Ladies and gentlemen, thank you for standing by, and welcome to the Dynex Capital First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session.

[Operator Instructions] I would now like to hand the conference over to your first speaker today. Alison Griffin, please go ahead..

Good morning, and thank you for joining us today for the Dynex Capital first quarter 2021 earnings conference call. The press release associated with today’s call was issued and filed with the SEC this morning, April 28, 2021.

You may view the press release on the homepage of the Dynex website at dynexcapital.com, as well as on the SEC’s website at sec.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, 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, which may be found on the Dynex’s website under Investor Center as well as on the SEC’s website.

This conference call is being broadcast live over the Internet with a streaming slide presentation which can be found through a webcast link on the homepage of our website. The slide presentation may also be referenced under Quarterly Reports on the Investor Center page.

Joining me on the call is Byron Boston, Chief Executive Officer and Co-Chief Investment Officer; Smriti Popenoe, President and Co-Chief Investment Officer; and Steve Benedetti, Executive Vice President, Chief Financial Officer, and Chief Operating Officer. With that, it is my pleasure to turn the call over to, Byron Boston..

Thank you, Alison. Good morning and thank you all for joining us today. I'm extremely pleased with our first quarter results which Steve and Smriti will review in more detail in a minute.

Our current total economic return for the quarter was 7.2% on a quarterly basis and we have generated a total economic return of 34.8% over the last four quarters averaging 8% per quarter. We achieved this during an unprecedented time in the markets.

Most importantly, since this new era in history began in January 2020 we have outperformed our industry and other income oriented vehicles with 27.1% total shareholder return as noted on slide 5. Our performance during the first quarter continues to demonstrate that Dynex has the skills and experience necessary to navigate the current environment.

The Dynex team relied heavily on our deep experience in managing the embedded extension risk and mortgage-backed securities and we use this tactical expertise to take advantage of the environment. We created value during the first quarter in four ways.

We managed the existing portfolio, we optimized our capital structure, raised equity and invested capital to generate an excellent return for the quarter. We have been strategically focused on our investment strategy and capital allocation as well as simplifying and enhancing Our capital Structure.

We have been executing a strategy to grow the company to drive operating leverage and to improve our common stocks liquidity while balancing our equity capital. This quarter was unique in providing us the opportunity to raise $128 billion in new common equity and invest that capital accretive.

We also called our higher coupon preferred series B further optimizing the right side of the balance sheet. Both decisions added to earnings and book value in the first quarter in our view will end in our view will strengthen our performance over the long term.

Now from a macro perspective we're at a critical inflection point in the global economy as the pandemic evolves in a disparate fashion and the impact of government responses and the vaccine take hold.

We are preparing in our usual disciplined manner for the multiple scenarios as we have said before surprises are still highly probable given the geopolitical backdrop. We firmly believe that we can deliver value to our shareholders across multiple market scenarios.

As Smriti will elaborate in her comments this remains a very favorable return environment with funding costs anchored and the curve steeper. We believe the liquidity and flexibility inherent and our agency focus strategy are essential for a highly uncertain global environment with many complex and interrelated risks.

Now I'll turn the call over to Steve and Smriti to give you more specifics about our returns and our balance sheet composition..

Thank you Byron and good morning everyone. The first quarter continued the excellent performance for the company. For the quarter we recorded comprehensive income of a $1.76 per common share total economic return of a $1.38 per common share or 7.2% and core net operating income of $0.46 per common share.

Overall, total shareholders capital grew approximately $100 million or 15% during the quarter as we raised $128 million in net common equity through two public offerings as Byron noted, redeemed $70 million in higher cost preferred equity and added approximately $36 million in capital from excess economic return over dividends paid.

The excess economic return was largely driven by our hedging strategy as we actively managed our position and timed our hedging adjustments as the curve steepened during the quarter, resulting in gains of $166 million more than offsetting the impact of higher rates in our investment portfolio.

Book value per common share during the quarter rose $0.99 or 5.2%, absent the cost of the equity raises book value grew approximately 7.5% during the quarter.

Core net operating income to common shareholders, sequentially improved this quarter to $0.46 from $0.45 in Q4, principally resulting from lower G&A expenses and the reduction in the preferred stock dividend with the redemption of the remaining 70 million in Series B preferred stock outstanding mid-quarter.

