AGNC - NASDAQ

Good morning, and welcome to the AGNC Investment Corporation First Quarter 2023 Shareholder Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Katie Wisecarver, Investor Relations. Please go ahead.

Thank you all for joining AGNC Investment Corp.'s first quarter 2023 earnings call. Before we begin, I'd like to review the safe harbor statement. This conference call and corresponding slide presentation contains statements that, to the extent they are not recitations of historical facts, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNC's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law. Participants on the call include Peter Federico, Director, President and Chief Executive Officer; Bernie Bell, Executive Vice President and Chief Financial Officer; Chris Kuehl, Executive Vice President and Chief Investment Officer; Aaron Pas, Senior Vice President, Non-Agency Portfolio Management; and Sean Reid, Executive Vice President, Strategy and Corporate Development. With that, I'll turn the call over to Peter Federico.

Thank you, Katie. The performance of Agency mortgage-backed securities in the first half of the quarter was very strong, continuing the positive momentum that began last November. This led to a notable increase in our net asset value through mid-February. These favorable conditions, however, gave way to a more challenging investment environment in the second half of the quarter, as regional bank instability dramatically altered the macroeconomic and monetary policy outlook, and led to a material increase in interest rate volatility and rapid repositioning of fixed income portfolios. As a result, the strong improvement in our net asset value early in the quarter turned into a modest decline by quarter-end. Following stronger-than-expected economic data in January, the Fed raised the federal funds rate by 25 basis points at the February 1 meeting and indicated more hikes were likely and that short-term rates would remain higher for longer. By early March, the terminal fed funds rate implied by the futures market approached 6%, indicating that another 100 basis points of tightening was likely. Against this backdrop, the yield curve became meaningfully inverted with the 2-year to 10-year treasury yield differential reaching negative 108 basis points in early March. This sharply inverted yield curve and more aggressive monetary policy outlook raise serious questions about bank earnings and unrealized losses on their asset portfolio. These concerns ultimately led to the abrupt failure of Silicon Valley Bank and drove a dramatic repricing and monetary policy expectations. At the peak of the banking uncertainty, meaningful rate cuts were expected over the remainder of the year rather than rate increases, as previously indicated by the Fed. In this highly uncertain environment, interest rate volatility increased to crisis levels. As an example, the MOVE index, which measures treasury market volatility, reached a 15-year high. Short-term interest rates experienced the greatest volatility, with the yield on the 2-year treasury dropping 61 basis points in a single day, unmatched by any day during the great financial crisis. Longer-term treasury rates were also volatile with the yield on the 10-year treasury increasing 60 basis points in February and falling by a similar amount in March. Predictably, this volatility adversely impacted Agency MBS. The possibility of bank selling, which became a reality with Silicon Valley Bank, also weighed on Agency MBS performance late in the quarter. Given these banking issues, the supply and demand outlook for Agency MBS is now more uncertain. Over the near term, it is likely that banks will not be meaningful buyers of MBS and, in some cases, could be sellers. Over the last two years, the fixed income markets experienced a significant repricing as the Fed tightened monetary policy at a historic pace. Agency MBS have been uniquely impacted with the spread between the current coupon MBS and the 10-year treasury, widening 135 basis points since April 2021. Importantly, we believe this repricing is in the late stages and that a new trading range is emerging. More specifically, we think spreads could remain at these compelling levels until this tightening cycle is well behind us. Such spread levels provide investors with meaningful incremental return and are about double the average of the last 10 years. We also believe agency MBS are attractively priced and adequately compensate investors for the volatility and uncertainty that characterized the U.S. treasury and Agency MBS markets today. In addition for investors seeking the highest credit quality and incremental return, Agency MBS provide a compelling alternative to U.S. treasuries. As we mentioned last quarter, the path to stability is not a straight line and the first quarter is a good reminder of that. But despite the headwinds that we encountered in March, our outlook continues to be very positive. A key driver of this optimism is our belief that our portfolio can generate mid-teen returns at current valuation levels and without spread tightening. For much of the last 15 years, we have competed with the world's largest and most price and sensitive buyer of Agency MBS. As the Fed and now banks repositioned their balance sheets, we find ourselves in the favorable position of being one of the few permanent capital vehicles dedicated to Agency MBS at a time when valuations are historically attractive and appear poised to remain that way for some time. Also important, unlike banks, our interest rate exposure is conservatively hedged and our portfolio is fully mark to market. As such, when you invest in AGNC today, you are buying into a levered and hedged portfolio priced at today's historically attractive valuation levels, making this opportunity very similar to 2009, which was one of AGNC's most favorable periods. With that, I will now turn the call over to Bernie Bell to discuss our financial results in greater detail.

