Dynex Capital, Inc. (DX) CEO Byron Boston on Q1 2020 Results - Earnings Call Transcript

Dynex Capital, Inc. (NYSE:DX) Q1 2020 Earnings Conference Call May 6, 2020 10:00 PM ET

Company Participants

Alison Griffin - VP, IR

Byron Boston - President, CEO, Co-CIO & Director

Steve Benedetti - EVP, CFO, COO & Secretary

Smriti Popenoe - EVP & Co-CIO r

Conference Call Participants

Doug Harter - Credit Suisse

Eric Hagen - KBW

Trevor Cranston - JMP Securities

Christopher Nolan - Ladenburg Thalmann

Paul Stewart - JonesTrading

Matthew Howlett - Nomura

Jay Weinstein - Wealthspire

Operator

Ladies and gentlemen, thank you for standing-by, and welcome to the Dynex Capital Inc. First Quarter, 2020 Earnings Results 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 speaker today, Alison Griffin; Vice President, Investor Relations. Thank you. Please go ahead.

Alison Griffin

Thank you, operator. Good morning everyone, and thank you for joining us today. With me on the call, I have Byron Boston, President and Chief Executive Officer; Smriti Popenoe, Executive Vice President and Chief Investment Officer; and Steve Benedetti, Executive Vice President, Chief Financial Officer and Chief Operating Officer. The press release associated with today's call was issued and filed with the SEC this morning, May 6, 2020. 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 the annual report on Form 10-K for the period ending December 31, 2019, as filed with the SEC.

The document may be found on the Dynex website under Investor Center as well as on the SEC's website. This 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.

I now have the pleasure of turning the call over to our CEO, Byron Boston.

Byron Boston

Thank you, Alison, and thank you all for joining us this morning. At Dynex Capital, we operate with a long-term vision. In 2019, we celebrated 30 years as a listed company on the New York Stock Exchange and we formed a new 30-year vision for the future. Such a long-term view, where management is tied and totally committed to the success of Dynex. It’s very much aligned with the interest of our shareholders, creditors and all the stakeholders. To succeed in managing the mortgage REIT over such a long time horizon, it is imperative that we adjust our risk posture as necessary to fit the complexity of the overall global environment and then we allocate our capital in a very disciplined manner.

Multiple years ago, we were up in credit and up in liquidity and we maintain that posture today. Furthermore, we have reduced our leverage in the short-term as we assess the currently evolving health and economic crisis. This current global situation is very different than the great financial crash of 2006 to 2008. And the next several months will be extremely important in assessing our best risk and capital allocation strategies. It is too early to discern the broad base impact of the current exogenous shocks across the global economy. On our call today, we will cover the first quarter, our macroeconomic view, our view on the economy, business model and we will give you an outlook for a dividend.

I’ll now turn it back to Alison, who will lead us to a series of Q&A.

Alison Griffin

Thank you, Byron. Turning now to Steve, please walk us through the company’s first quarter performance.

Steve Benedetti

Thanks Alison and good morning everyone. Our results for the quarter on both GAAP and non-GAAP basis are highlighted on Slide 7 in the presentation and in the press release we issued this morning. For the first quarter of 2020, we’ve reported a comprehensive loss per common share of $1.45 and core net operating income of $0.51 per common share. While, we benefited from the lower interest environment in our repo funding cost during the quarter, our periodic swap benefit declined as rates rally and we lifted hedges.

TBA drop income also fell and we had modestly smaller investment portfolio and lower prepayment compensation on CMBS. Finally, dividends on our preferred stock increased due to the timing delay between the Series C issuance and the redemption of the Series A and partial redemption in Series B.

Book value for common share declined $1.94, 10.8% principally as a result of CMBS IO and Agency CMBS spread widening during the quarter given the tremendous volatility in prices and yields in the later stages of March. As we noted in our call on April 15, we actively managed our dilation position, which lessen the impact of the volatility during the quarter on our book value.