Average earning assets marginally increased to $4.3 billion as we opportunistically deploy the capital raise throughout the quarter.

At quarter-end, leverage was 6.9 times shareholders equity and earning assets were $5.2 billion with the growth in the investment portfolio and the continued favorable conditions for the TBA dollar roll market, we expect sequential core net operating income growth for the second quarter versus the first quarter.

Adjusted net interest income was essentially flat as declines in RMBS pool balances were offset by an increase in TBA investments. Adjusted net interest spread was slightly lower at 187 basis points versus 198 basis points last quarter.

On balance sheet portfolio asset yields and TBA specialness were 12 basis points lower during the quarter which was partially offset by the benefit from lower borrowing costs which declined 5 basis points.

TBA drop income increased 33% during the quarter is we more heavily invested in TBAs but at slightly lowered net interest spreads as TBA specialness was lower in the quarter.

TBA has continued to offer superior returns versus repo borrowings and today our expert expectations are that adjusted net interest spread will be flat to modestly higher for the second quarter depending on prepayment speeds. With respect to prepayment speeds, they increased but were well within expected ranges during the quarter.

Agency RMBS prepayment speeds were 18.4 CPR for the quarter versus 17.1 CPR for Q4 while overall portfolio CPRs including the CMBS portfolio were approximately 14 CPR. That concludes my remarks and I will now turn the call over to Smriti..

Good morning everyone and thank you Steve. I will begin with a review of the markets, our performance and then cover our current macroeconomic view and the outlook. Starting with the markets, please turn to slide 18 and I'm going to bring your attention to the line at the top of the panel that says 10-year treasuries.

We've now completed an incredible round trip and the 10-year treasury yield as of December 31, 2019 you can see that was at 1.92%. That yield touched something like 50 basis points in the first quarter of 2020 and we've come all the way back to 174 basis points at the end of the first quarter.

So, it's been an incredible roundtrip I just wanted to point that out. The other thing to note here is just the incredible decline in repo rates again, 12/31/2019 repo rate stood at 2% and now one-month repo rate now is sitting in the mid-teens 14 basis points. So, it's -- the curve is steeper and it's been quite a ride in the markets.

For the quarter two-year treasury rates were up 4 basis points while 10 and 30-year rates rose 82 basis points and 76 basis points, respectively. Implied volatility on swaptions broke out of the tight range of 60 basis points to 65 basis points where it traded in the second half of last year.

It increased to an elevated 75 basis points to 80 basis points per day range where it remains today. Shorter tenures were even more elevated during the quarter which prompted us to rebalance our hedges.

As you can see on this chart MBS [indiscernible] were within a range of about 15 basis points to 20 basis points with even wider ranges when you include intraday volatility.

Agency repo rates on the quarter declined 7 basis points and this reflects significant liquidity in the frontend some technical factors that have kept favorable financing costs at record low levels. We had an excellent quarter in which the costs of our two equity raises was more than offset with active management of the balance sheet.

As Steve mentioned book value increased to $1.44 or 7.5% on a gross basis, less $0.45 cost of the capital raises we get to the net of $0.99 or 5.2% increase reported for the quarter. Roughly 65% of the $1.44 or $0.90 of the book value increase was due to the portfolio positioning from the existing portfolio.

MBS performed very well and our hedges were positioned appropriately for the move.

As we explained on last quarter's call, we came into this quarter with a view that a steeper curve was highly probable given the vaccine development and deployment fiscal stimulus treasury supply and inflation dynamics hedging positions in the long end and options reflected this view and this view largely played out over the quarter.

The other 35% of the book value increase came from the timely deployment of capital from the two raises. As we mentioned last quarter we expected curve volatility to create opportunities to add assets at attractive returns. And we were able to capitalize on the spread widening that accompanied large moves in interest rates.

We're ending the quarter with leverage at 6.9 times up about 0.5 turn from year end. It's important to understand the numbers behind the leverage earning assets actually ended up quarter over quarter almost $1.1 billion higher including TBAs.

The decline in leverage also includes the fact that book value increased and the equity raise also reduced leverage. Peak month and leverage during the quarter was 7.7 times. So you know the balance sheet is actually larger even though the leverage doesn't seem to have been affected as much.

So this last quarter we were active in managing all aspects of our balance sheet both the left and right hand side as Byron mentioned our options based hedges on the long end of the yield curve performed very well and we actually booked gains and rebalanced into more futures based hedges to navigate the coming quarters.

