Q3 2024 Dynex Capital Inc Earnings Call

Abby: Ladies and gentlemen, good morning and thank you for standing by. My name is Abby and I will be your conference operator today.

Abby: At this time, I would like to welcome everyone to the die next capital 3rd quarter 2024 earnings conference call.

Abby: All lines have been placed on mute to prevent any background noise.

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

Speaker Change: Thank you, and I would now like to turn the conference over to Alison Griffin, Vice President of Investor Relations. You may begin.

Alison Griffin: Good morning and thank you for joining us for Dynamics Capital's third quarter 2020 four earnings call. The press release associated with today's call was issued and filed with the SEC this morning October 21.

Alison Griffin: 224. You may view the press release on the homepage of the Dynax website at DynaxCapital.com as well as on the SEC's website at fcc.gov.

Alison Griffin: Before we begin, we wish to remind you that this conference call may contain forward-looking statements within the meaning of the private security for vacation reform act of 1995.

Alison Griffin: The words believe, expect forecasts, anticipate, estimate project plan and similar expressions identify forward-looking statements that are inherently subject to risks and uncertainties.

Alison Griffin: Some of which cannot be predicted or quantified. The company's actual results in timing of certain events could differ considerably from those projected and are contemplated by the forward-looking statements as a result of unforeseen external factors or risks.

Alison Griffin: For additional information on these factors or risks, please refer to our disclosure filed with the SEC, which may be found on the DynaX website under Investors Center as well as on the SEC's website.

Alison Griffin: This conference calls 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.

Alison Griffin: The FI presentation may also be referenced under poorly reports on the Investor Center page.

Speaker Change: Joining me on the call today are Byron Boston, Chairman and Co-Chief Executive Officer.

Speaker Change: Smriti Popenoe, Co-Chief Executive Officer, President and Chief Investment Officer, Rob Colligan, Chief Financial Officer and Chief Operating Officer, and TJ Connolly, Senior Vice President, Strategy and Research. It is now my pleasure to turn the call over to Byron.

Byron Boston: Thank you, Alison. Good morning and thank you for joining us today.

Byron Boston: Are you economic return of 7% of a quarter continues to highlight the skills and experience necessary to navigate the current environment.

Byron Boston: We firmly believe that we can deliver value to our shareholders across multiple markets and areas.

Byron Boston: As a sign of our confidence, the board is voted to increase the common dividend by two cents per share per month.

Byron Boston: This represents a 15% dominant increase from 13 to 15 cents per share.

Byron Boston: This decade, we have been strategically focused on our investment strategy and capital allocation.

Byron Boston: Simplifying and enhancing our capital structure, we embarked on a strategy to grow the company to drive operating leverage and to improve our common stock's liquidity while balancing our equity capital. Our highest priorities are to be reliable stewards of capital transparent in our actions and good corporate citizens.

Byron Boston: Dynamics is a strong, diverse organization building on a 30 year vision to create a multi-generational organization that can stand the test of time.

Speaker Change: A Smriti will elaborate in our comments, this remains a very favorable return environment, with funding cost declining and the curve steeper.

Speaker Change: She and the team are prepared with flexibility and liquidity, both are essential for today's global environment. I'll now turn it over to Smirty.

Smriti Popenoe: Thank you, Byron. From a macro perspective, we are moving into a regime with a left-restricted Fed, which brings with it the opportunity to earn positive carry from the yield curve. This is a powerful source of bold returns.

Smriti Popenoe: Overall, we are positioned to deliver solid results, creating value in four main ways, managing the existing portfolio, optimizing our capital structure, raising equity and investing capital at a creative our leads.

Smriti Popenoe: The broader investment environment remains favorable with more extreme still near historic whites. The yield curve shows forward finance and cost declining well into 2025.

Smriti Popenoe: While being mindful of risks, we are investing capital at marginal returns in the mid to high teams early.