Thank you, Peter. For the first quarter, AGNC had a comprehensive loss of $0.07 per share. Economic return on tangible common equity was negative 0.7% for the quarter, comprised of a decrease in our tangible net book value of $0.43 per share and $0.36 of dividends declared per common share. As of last Friday, tangible net book value was down about 1% for April. Leverage at the end of the quarter was 7.2 times tangible equity, down from 7.4 times as of the fourth quarter, driven by a reduction in our asset balance and the addition of $171 million of common equity raised through our at-the-market offering program. This issuance occurred opportunistically during the quarter at levels that were meaningfully accretive to book value. Our average leverage for the quarter was 7.7 times tangible equity compared to 7.8 times for the fourth quarter. As of quarter-end, we had cash and unencumbered Agency MBS totaling $4.1 billion or 57% of our tangible equity, and $70 million of unencumbered credit securities. Net spread and dollar roll income excluding catch-up amortization was $0.70 per share for the quarter, a decline of $0.04 per share from the fourth quarter due primarily to somewhat higher funding cost and the addition of new longer-term pay fixed swap hedges. Lastly, the average projected life CPR in our portfolio at the end of the quarter increased to 10% from 7.4% as of the prior quarter-end, consistent with moderately lower forward mortgage rates and a higher average coupon in our portfolio. Actual CPRs for the quarter declined to 5.2%. I'll now turn the call over to Chris Kuehl to discuss the Agency mortgage market.

Thanks, Bernie. The first quarter was marked by extreme rate volatility. The tailwind of a growing consensus around the outlook for Fed policy and expectations for lower rate volatility carried over from year-end through the month of January, leading to one of the strongest months on record for Agency MBS performance. But that tailwind abruptly ended in February with the release of much stronger-than-anticipated economic data, and in turn, material repricing of expectations for further Fed policy tightening. Against this more challenging backdrop, Agency MBS materially underperformed hedges in the second half of the quarter. Performance across the coupon stack varied considerably with 3.5% through 4.5%, outperforming production coupons early in the quarter and lower coupons materially underperforming in March as the market priced the impending supply shock following the failures of Silicon Valley Bank and Signature Bank. Higher coupons widened as well in sympathy with lower coupons, although to a lesser degree. In total, interest rates rallied approximately 40 basis points and 2s through 10s. From this perspective, the quarter appears much more benign than what actually occurred. Given the extreme intra quarter rate volatility and stress in the regional banking system, it is not surprising that mortgages underperformed. Since quarter-end, rate volatility has declined materially as contagion concerns in the banking system have subsided somewhat and economic data appears support of a Fed policy nearing the terminal level for rates. Despite relatively common markets, the overhang of supply from the FDIC and related bank failures has driven Agency par coupon spreads 10 basis points wider since quarter-end to approximately 163 basis points to a blend of 5- and 10-year treasuries. Our Agency MBS portfolio declined to $56.8 billion as of March 31, down from $59.5 billion at the start of the year as we adjusted leverage lower to enhance flexibility to add Agency MBS as a result of the highly volatile market environment. Despite relatively weak roll implied financing levels during the quarter, specified pool performance generally lagged TBA performance. We took advantage of these weaker specified pool valuations by increasing AGNC's holdings by a little over $5 billion while reducing our TBA position by approximately $8 billion. With respect to our coupon positioning, we continued to gradually move up in coupon with the weighted average coupon of the portfolio increasing approximately 10 basis points during the quarter. As of March 31, the hedge portfolio totaled $59.7 billion and our duration gap was 0.2 years. Our hedge ratio declined to 114%, consistent with the expectation that we are nearing the terminal stage of the Fed tightening cycle. And as we have discussed, we expected to gradually shift the composition of our hedge portfolio towards a greater share of longer dated hedges to address the risk of a yield curve steepening. This effort continued in the first quarter and was most pronounced in our treasury holdings where we added intermediate term treasuries while maintaining a short position in longer-term treasury-based hedges. Looking ahead, the combination of wide spreads, low prepayment risk and robust funding markets for Agency MBS creates what we believe to be an extraordinarily attractive and durable earnings environment. I'll now turn the call over to Aaron to discuss the non-Agency markets.