You can see that on page 11 in terms of repo management our focus on the technical was essential this quarter to position our book to be more short term to take advantage of falling repo rates. And we're now locking in much lower rates into second and third quarter.

Post quarter end we took some profits on our 30 and 15 year MBS TBA positions we're expecting to reinvest at wider levels. Leverage is about 6 one times and book value is flat versus quarter end.

Turning now to our near-term macroeconomic view and outlook, we expect a range bound environment to support MBS valuations with the ability to invest during bouts of volatility.

Specifically declining payups on specified pools historically low repo rates an unprecedented dollar specialness or unique potential opportunities in our focus, in terms of rates and the curve the front end is still anchored. The Fed has defined itself as being very patient having an outcome based response function versus projection based.

In our view this means prepare for a more volatile set of outcomes in the longer end of the yield curve as the data begins to flow. And the environment has shifted from rates just moving steeper and higher to the more range bound with possible surprises in both directions.

While we think the market eventually evolves into a steeper curve and higher rates we think it'll chop through some range bound action in the interim. And the implications for Dynex a range bond environment is really a great environment to earn carry. And so we spend time on discipline preparation for more volatility and surprises.

We focus on the data and we believe we'll have chances to add assets that low double-digit returns just as we did last quarter. And eventually the steeper curve will lead to a higher return environment and wider net interest spreads.

In terms of mortgage spreads and returns agency RMBS have been very well supported by both bank demand and Fed demand coming into this quarter. We've also had lower net supply slower prepayment speeds and now we have slightly higher mortgage rates. We expect strong MBS performance to continue supported by these technical factors.

And the implication for Dynex is that book values will be supported by this performance. Any discussion of the taper or technicals where demand starts to fall away from mortgages we believe creates investment opportunity and we're well-positioned to take advantage of that.

In terms of prepayments, they remain a driver of returns particularly in higher coupons and unspecified pools. The winter seasonal slowdown that typically comes was actually very modest. Interest rates mortgage rates specifically were lower during the season and the responsiveness of borrowers to low rates now appears to be really strong.

So the implication for Dynex here is that our coupon selection and flexibility from moving between TBA and pools will still be a major differentiating factor in creating returns and we believe again provides the opportunity to add assets creatively. Turning to specified pools on page 19, we have a pricing matrix that just goes through by coupon.

What happened to various types of specified pools over the quarter and the first quarter unequivocally was a bad quarter for specified pool pay ups as interest rates rose. You can see there's been a dramatic decline in pay ups since year end particularly on the higher coupons.

And in our opinion this offers the opportunity to be very strategic in shifting between TBA and pools which is also supported by low repo rates at this point.

And finally, just a comment on dollar roll specialness; we expect to see continued specialness in the 2% and 2.5% coupons well into the third quarter and the decline in repo rates that we've recently seen has actually made pools more attractive than they were before compared to TBAs and so we continue to look at that tradeoff and invest selectively and inspect pools.

Over the next few quarters, last quarter of flexibility and nimbleness was rally You know last quarter of flexibility and nimbleness was really important and I think they both remain very key to our success in managing the portfolio at the current leverage which I mentioned we had delevered post quarter end and balance sheet size which is about a $1 billion higher versus quarter end - versus year end.

We still expect core net operating income to continue to exceed the level of the dividend. And as Steve mentioned the second quarter will include some accretive benefits of really good dollar roll levels that we have locked in through June.

We are looking ahead in the next few quarters to actual data the potential for a Fed discussion of tapering, possible technical reduction in demand away from the Fed. So perhaps banks stepping away and overall volatility in the long end of the yield curve to offer opportunities to add assets.

We're also watching carefully the evolution of debt markets particularly the transition from forbearance to foreclosure in residential and commercial sectors. And we think that there might be some opportunity there but believe that develops closer to the second half of the year.

In terms of leverage I mentioned we'll continue to manage the portfolio composition and size based on the opportunities in the market at this point we're estimating again another two to three turns of capacity that offers that additional total economic return power of anywhere between 1% to 3%.

And just as an example you know one turn of leverage invested at 10% economic return is $0.24 which represents a meaningful upside to returns from today. I'll now turn the call back to Byron..