Smriti Popenoe: We're also honoring this period with solid performance, 7% total economic return for the quarter, and 6.5% year to day.

Smriti Popenoe: While we remain highly alert and prepared for near-term event risk from the U.S. elections and broader geopolitical developments.

Smriti Popenoe: In the medium term, we see tremendous upside earnings power on the balance sheet from the ability to take leverage up and the ability to earn additional drop income.

Smriti Popenoe: A one-time increase in leverage invested at 12% at 19 cents per share per year in economic return.

Smriti Popenoe: We think we have the room to take our total leverage up one to two times from today's levels and aim to do so opportunistically as always within the context of the global macro risk environment.

Speaker Change: Secondly, drop-and-come, as you know, is a key feature of investing in TBAs. Drop-head two components that return on the assets, which is a function of repayments, and the implied financing cost, which is driven by supply and demand.

Speaker Change: In a CBO curve environment, the payments usually swell, the asset yield rises, and therefore drop income also rises.

Speaker Change: When demanded is heavy for MBS, as it can be when the curb is steep, implied financing cost decline, also increasing the drop. This is called specialments.

Speaker Change: So at any given moment, the drop is a function of these two factors which are quite independent of each other and we anticipate both to be favorable. Higher sustained asset yields and some degree of specialness returning to dollar or market dispenance and cost decline.

Speaker Change: Dennis is uniquely positioned to capitalize on these opportunities and the team relies heavily on our deep experience in managing the embedded risk in mortgage backscarities.

Speaker Change: We leaned on our tactical expertise to adjust our portfolios through the major market moves this quarter.

Speaker Change: Speaking of deep expertise, I am delighted to introduce my colleague, TJ Connelly, our Senior Vice President of Strategy and Research, who joined us just over a year ago.

Speaker Change: He brings over two and a half decades of experience at hedge funds and asset managers, with his deep background and research and investing, TJ brings a disciplined process and enhanced by his knowledge of the latest data science and AI methods.

Speaker Change: Some of you may have already met TJ as he has been active in talking to our institutional investors over the last year and I will now turn it over to him to discuss elements of our investment strategy.

TJ: Thank you, Sworthy. It's a pleasure to be here. The investment team at die next is one of the strongest, not only in the reading industry, but across the asset management industry. I'm excited to continue to enhance the team's discipline and transparent investment process.

TJ: The process is built for a multitude of environments. Today, markets are shifting into a powerful new financial regime, with a steeper younger and improved financing rates for mortgages.

TJ: Economic Growth remains modest to moderate, inflation is manageable, and monetary policy appears likely to be less restricted. This historically been a recipe for robust mortgage performance.

Speaker Change: As Smriti mentioned, in this time of environment, the market for newly issued to be announced mortgages, TBAs.

TJ: has historically enjoyed a strong technical bit.

TJ: We have already started to see signs of this, dropping them available in coupons like fours and four and a half for instance, jumped sharply in the third quarter amid stronger bainton and additionally there was an uptick in demand for collateralized mortgage obligations, CMOs, as investors sought floating rate bonds backed by agency R&BF.

TJ: As we expected, mortgage demand was dispersed across the agency mortgage coupons that.

TJ: Lower Coupons perform particularly well while higher Coupons lack. Overall in the quarter, option adjusted spreads were anywhere from 10 to 15 basis points tighter on lower Coupons, to as much as 10 wider on TBA sixes and higher.

TJ: In the last two quarters, the team shifted the portfolio towards specified pools, especially in higher coupons, and this contribute to our strong total return in the third quarter.

Speaker Change: Republicans rose sharply for some of the most recent Ansible mortgages as the average 30-year primary mortgage rate hit 6%.

Speaker Change: Repented protection from lower-loam balances and other specified characteristics mitigated the impact of faster speed. Specified pools generated solid cashews and positive alpha with higher payoffs relative to TBAs.

Speaker Change: The team here at Dynax expects the bank and CMO demand will grow in the coming quarters.

