in the winter, right. And then the last piece of this is that you are starting to see credit trends deteriorate, right. There's headlines about auto loan delinquencies rising, you know corporate bond delinquencies rising, you know, percent of bond that could be downgraded rising, all of those things eventually, right, make it make your money good asset worth more.

Smirthy Popenoe: So in general, right, is that 200 basis points. Upper end of the range, you know, intact solid. I can't say that to you, I can't say that there are many factors in play today that really limit how much further. That those spreads can go now. And because we're cognizant of the technical picture, we're prepared for whatever, you know, for it to blow out past that. But, you know, in general, there are many things we see in place right now that say, okay, look, even if we get out there, there's a reasonable. There's a reasonable thought process around why you could quickly come back to more, more tighter levels of spreads from those extremely wide levels. Yeah, okay, that makes sense. Thank you. Sure.

Matthew Erdner: Your next question comes from a line of Matthew Ergner from Jones Trading. Your line is open. Hey, good morning, guys. Smith, you can grab some of the board nomination and thanks for taking the questions. So you mentioned the spread range. And I'm going to kind of follow up on the question before. What do you think drives them tighter? Is it other people getting in the market to kind of absorb some of the supply and stop the technical selling or is it the Fed kind of hinting that they're going to start to cut rates or just kind of figure out the duration of how long that they will hold.

Matthew Erdner: I think it's all of those things, Matthews, and I appreciate the congrats. Thank you for that. Look, I wish I could say, hey, these are the, these are the, if this happens, they're going tighter, right? One of the things that's happened right now is that you've got a technical situation where money managers have become net sellers. One thing that keeps me sort of like very disciplined about my view on mortgage spreads is what happened to mortgages in January of this year.

Matthew Erdner: This year, once retail and RIAs and basically, you know, the investor investor universe decided that it was going to be the year of the bond, mortgage spreads tight until like 120. That's a very positive outcome when you go back and see what happened in mortgage spreads this year. That can definitely happen again. Now, why do I say that? The yield curve is almost flat like a pancake at 5%. So now, for the first time, investors can look out the yield curve and say, hey, I can earn a 5% yield for taking durations.

Matthew Erdner: In mortgages, you can actually earn a spread over the financing costs. These are very positive sort of inherent things in the way the market is structured today. But you've got to get through this technical pressure first. The number one thing that's keeping mortgages from tightening right now is this supply technical. The number one thing that's going to get mortgages to tighten from here is a demand technical. That demand technicals.com from a marginal buyer.

Matthew Erdner: That marginal buyer right now is really investors. Any investor that's basically wanting to take that duration risk. And investors will make that decision. We think when they believe the Fed is done, which the Fed is kind of telling us we're close to being done. And when they feel like they're being adequately compensated for taking on that risk, which the curve has steepened and that risk premium has been built back into the curve.

Matthew Erdner: Now, whether that's enough or not yet to be seen. But the factors are here for that switch to occur. Gotcha. That's helpful. And then one quick question on the portfolio. You guys have trimmed the TBA position for the past couple of quarters. Should we expect that to continue going forward? We like the TBA position where it is. You know, we believe that having a mixture of TBAs and pools is a is a very smart thing to do here in this kind of an environment TBAs are very easy to trade. So I don't think we'll be we'll be moving that that exposure much higher here from this point on. Got it. Thank you.

Eric Hagen: Your next question comes from a line of Eric Hagen from BTIG. Your line is open. Hey, thanks.

Rob: Good morning. I think a couple here. I mean, follow up on leverage and maybe just how you think about your own stock valuation, just where you could trade and the cost of maybe raising incremental capital and light of that leverage. And then the second one here, I mean, just how sensitive are you to additional realized gains from the hedge portfolio if rates are expected to keep on rising? Like, what is the offset offsetting benefit to maintaining that structure of the hedges if there's this realized gain to think about, you know, on top of that.

Rob: Thanks. Hi, Eric. I let Rob answer your second question first. And then I'll take the leverage question after that. Great. Thank you, guys. Yeah, Eric, so can you clarify your question a little bit on realized gain? Yeah, we're just like how sensitive you guys are to taking additional realized gains from that hedge portfolio if rates are rising and you know just explain and kind of like what the offsetting benefit is to maintaining that structure of hedges if we have to think about this realized gain component too.