Thanks, Chris. Considering the significant interest rate volatility, the shifting inflation and economic outlook as well as two large bank failures, credit spreads were, on the whole, fairly well behaved. To put the performance in perspective, in the days following the failure of SVB, the CDX investment grade and high yield indices widen to 91 and 533 basis points, respectively. These [local] (ph) wides were significantly tighter than what occurred during the U.K. liability-driven investment crisis late in the third quarter. In addition, both were tighter at [3/31] (ph) as compared to year-end. Post SVB, falling rates or rising bond prices for benchmark bonds provided support for the spread product complex. Unlike in September, when spreads and rates both drove bond prices lower, the large rally across the curve towards the end of the first quarter helped dampen credit spread widening. This likely contributed to better performance with reduced forced selling and deleveraging and bolstering credit spread performance. Consistent with these themes, residential credit spreads performed well in the first quarter. On the run, CRT closed largely unchanged to slightly tighter over the prior quarter, while pockets of seasoned CRT tightened more meaningfully. The residential credit space likely will be a favorite asset class in the near term as credit concerns play out in other asset classes. The residential space as a whole is still supported by low mark-to-market LTVs and conservative underwriting. This results in reduced sensitivity to even moderate housing shocks or a small increase in unemployment. Turning to our holdings, our non-Agency portfolio ended the quarter at $1.3 billion, a decline of approximately $100 million from year-end. The majority of the decline was driven by sales of AAA CMBS. With wide Agency MBS valuations, and a stronger relative funding outlook, surrogate investments for Agency MBS such as high grade residential and commercial back cash flows have become less attractive for us to hold. Our CRT portfolio was little changed in the first quarter and performed well due to the composition of our holdings. We continue to maintain a high allocation of bonds that provide little to no capital relief to the GSEs. As such, our expectation is for the GSEs to attempt to extinguish this protection over time by tendering the securities at above prevailing market levels. In fact, just yesterday, Fannie Mae announced the tender for seasoned CRT. We expect these tenders to drive favorable total returns for this portion of our whole. With that, I'll turn the call back over to Peter.

Thank you, Aaron. With that, we'll now open the call up to your questions.

We will now begin the question-and-answer session. [Operator Instructions] And our first question here will come from Rick Shane with J.P. Morgan. Please go ahead with your question.

Good morning, everybody, and thanks for taking my question. Look, we're obviously at a really confusing crossroads right now in terms of rates. I suspect a lot easier to manage the portfolio when there's clear direction. Can you talk a little bit about how you balance levering up in this environment, the hedge strategy and what the signals you will look for to weigh in more aggressively once you see the market taking a direction?