Okay first let me finish with a couple of thoughts. Our team has always operated with great integrity and unwavering commitment to our values and a focus on supporting our community. Given our fiduciary responsibilities, our highest priorities are to be reliable stewards capital, transparent in our actions and good corporate citizens.

Dynex is a strong diverse organization building on a 30-year vision to create a multigenerational organization that continues to stand the test of time. In our annual report this year, please take a look. We shared our purpose core values and vision.

We live and breathe these elements in our daily work and believe this is a distinguishing factor for our company. This is reflected in our long-term industry leading performance as shown on slide 5 and 6. Dynex the highest three-year and five-year returns along with the best job ratio among 15 peers comprising agency and hybrid mortgage REITs.

Our management team, our board of directors and I are personally committed to investing alongside our shareholders. As we disclosed in the proxy together we are among the top five shareholders on a percentage basis in our common stock. Let me leave you with this thought, it continues to be a great environment to generate strong economic return.

We remain optimistic about our future and our prospects for 2021 and beyond. And with that operator I'd like to open the call for questions at this time..

[Operator Instructions] Our first question today comes from the line of Bose George. Please proceed with your question..

Good morning.

First can you give us an update on book value quarter-to-date?.

Both, the book value is flat quarter-to-date..

Okay. Great. Thanks.

And then just in terms of leverage can you just talk about what you need to see before we see that again moving closer to something more normalized?.

Yeah. I mean we’re -- we've been in a range over time our leverage was as high as 7.7% as I mentioned in the first quarter, it stepped back down here post quarter end because we took some profits.

On average, I'd say we’re -- we over the last four or five quarters if you look back and see we've operated at a leverage of about 7%, 7.5% -- 7.5 times and what it takes to get us back up there is really wider spreads and better returns. So we saw an opportunity to buy bonds at really great levels in the first quarter.

We had a tremendous run just even within the quarter and coming into this quarter on some of those purchases we felt like that had run its course and we were -- we're reloading at this point to see if returns get better in the coming quarters.

So, returns have to get to that double-digit ROE for us to get back in and I -- and I'll just make the point that even at this lower leverage level we still expect to exceed core EPS to exceed the level of the dividend in the second quarter significantly relative to even the first quarter..

Okay..

So, at this point it's just really a risk return tradeoff and we'll get our way back to 7x here and it's going to be a matter of what opportunities we see..

So. Okay. Great. Makes sense. Thanks a lot..

Hey, Bose.

I didn't quite hear all of your comments, but I could -- you’re breaking up a little bit on my end but I just want to emphasize that when we say this is a great environment one of the things behind the word great is what we saw in the first quarter was some intra-quarter volatility that you as an analyst or even other investors may not see unless you're in the mortgage market.

That gives you create opportunities to invest. And I think from a macro perspective that the markets will continue to give us opportunities. It was a great environment our refinancing costs fixed, the markets are going to continue to give up great opportunities to invest and manage our leverage.

So we are very tactical and very strategic about every decision we make and we’ll continue to be done in the future..

Okay. Great. Thanks, Byron..

Your next question comes from the line of Doug Harter with Credit Suisse. Please proceed with your question..

Thanks. Smriti you talked about specified pools declining, pay ups declining in the quarter.

Can you just talk about how -- how they performed versus hedges and versus expectations and just kind of going into a little bit more detail as to maybe where is the opportunities there of [indiscernible] 00:25:10 out of TBAs?.

Sure. Yeah. it’s a great question because again performance is all about your hedge ratio. And with specified pools there's a couple of different nuances.

One is that when rates do go up, you have the TBA underlying that is going to extend and the specified pool pay up Which also “extends by declining when rates go up” so your duration unspecified pools which helps you a great deal when rates go down can actually hurt you if you don't have it modeled correctly and think through all the components of how the cash flows change as interest rates rise and the curve steepens.

You know in general I would say that specified pools moved in line with their duration. Pay offs on higher coupon specified pools came down right. But the dollar price of the underlying TBA did not come down as much. And so that was an offsetting factor.

So in general I would say that surprises in spec pools was simply the magnitude of the decline in pay offs. I mean you can see that in the 3% coupon that there were pay offs and in the 6.6 points above TBA and these things were trading at $1.10 price. And there are now substantially lower.

So hopefully if you own those you were running them to a very long duration and you had that hedged correctly. You know our spec pools have been lower pay off spec pools in the 2% and 2.5% coupon. We've always thought of those as longer duration instruments and you can see the hedge performance of the first quarter was very good.