We also sold specified pools in early March monetizing payout gains before spreads widen by during the month. The issuance of the Series C preferred stock in February reduced book value by $0.15 per share which save us approximately 75 basis points in coupon going forward on a blended basis. We estimate book value per common share as of the yesterday is relatively unchanged from March 31, so we have now conducted our normal procedures in connection with this estimate.

For the first quarter, total economic return was a negative 8.3% versus a positive 2.2% last quarter due largely to the aforementioned decline in book value. For the quarter, we declared and paid $0.45 dividend per common share. Average interest earning assets were modestly lower at $4.9 billion versus $5 billion last quarter. An adjusted leverage was 8.8 times total shareholders’ equity at March 31, lower than then 9.0 times at year-end. As we already mentioned on our update call on April 15, we have further reduced our investment portfolio and leverage post quarter-end. As of April 30, our investment portfolio asset balance is approximately $2.4 billion and leverage is approximately 4 times total shareholders’ equity.

Looking forward, we expect our net interest spread on our existing portfolio of $2.4 billion to increase in the second quarter’s repo financing rates fully reflect the benefit of the Fed reductions at March of its targeted Fed funds rate.

From an earnings standpoint, much of the prepayment risk to our earnings in our Agency RMBS and CMBS portfolios has been reduced at this point as our amortized cost basis on these assets are a combined approximate [$102] dollar price. That said our investment portfolio is smaller today. We have capital to invest and ultimately our net interest spread and earnings will be a function of where and when we deploy our excess capital.

Alison Griffin

Thank you, Steve. Byron can you describe our macroeconomic outlook?

Byron Boston

Sure. We've had a long-term economic views that not changed. The global economy is fragile and global risks have intensified. The current exogenous shock has only served to increase the probability of future surprises, as risk factors that play are increasing in complexity and number. The entire global economic and financial system is currently increasing leverage enormously to survive this crisis. As such, the post crisis world will continue to see a drag imposed on growth and inflation from global debt, demographics, technology, human conflict and other risk factors.

Global economies and the global financial system cannot stand on their own without the central bank's continuing to play a major role. Policy risk have increased and will be a major factor well into the future.

How our world will evolve is still uncertain in the short to medium-term. This fragile global economy is currently absorbing the impact of multiple shocks and it is too early to fully discern the broad base impact of these negative developments. We are still in the early stages of a health and economic crisis. The central banks have move swiftly to avoid a financial crisis, and a potential policy crisis might evolve in the future as the world attempts to manage the side effects of all the new civil and monetary programs that have been implemented. Since our macroeconomic opinion continues to support our investment thesis of being up in credit and up in liquidity.

Alison Griffin

Thank you, Byron. Turning now to Smriti. Popenoe, can you briefly discuss the portfolio adjustments we've made at quarter-end?

Smriti Popenoe

Yes, Alison. I'd like you to please turn to Slide 9. We've revamped – rebalance the portfolio to focus on Agency RMBS. The adjustments we made post quarter end leave us with lower leverage higher liquidity and a bigger capital position, you can see on this slide our cash and unencumbered asset position was at $312 million. I'll discuss our views on redeploying the capital later on in the call.

In March, we shifted our thinking on cash flow risk, and started to evaluate our portfolio for the increased possibility of delinquencies and defaults. While we did not and do not assess the probability of default as high, we felt it prudent to monetize the $200 million in unrealized gains in our Agency CMBS DUS portfolio.

Post quarter end as liquidity and pricing stability returned to the markets, we rapidly reduced our Agency CMBS DUS position. During the month of April, we've reduced that position from $2.1 billion to $800 million. We've realized $166 million in gains and cut over 80% of our premium exposure.

Alison Griffin

Great. How are you assessing your current investment environment we're operating in? And how do you think this plays out for Dynex’s investment strategy?

Smriti Popenoe

As Byron mentioned, Alison, this is a health and economic crisis, but it's layered on top of the already existing fault lines that we identified before the shocks, social factors, global debt, technology, environmental, geopolitical and demographic factors. These were already in place before the pandemic and oil shock. So, we think, right now there are two forces to consider that are working in our position. The first force is the potential for disruption to cash flows. The shutdown of economic activity has led to loss of employment for over 25 million American workers thus far. Borrowers are seeking forbearance, renters are seeking rent relief. We're seeing a lot of evidence that the financial position of state and local governments non-profits, universities are compromised.