Speaker Change: That's five pool of the share of our total agency R and BS portfolio, and in the quarter to local high, as pricing has evolved and the potential for stronger drop-in come in TBA develops, we will continue to consider the optimal mix of pools versus TBA as we seek to generate alpha for the portfolio.

Speaker Change: We expect some answering costs to continue declining as the bed of the liver is more rate cuts.

Speaker Change: As we often see during transitions to a new regime, though, financing markets have experienced some volatility on the way to a new equilibrium. The Fed's quantitative tightening program and regulatory capital constraints have put upward pressure on mortgage repo rates relative to silver, especially according in. We're planning for more periodic rate pressure in repo markets ahead.

Speaker Change: We started to adjust our hedge book in the third quarter, shifting to silver swaps from treasury futures. For several years now, treasury hedges have been the best choice for managing interest rate duration because we were effectively selling the asset that was being created in most.

Speaker Change: The government has been financing massive fiscal deficits.

Speaker Change: As you can see from slide 14 in our earnings deck, the spread between long-term treasury and so far rates is historically wide. Devin year silver swap rates are 40 dips below the seven year treasury yield.

Speaker Change: You can also see on that slide that the spread is historically moved with the level of federal deficits.

Speaker Change: At today's Red Levels, we think lowering the fixed rate yield on our hedges by 40 basis points offers highly a creative ROE for the incremental capital required for swaps versus futures.

Speaker Change: In our view, the spread now compensates us for the risks of the potential for their increase in federal deficits over the long term.

Speaker Change: Overall, we expect the environment will be favorable for both the asset and hedge sides of our portfolio. The opportunities to earn carry and roll down with a super curve are significant and growing. We expect to be able to generate alpha with an agency R&BS from dollar rolls and relative value.

Speaker Change: More compelling yields on our hedges will also gradually allow a greater mix of assets across the spectrum of residential and commercial mortgages to generate robust and resilient long-term returns to support our dividend.

Speaker Change: I'd like to now turn it over to Rob for more details on the quarter.

Rob Colligan: Thank you TJ, and good morning to everyone joining the call.

Rob Colligan: Will value end of the quarter at $13 for share, and the economic return was 7% for the quarter.

Rob Colligan: Leverage was down slightly from the second quarter, primarily driven by the increase in our book values.

Rob Colligan: The tenure treasury was down approximately 60 basis points from the end of the second quarter, and mortgage spreads were broadly tighter this quarter.

Rob Colligan: We raised $56 million of new capital and we continue to keep ample levels of liquidity to deploy a spreads widen, or volatility increases between now and the end of the year.

Rob Colligan: Inter-Sinkham was up from the second quarter from the active edition of higher yielding assets into the portfolio, while older, lower yielding assets continue to pay down.

Rob Colligan: Borrowing rates on repurchase agreements are beginning to trend down as a result of the Fed's first interest rate cut in September. This is the first cut following the interest rate hiking cycle that started back in March of 2022.

Speaker Change: And at DJ mentioned, our hedge book now includes both swaps and treasury features.

Speaker Change: And as I've mentioned on previous quarters calls, heads gains and losses on features are a component of retaxable income and will be part of our distribution requirement with other ordinary gains and losses over time.

Speaker Change: This quarter, we realize hedge losses, which will reduce our distribution requirements compared to our disclose numbers at the end of the second quarter. Yet, we still have a large cumulative benefit for our portfolio.

Speaker Change: As a reminder, periodic swapping come will be reported as earned each quarter with projected cash flows reported on a mark-to-market basis.

Speaker Change: You can see some details on this on page 6 in the earnings release, page 11 of the earnings presentation, as well as the EAD reconciliation for the periodic swap benefit.

Speaker Change: Expenses for the third quarter were up primarily related to performance-based compensation and the solid financial returns delivered this quarter.

Speaker Change: With that, I'll turn the call back over to Smriti for closing comments.

Smriti Popenoe: Thank you, Ron.