And that hedge ratio was sort of captured accurately. In terms of where the opportunity is at this point right there's opportunity in the 2.5% coupon. And that's where we see the biggest area here because you can see for example New York only pools have come down substantially. you know the $1.10 max which we don't show on here.

But those are areas in which we find attractive returns relative to repo. And then finally I would say you know just in terms of returns themselves. You know the TBA still offer very good returns when you include the role.

And you know I've mentioned this on calls in the past, it's not just your level of financing relative to repo rates that matters as rates go up the yield on the underlying keep us [indiscernible] to deliver also goes up. And so the nominal carry being offered by TBA is right now are higher relative to year-end.

So all of that factors in, the only thing I would say is that it's just a because repo rates are so low and payups have come down. The relative attractiveness of specified pools now starts to become a good option for us to diversify away from TBAs..

I appreciate that. And then just one last as you think about your hedge construction today seemed like you guys increased the treasury futures position.

Just I guess how do you weigh that versus swaps versus options in today's environment?.

Yeah. You know we really prefer treasury futures in terms of the flexibility we have not yet wandered back into swap land given the uncertainty around LIBOR. And you know there is still swap market is still a developing market.

So we have that on our radar with respect to the ability to sort of lock in financing rates, but still don't believe that that's necessarily a liquid and flexible enough option for us at this point. On the options side, very interestingly we saw implied valves really pop in the first quarter.

So that allowed us to sort of take some of the hedges rebalance out of the options and put on more plain vanilla duration based hedges. And that's a function of two things. One is that you know we took profits on something that went up. That was great for us to do.

The second thing was you know from here on out we've had a massive steepening in the yield curve.

And from here on out we're just our macro view is that the markets and us are in a wait and see mode to be able to fit range bound trade for the next few quarters until we see real data and we start to see what the next direction is in terms of how the yield curve will evolve. So at this point we feel we can be somewhat patient.

And in looking at that positioning and the last piece on that Doug is that from - we have been using options and futures and swaps and to do a lot of the movement in our portfolio to rebalance for rate moves. It's now shifting to an environment where we might actually be able to start to do rebalancing on the asset side. So you could go up and coupon.

You could have more specified pools. There's other ways in which you can adjust your hedge ratio if you will to manage the market. So for that reason we've been okay having the futures position on and then working our way into either options or a different coupon profile. Those are some other ideas that we have going into the next few quarters..

Great. Thank you..

You're welcome..

Your next question comes from the line of Eric Hagen with BTIG. Please proceed with your question..

Hey. Good morning, guys. Thank you. So when we look at slide 18 and we see the negative [ph] OAS in the 2% and 2.5% coupons.

How do you think investors should square that with the really healthy return that you guys are generating with 7 times leverage? Like in other words where are you guys maybe not hedging that allows you to earn that higher spread? And then second question can you just maybe hone in on some of the rebalancing that you expect if rates do back up further where is there may be some more extension risk in the coupon stack and can you share what types of specified pools you guys are buying to? Thanks..

Sure. Yeah. So I always have a saying which is you can't eat OAS. So yes you've got this OAS but you can't eat it. And I think the big difference just in terms of where returns are just nominally the yield on [ph] Fannie 2s started the year at 1.4% and we're now at 1.9% on Fannie 2. So just the nominal yield, is 50 basis points higher.

The other thing that the OAS doesn't show you is the specialness in the roll. So that's an additional 20 to 40 basis points of return that you're getting.

So our performance in 2% and 2.5% and how we performed in the first quarter is less a function of the OAS and more a function of the mortgages performing well due to the technical factors from Fed and bank demand. So mortgage prices didn't move as much. They didn't move as much as OAS or duration even suggested. Right.

And the second piece is just our hedge positioning. And the second piece is just our hedge positioning. So our hedge positioning was in the back end of the yield curve. And we had options on the back end of the yield curve. And that's what we were hedging. So you asked the question why weren't we hedging.

We were hedging the back end of the yield curve and that's where we expected most of the move. What we weren't hedging was the zero to five year part of the yield curve which didn't move as much right..

Got it..

So the back end of the yield curve is what we were hedging. That's how the return got generated. In terms of twos versus two and halve you know again the important thing to remember on these two coupons you know twos I would say look to us more like a duration or curve. Trade and two and a halves have more convexity and prepayment risk.