Rob: Got it, got it. Yeah, you know, I think we come in today and every day trying to figure out which direction we should go in and how to best position in the short term, right. So that's one of the focuses as I mentioned earlier, we've had over a hundred million dollars of realized gain or I'm sorry, of gain our futures role quarterly. So they haven't been realized, but if the quarter ended today, we would have over a hundred million dollars of gain that we will have.

Rob: And you know, if you were looking at this in terms of an equivalent swap, you know, that would be coming to us over time. The nice thing about the futures we have that cash in our pocket today and can be very flexible with that and can make adjustments very quickly. But you know, we've done a very good job of managing rate risk really from early 2020 to now and you can expect us to continue to do that.

Rob: Okay, thank you. So I think I think on the leverage there, there are really two big considerations. Okay. One is what's causing, what's causing the leverage to go up right now we have the number one thing that's causing our leverage to go up is wider spreads period. And wider spreads is an inherent risk that we take. It's a native risk to our balance sheet. And I think that's something that we evaluate every day to be able to say, is this risk a risk that we want to cut or is this risk a risk that we want to continue to take?

Rob: Right. When you have high levels of leverage, if you will, let's just say when we're calling this high here, wherever we are, the number one consideration is how much liquidity you have. Now we walked into this month with $450 million of unencumbered assets and cash. And we consider that liquidity position, a position of strength. So we want to use our liquidity position to buffer further increases in spreads. And we only do that, obviously, if we believe that risk is worth taking.

Rob: So I'm giving you the framework with which we use to think about risk versus return and how we've thought about whether it's good or not good to take the organic risk that's within our balance sheet. We have a very high conviction that the forward we turn on these assets is outstanding relative to our cost of capital. So all of those things are sort of in our minds right now as we evaluate what to do going forward.

Rob: I know that's not a clear answer. People are looking for us to say, we're cutting risk or we're taking on the risk. We're managing the risk. You know, our shareholders have become very accustomed to us doing the right thing in these circumstances. I will remind you guys in October, November of last year when we got to these types of spread levels, I will remind you guys we cut risk. We weren't afraid to do it and I'm going to tell you I think it was the right call given everything that's happened this year, that was the right call.

Rob: Okay. So we're going to manage it actively. When we have a disclosable event, relative material change in our position, you know, we will disclose it. You know, you have also a tradition of transparency and disclosure for months. Marth, let me let me add one other thing for Eric, which is because you've listened to us over the years and these moments like these are evolving. They're changing rapidly. And in some situation like March of 2020, we just didn't take questions at one point because it was just changing too much.

Rob: So I understand some of the things we asked some of questions about our position change is just at the time. It is changing. It is evolving and we've talked about that. And we are prepared as a company to withstand what we said in the past, if you use a sailboat, an example, the shifting and changes in the market. Okay. Boy, I can't tell you everything. We sold this, bought that, sold that bit, bought this.

Rob: So that's, as you want to emphasize, see, just the moment in which we are right now in the markets, the team is prepared. And I think Smurz wants to jump back in here too with a couple of other thoughts. Look, with regard to raising capital, all right. This asset class is cheap, period. It's the cheapest asset class out there. It's the asset class that every student investor should be looking at because the forward returns are extremely compelling.

Rob: So if we're out there raising capital, the story we're telling is number one, this is the asset class that's gotten the cheapest. We know why it's here. We know why it's cheap. We know why we're getting to earn this incremental spread because private capital now can earn a risk premium that wasn't previously there to earn. We have the skill to manage this asset class and that's the premise on which we go raise capital, right.

Rob: So our current position, our track record, all of that are nice things to have on the side. The most compelling thing about what's going on in this environment right now is that these things are cheap and they're money good and relative to everything else that's going on in this macro economic environment, they're the most liquid thing out there for you to be able to put your money in right now. So that's the premise on the capital raising.

Rob: Yeah, and this asset class has made it through every crisis in my career and I've watched the other one get annihilated for whatever reason investors forget the place in the past, but this asset class has made it through every crisis that I've been involved with in my career.

Byron Boston: Well, thank you guys very much. We appreciate you. Thanks, Eric. And again, if you would like to ask a question, press star, then the number one on your telephone keypad. And there are no further questions at this time.

Byron Boston: I will turn the call over to Byron Boston for some final closing remarks. Thank you all. We appreciate you joining us today. We look forward to you joining us in the future. We'll leave you just with the talk as an environment involving environment. We've been prepared for it. We've prepared for it. We've got a great opportunity. Thank you very much.

Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect. Please wait.

Operator: The conference will begin shortly.