Smriti Popenoe: Our team has always operated with great integrity and unwavering commitment to our values and a focus on supporting our community. We continue to operate with these tenets at the center of our activities. We live and breathe these elements in our daily work and believe this is a distinguishing factor for our company.

Smriti Popenoe: This is reflected in our long-term industry leading performance as shown on page 7 in the investor presentation.

Smriti Popenoe: Dynak shares offer compelling value at today's levels, and we believe over time, they will command the premium valuation that is warranted for the ethically managed high quality investment product we deliver.

Smriti Popenoe: Our management team, Board of Directors, and the Dynastine are all personally committed to investing alongside our shareholders, where optimistic about our future and our prospects for 2025 and beyond. With that operator, I'd like to open the call to questions.

Speaker Change: Thank you, and we will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue.

Speaker Change: If you would like to withdraw your question, press star one a second time.

Speaker Change: If you're called upon to ask your question and are listening to be a speaker phone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.

Speaker Change: Again, it is star one if you would like to join the queue.

Speaker Change: and your first question comes from the line of those George with KVW, your line is open.

Speaker Change: Hey everyone, good morning. I just get an update on mark to market book value.

Speaker Change: Peace.

Speaker Change: On to market book value is down about a percent, please quote on it.

Speaker Change: Okay, great. Thanks, and then you gave the sensitivity to the increased leverage that one turn of 19 cents. In terms of taking up the leverage, what kind of factors are you focused on in terms of that potentially happening at some point?

Speaker Change: Yeah, I think one of the biggest things is just near-traumabot risk getting through the election season.

Speaker Change: and...

Speaker Change: Any kind of near-term market volatility, both the macro environment in general, is probably the first consideration. And then just near-term at that risk.

Speaker Change: I think we can really be more confident about sort of the long-term impacts of taking that leverage up. Other factors, you know, the marginal ROI, the level of spreads where they are, the range, all of that, just economic considerations obviously will be there as well.

Speaker Change: Okay, great. Thanks, and then just in terms of the, you know, the switch of some of the hedges to swaps from treasuries, from the nymph standpoint, the part, the piece that you're switching, does that incrementally get that sort of that 40, 40 basis point differential between, you know, the treasuries spread versus a swaps trend?

Speaker Change: It does, I think, and I think one of the most important concepts.

Speaker Change: Here is, and when we say, you know, an answering process, favorable, an answering process of declining, it's important to know the distinction between sort of what the Fed is doing on the Bailey front end and what the lock.

Speaker Change: So the Fed doesn't actually have to cut for our financing costs to come down. The market just has to price those cuts and we have to lock that in and that's exactly what we've been doing by switching into swaps. So when we do this transition out of futures into swaps, we're doing two things.

Speaker Change: One is, we're effectively earning that extra 40 basis points, but two are also locking in forward financing costs, opportunistically.

Speaker Change: That's what takes sort of the idea that, you know, does the Fed have to cut, not necessarily, we've already locked that in with, which it's over time. So I think that's a big piece and quite frankly.

Speaker Change: that in a bunch of other positive things that was been saying about the environment is what has led us to raise the dividend.

Speaker Change: Okay, great, thank you.

Speaker Change: Thank you.

Speaker Change: and your next question comes from the line of Eric Kagan with BTIG. Your line is open.

Eric Kagan: Hey, thanks. Good morning. Great quarter. So if we saw pre-payment speeds pick up a little bit more meaningfully especially in the higher two-pone stuff.

Eric Kagan: I mean, how do you think that would maybe change your approach to leverage or the structure of hedging? And then the second part of that question I mean is the objective to basically reinvest most of the pay downs into the current coupon, or do you feel like there's scenarios where, you know, it can maybe deviate from that and be opportunistic within the coupon stack. Thank you guys.

Speaker Change: Yeah, hi, Eric. Thank you. I think, you know, I'll just give you a broader sense for pre-payments and the impact. One of the most unique things about this environment is that we have nine or ten different coupons into which we can invest.