Sure. Thank you for the question, Rick. It's a good question to start with. There's a lot to it and I might leave some things out, so if I miss some of it, ask more. But first let me talk about leverage and sort of the issue that you raised is it is a really challenging environment and that's sort of to be expected when you think about it. We're right at sort of the end of the Fed tightening cycle and I think the Fed tightening cycle is going to end at the next meeting whether they raise 25 basis points or pause or just simply pause here, I think it's likely the last move. So, it's not surprising that the market is so, if you will, sensitive right now. And really when you go back and you think about the concerns that the market confronted last September, really the issue that destabilized the market was the concern that the Fed would go too far and ultimately cause something in the financial system to break and that in fact happened in March. And now as we look forward, I think the Fed now understands that and they've made it clear that the instability that occurred in the banking system is going to have a material impact on credit availability and ultimately slow the economy down and ultimately act as a tightening of monetary policy. So, I think we're near the end of that process. I also think that, as Chris mentioned in his prepared remarks, we are starting to see some stabilization in the banking system, which is obviously very good for everybody. But we had to sort of deal with that instability and uncertainty in March and that's one of the reasons why we maintained a fairly defensive leverage position. We actually sold some assets net during the quarter. As Bernie mentioned, we used our ATM accretively to help manage our desired leverage position. So, I think that worked out beneficial to our shareholders. And we put ourselves importantly -- and this gets to the sort of the outlook, we put ourselves in a position now where we have I think a lot of flexibility. And I think that there's going to be opportunities that arise in the mortgage market, and given our liquidity position, given our leverage position, I think we're really well positioned to take advantage of those. Now another key point though, and this is what I think makes this environment so unique and so favorable and I tried to touch on this in my prepared remarks is that we really don't feel any sense of urgency with respect to meaningfully changing our leverage profile because we think spreads are going to remain fairly stable in this area. And I think it's likely going to -- spreads will likely remain at these levels, which I think are cheap by anybody's measure regardless of how you look at them across the curve. They're going to remain, generally speaking, in this area for the foreseeable near-term future. And that really gives us an opportunity to be patient and to adjust our portfolio over time. But in the meantime, as I said, our portfolio can generate really attractive returns. So, we think we're sort of at the end of this repricing process. And I think we're going to stay here for a fairly meaningful period of time and that really gives us a lot of flexibility. A couple of comments with [regard to] (ph) hedging, because you did bring that up. We did start to change the composition of our hedge portfolio as can be seen in some of our numbers, and as Chris mentioned, consistent with the Fed coming to the end of the tightening cycle. As the Fed shifted from an easing cycle to a tightening cycle, we talked about this, we wanted to have a greater portion of our hedges in the front part of the curve because we expected yield curve to invert, which it clearly did. And as the Fed comes to the end of the cycle, we would expect the opposite to happen, and that has started to happen. We expect the yield curve to steepen and ultimately the front end of the market to rally more. And so, in that environment, we'll likely operate with a lower hedge ratio. Chris mentioned it went down to 114%. As we sit today, it's actually under 100%, and we'll likely operate with a greater share of longer-term hedges so that we have a little bit more exposure to the yield curve steepening and that would benefit our hedge portfolio. So, I'll pause there and let you ask a follow-up, if there is any.

No, great answer, very helpful, and I will pass the baton.

All right. Appreciate it, Rick.

Our next question will come from Trevor Cranston with JMP Securities. Please go ahead with your question.

Hey, thanks. Good morning.

Good morning, Trevor.

A follow-up on the comments you guys have made already about sales of the failed banks portfolio is coming to market. Can you talk about how much of that you think is priced in versus how much additional widening we might see as those sales actually come to market? And how much -- like who you see as the marginal buyer and how much capacity they have to absorb that right now? Thanks.

Yes, let me just start and then I'll pass it over to Chris. I think the market has had enough time to digest that information. It's now pretty well understood what exactly they're selling and it was a little bit different than the expectations initially, and Chris can talk about the composition that will ultimately come to market. But I think the FDIC essentially has done a good job in working with BlackRock to really make it clear that they are going to tread lightly, if you will, with respect to how they dispose of these assets. It's important that they maximize value, and doing so, that's going to take them a long time. I suspect this is going to take the better part of the year. And they'll adjust according to market conditions and as liquidity and demand shows up. But I think there could be some opportunities in that portfolio, and Chris can talk a little bit about that.

The only thing I'd add, I mean, what we learned last week was the composition and the likely pace for liquidation by asset class. And as Peter said, the pace of sales is a bit longer than maybe what the market feared or at least some had feared. There's $60 billion in pass-throughs that are expected to be sold at a pace of around $6 billion to $7 billion per month, and so, roughly eight to nine months. $22 billion in CMOs that are expected to be sold at a pace of around $1.6 billion per month. So that's a little over a year. And then, there's $14 billion of CMBS and $7 billion in munis. Lower coupons widened materially up to this event. And so, I would say, I would expect the generic sort of 30-year pass-throughs to trade pretty well. I think there are a few categories within the pass-through position that trade with pay-ups that could trade at very wide spreads. There are few categories within the CMO holdings that could also trade at very wide levels. We'll have to see. We'll certainly be engaged on the list as they come out. The first round of list last week traded well. We'll have to see how things go. But with the disclosure, as Peter said, they also had some market-friendly language that suggested that the FDIC does want to minimize adverse impacts on market functioning and they're going to consider trading conditions and liquidity on any given day. But there should be some opportunities in some of the less liquid sectors for us.