Against this, you have an opposing force of the rapid and significant fiscal and monetary responses globally. GSEs have responded by providing forbearance for single-family and multi-family borrowers. These actions collectively will probably cushion the economy in the near-term, and may delay cash flow disruption in some sectors. Ultimately, the question we're asking ourselves, as we what asking ourselves as we [technical difficulty] investment strategy.

Will the government actions be enough to minimize the disruption to cash flows or not? How do the structural factors evolve as we see the duration and severity of the health and economic crisis play out? How does the return on the investments we are considering back up against these risks? There aren't clear answers yet to these questions. It's still really too early to discern how this crisis will play out. But the next several months will be critical in determining the direction this will take.

Alison Griffin

So, are there areas to invest today?

Smriti Popenoe

Absolutely. We think that up in credit and up in liquidity is still the place to earn returns. If you turn to Page 11, you'll see our view of where we think returns are stacking up at this point. The Agency RMBS sector is the most attractive in our view. At this point, one of the most important drivers of levered returns is finance costs. We expect that financing costs will be low and stay low for a prolonged period of time, especially for high quality assets. So, that's a major positive for Agency RMBS. We can get financing for these liquid assets at low rates. The agency multi-family sector is also a sector that's currently supported by government policy. But the near-term extent of cash flow disruptions is less certain. So, until this becomes clear, we actually think Agency RMBS has a better relative risk adjusted return for marginal capital use.

Alison Griffin

Great. Can you talk about where you see relative value in the markets today and portfolio construction?

Smriti Popenoe

Yes, we prefer lower coupons, TBAs and generic pools versus higher coupons and higher payout pools. In the near-term, cash flows are going to be impacted by the forbearance policies of the GSEs. And the first thing that's going to happen is a delay in prepayments. The key beyond the near-term will be the transition from forbearance, either back to performance or to delinquency, and then modification and finally, default. Policy risk is a major factor and how this will all eventually develop, particularly given the GSEs credit risk transfer programs or CRT programs. We’ll now actually get to see how much credit risk was really transferred.

In the near-term, we think higher coupons and low balance pools will still offer value. The key on the higher coupons is being able to monetize the premium and selling the pools before default and modification phases begin. We're also respecting the recent severe lack of liquidity in higher coupons, and especially the higher payout pools because of the lack of a natural buyer at very high dollar prices. That favors the lower coupons as well.

Alison Griffin

What are the returns looking like in the Agency RMBS?

Smriti Popenoe

We see attractive returns in this sector. We are by no means at the super cheap levels, but still attractive. In the 15-year sector hedge net interest spreads are in the 80 basis point to 90 basis point range at 9 times leverage that's 8% to 9% static core ROE. 30-year generic lower coupons, the hedge net interest spreads are in the 110 to 150 range depending on whether you're buying specified pools or more generic pools, so ROEs are in the 10% to 15% range at 9 times leverage. And there's a slight improvement there in TBA for dollar rolls.

Alison Griffin

Okay. Our reference today is around 4 times, you see attractive returns in a liquid sector. Are you thinking about leverage and balance sheet size? And what kind of earnings power do you think the company has?

Smriti Popenoe

Great question, Alison. I was hoping you would ask me that. We think the balance sheet can be up to $4 billion in assets and leverage can rise to 6 to 7 times up from the 4 times that we sit today. This gives us the liquidity reserve and firepower to navigate any aftershocks. We can be flexible and leveraged up or down in the phase of new opportunities like a steeper curve, or if there's a risk flare up. These are guideposts we're placing in the near-term. We constantly evaluate these and we'll be ready to take risk up or down as we see scenarios develop.

Now, let me walk through our portfolio today and potential earnings power as we grow the balance sheet. Our existing portfolio after all the adjustments we made is a subset of the position on Page 10. So let's turn to Page 10. Specifically, the Agency CMBS portion of the portfolio is down to $800 million with a book yield of 2.5% reflecting the lower premiums in this sector.