Speaker Change: Right, so the relative value opportunities even if three payments are rising in the higher coupons are ample. I let TJ jump in here and just give you our thoughts on what our thoughts are on different aspects of the coupons that.

Eric Kagan: Yeah, Eric Dia.

Eric Kagan: You know, at higher coupons, as you mentioned, did pre-pay a bit faster. The actual pre-payment experience for our portfolio was quite muted.

Eric Kagan: given the specified pool holdings that we've had, so there's a lot of different...

Eric Dia: Opportunities in this environment, given where the best side pools are trading now, relative to TBA, so that's one consideration. And then the final comment in my prepared remarks I'd add that as far as the reinvestment opportunity is the coupon stack is very big as Smriti mentioned. And there's also a lot going on on the agency, CNBS side and other parts of the mortgage capital structures that are very increasingly interesting for us as well.

Speaker Change: Yep, great stuff. Hey, so do you guys have any perspectives on the volatility that we saw on the repo market?

Speaker Change: We got the end of the quarter here and the ability for mortgage repo race to track with Fed Funds going forward.

Speaker Change: How do you envision that?

Speaker Change: Absolutely, yeah, I think one of the things that we've been very focused on.

Speaker Change: has been just the evolution of financing markets as that does QT. And I would think about it in two different components here, Eric. One is that every quarter end, there's sort of a traffic jam that is happening in balance sheets where everyone's trying to go someplace and there's a jam that happens and we call this more of an intermediation effect. And that's causing locally, reburates the spike, especially at Montenex quarter end.

Speaker Change: And that's not a function of the availability of money. It's just a function of just a pipe's not being.

Speaker Change: Clear, and that's happening because of capital holes and such, right? So that's...

Speaker Change: That really affects people who are funding on an overnight basis, you will be more exposed to having a funding spike at month and a quarter.

Speaker Change: and then there's a second piece of this which is more structural.

Speaker Change: Where we are tracking, you know, what is the level of reserves in the system? The actual amount of liquidity that's available in the system, that is declining as the Fed is continuing quantitative tightening.

Speaker Change: And I think of that more as, you know, just like how big the highway is. So every quarter and you've had a traffic jam, that's affecting the price at which you can borrow money. And if you're funding on an overnight basis, that's affecting you. And then overall, there's just been the size of the highway starting to shrink as QT continues. And so these are kind of the two different pieces. So far, we've really not seen, you know, a detrimental impact to the availability of weepo financing, especially for agencies.

Speaker Change: It's just been the price and it's been locally spiking, and otherwise the market seems healthy. And T. did you have any other details to offer here?

Speaker Change: I think that you've highlighted the important things. One thing I would add is that the Federal Reserve is monitoring these markets more closely than ever.

Speaker Change: They have a new bank survey of reserve levels that they're publishing each week, in fact the least one came out on Friday.

Speaker Change: So the Fed is monitoring these conditions. It is about availability versus the intermediation factors that Smriti has commented on. So availability and then the distribution of that liquidity is the key. It's the distribution of that liquidity that has been creating these traffic jams.

Speaker Change: Yep, I appreciate you guys, thank you.

Speaker Change: Thanks for that!

Speaker Change: and your next question comes from the line of Trevor Cranson with Citizens JMP. Your line is open.

Speaker Change: Hey, thanks, good morning.

Trevor Cranson: Can you guys talk a little bit about how you're thinking about the rates market and the potential for your movement and rates as we head into the election and sort of how you think about the overall risk positioning of the portfolio, you know, over the next couple of months, sitting into that.

Speaker Change: Absolutely, yeah, thank you. Thank you for the question. So overall, I'll just give you the broad comments on that. I can ask TJ to cover the detail.