And Trevor, just to add, you asked about the marginal buyer activity. Obviously, the key marginal buyer in this environment is going to continue to be money managers. The Silicon Valley Bank portfolios, low coupons and more than 50% of the mortgage index is made up of these low coupons. So, the money managers are going to be the key buyers of mortgages going forward at the margin. I think large banks could, at some point, come back into the market. But more importantly, I think there's going to continue to be a rotation out of treasuries into Agency mortgage-backed securities. And I think we started to see some of that over the last several months. I think there's demand on an absolute unlevered basis for Agency MBS that is growing. I think you see that in the formation of the ETFs that have occurred. BlackRock ETF has gained a lot of asset value over the last six months. DoubleLine initiated an agency ETF. So, I think there's going to be demand that will continue to -- fixed income demand that will continue to make its way into the Agency MBS market, but it's just going to take time, but I think that sets up for a positive dynamic.

Yeah, that makes sense. Okay. Thank you, guys.

Thank you, Trevor.

And our next question will come from Doug Harter with Credit Suisse. Please go ahead with your question.

Thanks. In your prepared remarks, you mentioned kind of favorable funding markets. Can you just talk about how you're thinking about the debt ceiling and kind of how you're seeing funding markets kind of around that time?

Sure. Thanks for the question, Doug. Good morning. We really haven't seen any disruptions in the Agency funding market. And that's one of the things that obviously makes Agency MBS so compelling on a relative value basis. Chris mentioned that in his prepared remarks that spreads are materially wider and the funding is still uniquely positive for Agency MBS. So that's a really positive long-term factor for us. Looking back at the first quarter, there was really very little disruption in the Agency mortgage market. There's still a lot of liquidity. I don't expect the debt ceiling to have any impact on the repo market for Agency MBS or for U.S. treasuries for that matter. The amount of money in the money markets system, the amount of money at the reverse repo facility at the Fed sort of signals to me that there's plenty of liquidity in the funding markets. I don't expect that the debt ceiling to be an issue in the repo markets. It may be an issue in interest rate volatility with respect to treasuries, but that's one of the reasons why we're operating with a relatively small duration gap. We'll continue to keep our interest rate exposure low. And ultimately this debt ceiling issue will get resolved. I think the market is mature enough and has gone through this enough times to know that a solution will be found. Hopefully, it can be found quick. But if it's not, I think the market ultimately will price in the fact that it will be resolved.

Great. Thank you.

Sure. Thanks for the question.

And our next question will come from Bose George with KBW. Please go ahead with your question.

Hey guys, good morning.

Good morning, Bose.

Peter, in your comments, you noted a new trading range in Agency MBS. Can you talk a little more about that sort of into just in terms of nominal spreads where you think things could end up?

Sure. Well, what's interesting, Bose, when you -- at this point when you look at Agency MBS spreads, a lot of times it's -- it really is dependent on where you look sort of at a point on the curve because you can have meaningful differences whether you use treasuries or swap hedges or whether you use 10-year hedges or 3-year hedges. But when you look at mortgages today, Agency MBS, they're cheap by all measures. For example, if you look at 10-years to 3-years in the treasury market, the spreads are somewhere between 125 basis points and 175 basis points. If you look at it, mortgages against SOFR market 3-years to 10-years, they're 150 basis points to 200 basis points. So that's why I think everybody looks at the mortgage market and said, they're probably in the 160 basis points to 175 basis point range. Ultimately, I think spreads will tighten from here. I think they can trade in this 150-ish basis points range for some period of time. And the reason why I sort of come to that number is that I think that's a number that is obviously about double, if you think about that versus the 10-year, that's about double the spreads that we've experienced for the last 10 years. So that's meaningfully wider, but that's a lot of additional compensation for the same credit quality as the U.S. treasury. So, think about it, if you're looking at the 10-year treasury at 3.5% and you can earn 5.25% for the same credit quality for a duration that's actually shorter than a 10 year, I think that's really compelling. I think investors in this environment requires a higher return. It's not surprising that we are here given the amount of monetary policy uncertainty and economic policy uncertainty. I think the market is going to be highly sensitive to economic data for the next several months until it's clear how the Fed is going to progress through this pause period. So, I think it keeps spreads in this range. But if you ask me 12 months from now where are spreads, I would say they're tighter than they are today, but they're still wider than -- meaningfully wider than historical averages.