The approximate weighted average book yield on the assets as of April 30 is 3%.

Now turning to the financing side, if you would flip to Page 25, you can see on Page 25, our repo rates were pretty high at the end of last quarter, because we had rolled positions through quarter end. We have already seen these repo rates come down substantially and expect to see these rates around 30 basis points to 35 basis points for one month and three months repo for a Agency RMBS and the IOs are financing at around one month LIBOR plus 90 basis points on a weighted average basis. So, that gets you to a net spread on the overall portfolio in the low 200 assuming we don't sell or reposition the portfolio.

As I mentioned earlier, we think leverage can be taken up to 6 to 7 times, $1.5 billion to $2 billion in assets at an average spread of 110 basis points. If you include 15 years of mix, it should get you to a weighted average net spread in the mid 100 on about $4 billion balance sheet when you combine the two.

To their significant earnings power in the position today, and it's there in about 2 to 3 terms of leverage. It's really a matter of putting the risk on in a disciplined manner, which we feel we can do with the liquidity in the Agency RMBS space.

Alison Griffin

Very good. Our portfolio is predominantly agency guaranteed. And you expect these focus on that sector? Can you discuss the investment we have in the non-agency sector CMBS IOs?

Smriti Popenoe

Yes, this is a sector in which we have been long-term investors. This is a great investment for REIT. IOs offer good returns for a shorter duration well structured cash flow at the top of the capital stack over 90% of the bonds we own are AAA rated and receive the highest payment priority in the cash flow waterfall.

Our non-Agency CMBS position, our IO position is currently 7% of the total portfolio by assets and 7% of our total capital is allocated to this sector. Over the last 12 years, we've had no problems financing this position, and we had no issues financing this position in March. The majority of the position is funded in a committed facility through June 2021. And there were no changes in financing spreads versus LIBOR even through the disruption in March.

We really like the seasoning in our portfolio, seasoning in the credit portfolio is key, 80% of the bonds we own are 5 to 6 years old, with only 4 to 5 years left to maturity. And a significant part of the underlying properties have price appreciation. The LTVs in the portfolio are in the low 50% for most of the portfolio.

The remaining average life on the portfolio is about 4 years and the weighted average credit enhancement is in the 25% range. We're at the highest part of the capital stack where we have structural protection, and we own a season portfolio, we're going to be opportunistic in managing this risk. We also factor in the fact that the portfolio pays down about $40 million in market value each year. So, that's a tremendous amount of cash flow. But, the position at this time next year should be about 25% smaller just from the passage of time. We'll have more detail on the credit and portfolio metrics in our 10-Q.

Alison Griffin

Okay, so shifting back to our overall strategy then, can you put all of that together for us?

Smriti Popenoe

Absolutely. The main point to remember is that our financing costs are low, and there is significant earnings power in the company via investments in Agency RMBS. We think, we can take leverage up in this environment to 6 to 7 times invested in Agency RMBS at a static ROE of 7% to 8% for 15-year, and the 15% for 30-year. We are respecting that we're in the early stages of this economic and health crisis. And we're considering the possible future disruption to cash flows. Our main objective is to take the appropriate amount of risk for the environment. Focus on preserving capital and generating what we view to be an above average return.

Alison Griffin

Great. Thank you, Smriti. Now turning to Byron, Byron, there's been a lot of questions about the mortgage rate business model since March. What are your thoughts on this topic?

Byron Boston

If you would turn to Slide 13, there's some interesting points on this topic. In general, though the mortgage REIT business model is fine. The RIET model is a tax efficient vehicle that depends on discipline, risk management, and capital allocation. Simply put, liquid assets should always be a core part of your strategy throughout all business cycles. There are times when liquid assets and balance sheet liquidity should be increased in anticipation of potential surprise corrections and asset price levels. For example, coming out of the great financial crisis, we went down in credit and down in liquidity. That was a great opportunity between 2009 and 2015. However, we reversed that strategy and adjusted our focus to emphasize liquidity as we watch the global risks intensify.