Speaker Change: But really at this point, we are looking at a Fed that is decidedly less restrictive, and that's just sort of a psychological fact of the Fed. And then once you've got the less restrictive Fed, the markets have done an incredible job of either pricing in anywhere from six to eight cups and now we're back to sort of like four to six cups. That's been the general direction in which the markets have been going, so you're looking at a terminal Fed one's rate somewhere between three and four percent.

Speaker Change: All right, and so our portfolio and the way we've thought about this, the world coming up, has been in the context of 3 to 4 percent terminal funds rate. And then as you know, right, like we look at this and say if it's perhaps 3 to 4, and then we're preparing for any sort of exogenous shocks outside of that range.

Speaker Change: So that's generally the premise under which we construct, you know, our view on ways going forward.

Speaker Change: And then the second piece of that is with rates, you know, if the terminal rates between 3 and 4%, where does the mortgage rate end up, right? And that we see somewhere between, call it 5% and 7%.

Speaker Change: That gives you a sense of sort of the opportunity to earn carry if you will, you know, in that environment, it gives you a sense of pre-payment risk that you're going to suffer in that environment.

Speaker Change: and let's just be honest, you're like a lot of the mortgage market is priced well below 5%.

Speaker Change: So the amount of pre-payment risk is actually quite limited to just the newly produced mortgages that have been out there in the last two years. So that actually creates a different set of opportunity in itself.

Speaker Change: And then if you look at our comments, like we are basically not saying, we're going to be at this level, or we're going to be at that level. We focus a fair amount on the shape of the Eulker.

Speaker Change: and I'll say even within that construct, we're actually focused on...

Speaker Change: how less inverted the Carbids versus how steep it is per se. So if you look back and look in the last three quarters, the amount of disenversion that has happened in the Yoke of is massive.

Speaker Change: and then the second piece that we've been looking at very actively and you'll see this in terms of how we've structured our features versus swamps.

Speaker Change: is, you know, when the market is offering.

Speaker Change: forward financing costs at attractive levels, we are locking those in. Right, so those are some ways tactically we've been thinking about the level of rates as well. TJ, if there's anything you want to add on.

Speaker Change: I've just taken to the tactical side there, Trevor, a little bit, as we're coming into one of the biggest known unknowns we've had in the marketplace in a long time with the November 5th election. We're our process.

Speaker Change: is heavily dependent on what's happening in the swapsions market, and what we're seeing there is the market is pricing forward volatility to be significantly higher for about very high for about five days following the election and significantly higher than historic averages for about a month. So we are very much prepared for that and the kind of liquidity that we're carrying, and as Smriti mentioned, we have capacity to add to leverage and take advantage of those opportunities that may come about from dislocations in the market that we think will be happening over the course of November and probably into December as well.

Speaker Change: Boston.

Speaker Change: Got it. Okay, that's very helpful. Thank you.

Speaker Change: And your next question comes from the line of Jason Weaver with Jones Trading, your line is open.

Jason Weaver: Hi, good morning. Congrats on the quarter. Maybe just some nuance on the prior question there. I think, you know, with the prior consensus to me to be more of a moderation of yields across the curve and seeing what we've seen since the Fed, you know, cut just recently. What would you expect a difference in portfolio of performance to be under a more of a bull steepening scenario, like we're seeing today with the long end board entered here at higher rates.

Operator: Yeah, I mean, we actually give out our portfolio profile very clearly in both the steepening scenarios as well as flattening scenarios. There's actually a slide in the earnings deck where that performance is laid out.

Speaker Change: Yeah, I mean, we actually give out our portfolio profile very clearly in both the steepening scenario, as well as flattening scenarios. There's actually a slide in the earnings deck, where that performance is laid out. It's slide 24.

Operator: It's slide 24. You know, our portfolio performs well in steep your curves in areas, right? It's sort of agnostic in terms of the level of rates. When we did approach sort of the two and three quarters terminal funds rate, our team felt like that was actually very attractive in terms of locking in financing costs, and we've been doing that, and we can see that it's part of the September 30th interest rate risk profile. So we felt those were good, good rates to lock in and in general, right, our portfolio benefits from steep your curve environment. I would say the mortgage market in general benefits from steep your curve environments because of the opportunity to end carry.