Okay, great. Thanks. That makes sense. And then...

Sure. Bose, I mean, I think that's just -- yeah, I just think that's really the key point and the message is that, that really does set up for a very good earnings environment. So, I'm sorry, go ahead.

Yeah, no, absolutely. That makes sense. Thanks. The other question I had, and I think you guys referred to this briefly, but what was the driver of the treasury -- long treasury position that you put on end of the quarter?

Yeah. Well, that really gets back to repositioning from a yield curve perspective our hedges. During the quarter, obviously, things started to move very quickly, so we wanted to achieve two things during the quarter. We wanted to maintain a positive duration gap given the rally that was occurring late in the quarter. So, we rebalanced by adding duration and allowing us to benefit from a rally that was occurring to give us more protection against the spread widening -- mortgage spread widening in a rally environment and we were able to do that. And at the same time, we wanted to continue to reduce our shorter-term hedges -- from there, I'd say, 5-years and in, intermediate to short-term hedges and maintain our longer-term hedges. So to achieve that objective -- both of those objectives, we ended up actually buying 5-year treasuries while maintaining our short position in 10-year treasuries, thus giving us a yield curve exposure to the curve steepening. So, it was consistent with that move. Over time, we'll continue to adjust our aggregate hedge position, but that was the idea behind that.

Okay, great. Thanks a lot.

Sure.

And our next question will come from Eric Hagen with BTIG. Please go ahead with your question.

Good morning, Eric.

Hey, thanks. Good morning, guys. Quick follow-up, I think, on the hedges. It looks like mortgages could be cheap versus interest rates, but also other fixed income assets like corporate bonds. And in the past, you guys have explored opportunities to extract value from those conditions. Is there any appetite to reintroduce those types of hedges, diversify your hedging?

Yeah, Eric, there is. We actually have a small position on in that hedge right now that IG CDX exposure, it's not particularly meaningful, it's a little less than $500 million, but there could be an opportunity to do more of that, particularly given what Chris and Aaron both talked about, which is the fact that agencies really have widened considerably relative to other fixed income spread product. And that's one of the things that makes us so compelling. That's one of the reasons why we've reduced our non-Agency portfolio and increased our allocation to the Agency market. So, there could be some opportunities there.

Yes, that's good to hear. With spreads being as wide as they are, there's still being this uncertainty around the market with spreads already being this wide. Does that -- you feel like that creates any limitations to operating with more leverage versus when spreads have been, call it, tighter than they are today? And on top of that, is there an estimate for how much liquidity or margin you might need to post for a given move in spreads?

Sure. What I would say is I sort of take your point that we're operating near, call it, the post-great financial wides and is there a risk that they could be materially wider. And one of the things that I take as a positive and this is why I refer to it sort of as a new range is emerging. I think when you go back and you look now from September to now we're five, six, seven months, I think the market is establishing that the upper bound that we've experienced sort of a couple of times and we're not far from it now is sufficient to attract fixed income buyers to the Agency MBS market. I think that's the key. We've seen it both just broadly with fixed income, but in particular the rotation into Agency MBS. And we see it in the bond fund inflows. They were close to $60 billion in January and February. They've slowed, but they're still positive in March. That's going to continue. I think that helps to stabilize spreads at these levels. I think that's sufficient amount of incremental income. So, we have to position for that risk. We got to be careful about that. There's no doubt in our liquidity position and in our leverage position. But when you -- I'll sort of answer your question about the capacity. We have about 25 basis points of price movement would be equal to, from a price sensitivity, around 12% of our [NLD] (ph). Today or at the end of the quarter, we had $4.1 billion of liquidity or about 57% of our unencumbered. So, we have a lot of unencumbered capacity to withstand an adverse spread move. And we also have a lot of unencumbered capacity to absorb higher leverage if we wanted to operate that. When you think about each turn of leverage is worth probably something in the neighborhood of around 6% of unencumbered capacity. So, we have -- when you think about it from that perspective, we have a lot of capacity. If we were to operate -- said another way, if we were to operate one turn higher in leverage, our unencumbered would only go down about 6%. We'd still have about 50% of capacity to withstand additional spread moves from here.