So you're combining those two things in by investing in those coupons. You know at some point the risk in two and a half especially with lower dollar prices in that coupon has shifted to where that prepayment risk in that coupon has actually come down, right.

So that's another reason for us to include two and a halves in the mix of our coupon selection at this point. The spec pools that we're purchasing they are either you know state specific spec pools. So New York is a big place for us to play. Florida is another state that offer something like almost 30% lower speeds than typical TBA cheapest to deliver.

We haven't yet played in the loan bound space. But you know we're really looking at the coupons and the spec pool areas work specified pool payups have come down substantially. And those are areas where we think that there's value. Your second question was about rebalancing and what we expect to do as rates go higher from here.

Okay so I'm going to answer that in two ways. One is you know our macro view from here is that we actually are going to be somewhat range bound until the next catalyst comes through for a move in the markets either higher and steeper or lower and flatter. And we think both of those events are actually quite probable.

So we have to be ready to rebalance in either direction. We're choosing at the moment to have a - less hedges in options because options prices have gone up a lot and there's a lot of demand for Puts. And so we think that that's maybe not as efficient a way to buy uprate protection.

We think we can actually manage the asset side of the balance sheet a little bit more flexibly to address any kind of rates up type of scenario. And then we have to be ready and this is why we have futures to be able to withstand the rates down. So you know the hedging is going to be more of a day to day quarter to quarter type thing.

And any purchases of options from here will probably be more balanced in terms of both call options and put options quite frankly because you know that's kind of how we're seeing the macro environment. And then you asked the question about extension know at this level of rates Fannie [ph] Tuzer are probably pretty fully extended.

2.5%s have the most negative convexity between the two of those coupons. And then obviously the 3% coupon is a very negatively convex coupon as well. So those two coupons in our opinion will be where most of the duration drift occurs. And that's why you need to be ready to be very flexible on the hedging side..

Thank you for the very complete and detailed response as always. Thanks..

Sure..

Your next question comes from the line of Trevor Cranston with JMP Securities. Please proceed with your question..

Hey. Thanks.

A question on the portfolio composition and obviously the TBA position becoming a larger part of the portfolio, can you talk about any considerations with respect to retests if TBAs were to remain kind of the more than half of the portfolio over the balance of year, is that -- did that bump up against any issues with either income or asset test that or something don't feel need to consider over the course of the year? thanks..

Hey, Trevor. It’s Steve. We've looked at that and we're comfortable with the TBAs at this at this level versus our exposure, if you will, on retest or compliance with retest in the [indiscernible] we don't see that as an issue at this point..

Okay. Got it. Thanks.

And then as you guys think about the Fed potentially announcing taper at some point maybe later in the year, can you share your thoughts around sort of how you think the CMBS market is likely to react to that? Obviously we've already had a pretty significant movement in rates and a lot of extension, but I guess just in terms of MBS performance can you guys kind of talk through how you see that playing out once tapers is announced?.

Yes. Yeah. Thanks, Trevor. That's actually a really good question. So, again I think people think back hear the word taper and they think back to 2013.

We don't believe this is anything like 2013 because you have a fed that is much more focused on forward guidance and telegraphing, what it is they're going to do and if they're even thinking about, thinking about, thinking about it we're going to know well in advance.

So the biggest factor on the taper is actually what percentage of the market the Fed is buying relative to the net supply in the marketplace. Right now the Fed is absorbing a significant amount of that and you also have incremental demand from banks and other investors.

So, in our view the way this -- the announcement itself is -- won't be a surprise necessarily and what is going to end up driving mortgage returns is going to be technicals which is good old supply versus demand. And one of the favorable things for mortgages coming into this quarter has been higher rates, slower speeds and less supply.

So, you'll really have to see two things happen as the Fed starts to step away from the market the net supply will start to get bigger and in our opinion that should naturally make mortgage spreads wider if there's nobody else to step in and take in that demand.

So that's an opportunity, right but we don't see unless we have a really significant communication screw up from the Fed where -- to where it's a market surprise, just a knee jerk spread widening crazy widening, that's not the highest probability scenario, here the highest probability scenario here that the highest probability scenario on the taper in our minds is literally you know how does the Fed gradually extract itself from the market.

What is the impact on that supply? What other investors step in to take that incremental slack. And quite frankly we think that's a great time for us to be positioned for to take up that slack..