Speaker Change: You know, our portfolio performs well in steep, yield curves in areas, right? It's sort of agnostic in terms of the level of rates.

Speaker Change: When we did a broad sort of the two and three quarters terminal funds rate, our team felt like that was...

Speaker Change: That was actually very attractive in terms of locking in. The Nancy Coss, and we've been doing that, and we can see that as part of the September 30th.

Doug Harder: Got it. That's very helpful. Thank you.

Operator: As a reminder, it is our one. If you would like to ask a question, your next question comes from the line of Doug Harder with UBS. Your line is open.

Speaker Change: Thank you for watching!

Speaker Change: And as a reminder, it is our one if you would like to ask a question, and your next question comes from the line of Doug Harder with UBS. Your line is open.

Doug Harder: Thanks.

Doug Harder: I think we could talk a little bit about capital raising decisions and you know, and the dividend increase. You know, in the past you've referenced kind of the dividend yield as kind of your cost to capital and making this capital raising decisions. And you know, I guess all else being equal, you know, the dividend increase would raise that cost of capital by about 200 basis points. So, you know, just curious how you're thinking about capital raises going forward.

Speaker Change: Thanks for watching!

Doug Harder: Thanks. Hoping we could talk a little bit about capital raising decisions and the dividend increase. In the past, you've referenced the dividend yield as your cost of capital and making capital raising decisions. And I guess all else being equal, the dividend increase would raise that cost of capital by about 200 basis points. So just curious how you're thinking about capital raising going forward.

Byron Boston: Absolutely. Yeah, Doug, thank you for the question. Look, we have been consistently messaging a number of different things. One is this is a very good investment environment. And we feel really good about just the ability to generate returns in excess of the level of the dividend. We've been talking about that for four to six quarters now. We've also talked about the ability to invest capital on the margin, repeatedly relative to our cost of capital. That has been a foundation for capital raising. We've been talking about how wide MBS breads are. They're still historically wide. We've talked about how we've been able to hedge the book while rates have been rising.

Speaker Change: Absolutely, yeah, Doug, thank you for the question. Look, we have been consistently messaging a number of different things. One is...

Speaker Change: This is a very good investment environment and we feel really good about just the ability to generate returns in excess of the level of the dividend. We've been talking about that for four to six quarters now.

Speaker Change: We've also talked about the ability to invest capital on the margin, a creatively relative to our cost of capital that has been the foundation for capitalizing.

Speaker Change: We've been talking about how wide MBS breads are, they're still historic, we've talked about how we've been able to hedge the book while rates have been rising and now we're looking at transitioning to locking in these low open-ancing costs.

Byron Boston: And now we're looking at transitioning to locking in these lower financing costs, right? So, all of these things have collectively set us up, including basically our raising of the capital, investing that capital at wider spreads, and writing that the spread tightening in; you can see that is showing up in our book value. All of these actions that set us up to be more confident about forward returns. And that's really the basis for raising the dividend. So, our ability to generate those forward total economic returns is what we feel is the right thought process here. And that's what causes the raise the dividend.

Speaker Change: So, all of these things have...

Speaker Change: Collectively set us up including basically our raising up the capital, investing that capital at wider spreads and writing that the spread tightening in, you can see that is showing up in our book value, all of these actions that set us up to be more confident about forward returns, and that's really the basis for raising the dividend.

Speaker Change: So our ability to generate those forward, total economic returns is what we feel is the right thought process here and that's what causes the way it's the dividend.

Byron Boston: In terms of capital raising, at this point, nothing has changed for us. Our discipline is still there. We're still looking at the macro, we're still going to be looking at the cost of capital, we're still going to be looking at the ability to invest that capital, creatively over time. And, you know, one thing you've heard me saying out for several quarters is that marginal returns in the agency and BS space are very powerful. If you look at the coupons back today, you are getting, you know, in some cases, before hedging out option costs in the 20% or we range, and then once you take out option costs and things like that, you're still getting high teams return.