The events of March 2020, and no way imply that there are fable flaws in the mortgage REIT business models. Rather, it exposed the illiquidity of a leveraged credit strategy at the wrong point in the credit cycle. The fault lines were apparent well before the pandemic. We have been monitoring them and adjusting our strategy accordingly. There were environmental factors that uniquely impacted each company differently based on their risk posture, but there are not inherent flaws in the business model. In fact, we believe there is a strong case to be made for earning income from high quality U.S. based real estate assets, especially as global interest rates have collapsed to zero or negative levels.

Alison Griffin

Thanks, Byron. Now that we've covered our key questions, what's the final message for all of our stakeholders?

Steve Benedetti

The appropriate process for reopen the global economy is in a phased approach. This will allow the world to observe whether our situation is getting better or worse. Likewise, we are reinvesting our capital in a phased approach. We will remain up and credit and liquidity, which always gives us the option of increasing our capital deployment rapidly. Furthermore, with our financing costs, anchored at really low levels, we're confident in our ability to generate solid cash flow. The key at this uncertain phase of this global crisis is to manage risk aggressively. Keeping with this approach, we anticipate no change in the dividend for the month of May. As always, our dividend will reflect the earnings power of the company and our risk posture. The final thought I'd like to leave you with today is that we are internally managed REIT, we are invested in Dynex along side of our shareholders. And we continue to manage our company for the long-term.

Operator, I'd like to open the call up for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. We will pause for just a moment to compile the Q&A roster. Your first question comes from Mr. Doug Harter from Credit Suisse. Your line is open.

Doug Harter

Thanks Byron [indiscernible]. Can you just talk about how you're balancing, kind of the flexibility in sort of a defensive posture in the certain time versus kind of possibly waiting too long and missing some of the attractive opportunities that are available today. Just how you think about that. Those tradeoffs.

Byron Boston

Let me start with a high level four On this, which is these questions is, it really starts automatic again back to the disciplined process, top down there macro questions is still that are still out here?

How many bankruptcies Are there going to be?

How many permanent firings they're going to be? How many people will not pay their mortgage payments in May? How many renters will not pay rent in May? How many by June will get permanently fired, and suddenly now they're joining the ranks of not paying? I mean, July will not pay. So there's a lot of questions here. And I understand what you're asking in terms of this trade off. There's a lot of macro questions that are still need to be evolved, how will the energy sectors and how will the energy sector be hit and how much unemployment will come out of that sector?

And, and then you take us back as we come down from the macro questions to our individual sector, we went up and credit up in liquidity strategy. And without financing costs anchored at the lowest levels we've seen really in the last 10 years. We know we can generate income. Furthermore, back to the macro with so much debt that's being created and need to be sold and financed, it's highly probable that we see a steeper curve.

Every basis points steeper that we take our time and invest in our money. Let's say the yield curve goes patina goes from 65 to 75 basis points that adds to our potential future are we let's say if it goes from 65 to 85 basis points, that's even better. Given that our financing costs are anchor. So we do have a lot of options. And we are trying to go to ask us how we're balancing that we're trying to balance it between looking at the macroeconomic environment depending on which is where you're, I think you're also have the Fed as a cushion or mattress underneath the mortgage, the agency mortgage backed securities market. So we could always say, hey, well, let's just go all in just because the Fed has our back. We're being more disciplined from a macro perspective. But we also have in our back pocket, the fact that we [technical difficulty].

Smriti Popenoe

-- this point, mortgage oil prices are probably as tight as they were in early March. And then obviously, they're not as wide as they were in the middle of March or late March. But we're seeing we're seeing opportunities to put capital to work. And I think, being nimble, putting the capital in the sectors where we see real value, I think we have that environment right now. At this point, the Fed is actually reducing how much they're purchasing on a weekly basis. There's some pens out there pent up demand here in terms of, mortgage pipelines coming, being able to sell forward and so on. So I think we're going to see some chances here to put capital to work at an adequate level.

Byron Boston

And Doug, let me add one other thing as you -- as you scour the landscape, and you look at a variety of companies, there are an enormous amount of people are in positions because they have no choice. They couldn't adjust the position. We're in a position because we want to be here. We've adjusted our position out of RBS into CMBS, back are CMBS back in RMBS, we've adjusted our balance sheet up to $6 billion back down to $2 billion. Now we're moving it back up again. That's deliberate.