That is really helpful detail. Thank you, guys. Thank you very much.

All righty.

And our last question will come from Vilas Abraham with UBS. Please go ahead with your question.

Hey, everyone. Thanks for taking the question. It looks like specialness has all but disappeared. I just wanted to get your thoughts on your outlook there. And just on the quarter, in Q1, on the cadence of how you manage the TBA book, just curious there because you did see that the end of period was a bit lower than the average.

Yes. So, your question -- just to make sure I heard it correctly, your question was on TBA specialness in the size of the TBA book?

Yes.

Okay, great. Chris?

So, rolls generally traded weaker in Q1, which really isn't all that surprising given the lack of a going away bid, lower REMIC activity and what's likely to be a pretty small short base in Agency MBS right now just given how wide spreads are relative to pretty much every other asset class. Implied financing rates will vary with [tacticals] (ph) and our rolls didn't add much value versus repo in Q1. They traded fine. I think it's likely that over the longer run, they'll average around 5 basis points to 10 basis points through repo consistent with historical norms. And so, it's likely we'll continue to carry a significant TBA position, but smaller than what we've averaged over the last couple of years given current levels of specialness. In the quarter, we had some good opportunities to add specified pools versus our TBA position. We added, as I mentioned, a little over $5 billion. Again in a quarter like the first -- it was an incredibly volatile quarter. And so that tends to reduce investor activity and participation in origination list. And so, specified pool pay-ups generally traded weaker relative to their duration implied expected values. And so, we're able to take advantage of that and add pools with good convexity characteristics versus TBA. The TBA position, the size of it, it's an opportunistic position, difficult to project, but hopefully that gives you some insight into the trade-offs that we think about.

That's helpful. Thanks. And then, just one more. So, you guys are constructive on the return opportunity here. I think spreads could kind of remain at these levels for a little while, given you a sustained opportunity. And your stock multiple is favorable right now obviously above book. So, as you think about your appetite for just equity raising, how do you think about that here? And why not be more aggressive than less given that valuation of your stock is probably a little bit more unpredictable than where other dynamic spread and that kind of thing may go? So, just any thoughts there would be helpful.

Yeah, you raise a good point and we have consistently traded at a premium to our book value. And I expect that to continue and I think it's consistent with the environment that we're in because it's such a favorable earnings environment. If you think about our portfolio on a go-forward basis, if you're buying into our portfolio today, you're buying in at a fully mark-to-market portfolio at really attractive valuation levels. So, the earnings expectation of the portfolio on a go-forward basis is really strong. As I talked about, it's mid-teens. It can support our dividend. And that's obviously encouraging from a price-to-book perspective. The way I would describe our appetite for capital is just sort of going back to the principles that I laid out before. We're not trying to raise capital for the sake of being larger. We feel like we have great scale, great operating efficiency. We don't want to lose our flexibility by being too large. But at the same time, we also want to be tactical with our use of the capital markets if we're able to raise capital accretively and it's consistent with our leverage -- desired leverage profile and we actually used it in the context of managing our leverage in the first quarter. If it's consistent with that, we will consider it. But there's no need simply raise capital and buy assets for the sake of being larger. But we will certainly try to use it opportunistically as long as it's accretive for our existing shareholders.

Got it. Thank you.

Sure.

And we do have another question from Bose George with KBW. Please go ahead with your follow-up.

Hey, guys. Actually my question was answered. I was going to ask about the dividend, but then Peter, you noted that it's well covered. So, I'm all set. Thanks.

Yeah, that's really the key is that the economic go-forward earnings is really consistent with our dividends, so we're very comfortable there.

Great. Thanks a lot, guys.

Sure.

And that will conclude our question-and-answer session. I'd now like to turn the call back over to Peter Federico for closing remarks.

Well, we appreciate everybody's participation today, and we look forward to talking to you again next quarter.