Speaker Change: In terms of capital raising, at this point, nothing changed for us.

Speaker Change: Right? Our discipline is still there. We're still looking at the macro. We're still going to be looking at the cost of capital. We're still going to be looking at the ability to invest that capital, uh, a creatively over time. And, you know, one thing you've heard me saying all for several quarters is that...

Speaker Change: Marginal Returns in the agency and the S-Base are very powerful.

Speaker Change: If you look at the coupons back today, you are getting, you know, in some cases, the foreheading out option costs in the 20% RLE range and once you take out option costs and things like that, you're still getting high teams return. So,

Byron Boston: So, when we're able to invest in that kind of a creative manner, you know, it's a positive sign. And, and I don't think there's detracts in any way from our ability to continue to raise and deploy money in the future.

Speaker Change: When we were able to invest in that sign of a period of mana, you know, it's a positive sign. And I don't think there's detracts in any way from our ability to continue to raise and deploy money in the future.

Doug Harder: Great. And, you know, as you've been raising, you've used both the ATM and you've used, you know, kind of larger block trades.

Speaker Change: As you've been raising, you've used both the ATM and you've used, you know, kind of larger block trades.

Byron Boston: You know, when you think about the environment, which, you know, kind of what form of capital raising do you think is kind of likely to be most attractive, you know, if these opportunities continue to persist. You know, I think the ATM is probably going to be our primary source. Obviously, if we have attractive, you know, block size at a reasonable price, we would definitely look at that.

Speaker Change: When you think about the environment, which kind of what form of capital raising do you think is kind of likely to be most attractive, you know, if these opportunities continue to persist?

Speaker Change: You know what I mean?

Speaker Change: Sure, Doug, I think the ATM is probably going to be our primary source, obviously, if we have attractive, you know, block size at a reasonable price, we would definitely look at that, but also adding to some of the comments, you know, we're one of the few in our space that have grown our capital base in 2020. It really points to the discipline that we've had in our approach and why we've been able to attract capital.

Byron Boston: But also adding to some of the comments, you know, we're one of the few in our space that have grown our capital base in 2020. It really points to the discipline that we've had in our approach and why we've been able to attract capital. I do feel like finally our stock price is, when you think about what we reported today, very close to our book value, so there's no longer this discount. And so raising capital. And I think we should be trading at a premium, right? That's just my view of the world. But there shouldn't be this negative stigma that we're raising capital.

Speaker Change: I do feel like finally our stock price is...

Speaker Change: When you think about what we reported today, very close to our book value, so there's no longer this discount.

Speaker Change: and so raising capital.

Speaker Change: And I think we should be trading at a premium, right? That's just my view of the world, but there shouldn't be this negative stigma that we're raising capital in it.

Byron Boston: And it's a detraction to book value at all, or there's a discount that we're achieving. I think we should continue to be at or above book value. And so we'll be raising capital, investing at a good time. And actually also helping our scale and size over time. So all those things should be compelling for not only us, but for our investors.

Speaker Change: It's...

Speaker Change: A detraction to book value at all, or there's a discount that we're achieving, I think we should continue to be at or above book value and so we'll be raising capital investing at a good time and actually also helping our scale and size over time so all those things should be compelling for not only for us but for our investors.

Doug Harder: Great. Thank you both. Thanks, Doug.

Speaker Change: Great, thank you both.

Operator: And that concludes our question and answer session, as well as concluding today's conference call. We thank you for your participation, and you may not disconnect.

Speaker Change: Thanks, Doug.

Speaker Change: And that concludes our question and answer session as well as concluding today's conference call. We thank you for your participation and you may now disconnect.

Operator: Please wait. The conference will begin shortly.