Okay, that makes sense. Thank you..

Sure..

[Operator Instructions] Your next question comes from the line of Christopher Nolan. Please proceed with your question..

Hey, guys nice quarter. On the strategy front for capital given where your share price is. Where you thinking about raising additional capital now realize that your leverage ratio is low, but given the comments you know there is a potential attractive market opportunity out there.

Is it thinking to raise more capital and would it be preferred or common? Will detail be great?.

Oops, sorry I was muted. Chris, this is Byron. Understand we're very thoughtful about how we raise capital. So I’m going to just reiterate I think Stephen and Smriti has said is a great first quarter to raise capital to have capital in our pocket because the opportunities were fantastic. We still believe the opportunities are fantastic.

And we have a long-term strategy for building our company. So I'm going to be a little long winded but I'm going to make sure you understand the principles in which we operate. We have no desire to mimic the largest companies in the business. We're very, very opinionated about being a nimble company. And there's only so large we want to grow.

So we're not reckless. We're not just running the grab capital. We don't earn fees because we charge you fees for the amount of capital that we have under management. So we're very thoughtful about this and we're being very opportunistic which is what you saw in the first quarter. We saw a phenomenal opportunity to raise capital.

So we raised capital and we were in position to take advantage of what I call the Second amendment and the second of this kind of intra quarter volatility whether it's spreads in hedge valuations or whether it's in specified pool levels or TBA levels.

There is enough volatility -- quarter volatility right now for skill team to give us opportunity to really generate returns for our shareholders. So from a long term perspective we are thinking still to grow our company. We would like to give our shareholders more liquidity in our stock.

We would like to attract those shareholders who want to see more liquidity have not invested in Dynex Capital to-date. We believe that every investor should have an opportunity to own this management team. We believe we have the most skilled and experienced management team. We'd like to make ourselves available to every shareholder to do that.

But to do that we need to continue to add more liquidity to our stock. That's what we've gotten the feedback from some of the largest shareholders will say well we really like you but your liquidity and your stock is not that great.

So those are some of the principles that we have that that will drive us and our decision making as we look forward into the future..

Great. And the dividend given that you guys are out earning the dividend quite handily I would think the dividend would have to go up just because of your REIT status is that fair way to look at it..

Well let me -- I’, going to let Steve to give some of the technicals on the REIT rules. But let me just say this. We are a dedicated management team who is generating cash income for our shareholders. That is the key focus of Dynex Capital. However, we're also very focused on our total return experience.

What we don't want to do is attempt to pay a dividend that is not in line with our macroeconomic outlook. Right now we're in a very uncertain economic environment. The world is evolving still. I know we're like 15 months since the whole pandemic started but the fact of the matter is this is still an evolving health crisis.

It's still an evolving economic situation and as such their macroeconomic view will be at the core of our thought process around the dividend. At this point, Steve you can jump in here and just give the real technicals around how much we're forced to pay out or how much should we have to pay. We've got flexibility.

But the most important message I want to leave you and our shareholders, we are committed to generating cash income for our investors but we're also committed to not trying to give generally too much cash income that we blow you away to the declining book value or major book value correction. So we're managing our risk.

Steve do you want to get the technicals around what limitations we may have in terms of dividend?.

Yeah. Sure. Hey, Chris. Just thinking about the first quarter I mentioned $36 million in excess economic return over the dividend some of which is realized and some of which is not realized. You think about that as potential taxable income.

We have carryforwards from many many years ago that have not yet expired that we can use to manage the dividend requirement as well as some losses from some -- from hedging activity many years ago that we also are carrying forward that can offset that distribution requirement at this point.

So we have the flexibility as we sit here today to be able to, from a technical [indiscernible] tax compliance -- distribution requirement perspective be able to manage the excess earnings and retain those to grow the capital base. So we have that flexibility. It becomes then a strategy as Byron just alluded to..

Great. That's it for me. Nice quarter..

Thanks, Chris..

And there are no further questions in queue at this time, I turn the call back to Mr. Boston for any closing remarks..

Thank you operator. Thank you all for joining the call and for those of you who are investors we really appreciate you owning Dynex stock along with us at the management team and at the board level and we look forward to seeing you next quarter during our second quarter conference call. Thank you. Have a wonderful day..

And this concludes today's conference call. Thank you for your participation. You may now disconnect..