We're not here because we have so many low balance bonds and we can't sell them. So we're very offensive in our current situation, but we do find it very intriguing and financing costs are currently at a low level, we don't expect that to change. Every, every one basis point five basis points 10 basis points deeper in the curve will be a huge benefit in terms of forward return opportunities. And then you got an entire macro environment with a health crisis, economic crisis, financial crisis. So we're watching the world see how we evolve.

Doug Harter

Right. Thank you guys for those answers.

Operator

Your next question comes from Eric Hagen from KBW. Your line is open.

Eric Hagen

Hey, Good morning, guys. Hope you're well and thanks for those really great opening remarks and Congrats. All things considered on a great quarter.

You guys mentioned being a little bit more constructive on agency RMBS right now, do you guys think you're going to take that position through more of a specified pool position or TBH now? Thank you so much.

Smriti Popenoe

Sure. Thanks, Eric. So I think we're going favor generic specified pools. Not extremely high pay up. And the TBA position. That's what we feel makes more sense at this point. That's not to say we want to own any loan balance or any high payoff pools, but the liquidity and the flexibility at this point is really valuable. And so in the lower coupons, by the way, lower coupons doesn't mean you're not taking premium risk, the lowest coupon out there, that's trading as a 2% with almost two points of premium on it. The next highest coupon has almost five points of premium on it. So there's risk. There's risk and all these coupons in terms of premiums, but you're the lower pay up, more generic strategies, I think at this point, offer us more flexibility and the TBA as well.

Eric Hagen

Right, thank you. And Byron following on quickly on your thoughts on just the mortgage rates and maybe the return that investors can expect over the course of the cycle. I mean, as you guys take leverage lower is that your way of saying that investors at certain points, should maybe expect a little bit less return but also potentially much less risk? Thanks.

Byron Boston

That's the balancing act. That's literally again, the reason I started off with that long term vision. It was very important why I started off with the long term vision is because we want you to know that the only way that you make it over the long term is first and foremost, you must prioritize risk. And so when we thought about the 30 year vision, what we told ourselves is we must get through 1998 and we must get through a 2008 scenario

Now we've added March 2020 to that. So the first thing we're always thinking is the key for our shareholders that they can stay in the game. Over, over the long term. So as we continue to evaluate the environment as we move forward t is going to be, again, this balancing act between, ultimately the risk in return. It's a very easy lever to pull in terms of leverage, your 4 times leverage your 5 times, 6, 7, very easy, the adjustment is easy to make. It's not a complicated process in that sense. Smriti do you want add something?

Smriti Popenoe

Yes, I think the other thing, we talk -- we think about in terms of returns, most of the globe has zero or negative yields in fixed income markets. And at this point, you've got to consider the risk environment and the return environment to say, don't reach for yield, don't reach out there and take the types of risks that actually, really damage you in a ‘98, ‘08 or March 2020 scenario. And so that does have an impact on, I think taking returns lower.

Eric Hagen

Thank you guys for the comments.

Byron Boston

Thanks, Eric. I appreciate that.

Smriti Popenoe

Thanks Eric.

Operator

Your next question comes from Trevor Cranston from JMP Securities. Your line is open.

Trevor Cranston

Hey, thanks. First question. Can you guys talk about the remaining Agency CMBS portfolio. How are you thinking about that, if it's something you might look to opportunistically continue selling as spreads have tightened or if that's something you're comfortable with [technical difficulty] continuing to hold on to at this point?

Smriti Popenoe

Hi, Trevor. Yes, so the book we have left is nicely split between what I would say are more par or slightly above par price bonds and then, some more premium price securities. We're comfortable with that position. We think we can be more opportunistic in terms of taking spread, tightening in what's remaining. So, again, our big reason to take down that position in March and in April was really driven by the fact that we had a high premium, high gain position in that portfolio and we wanted to monetize those gains.

The risk is there, but we are -- our thought process was more protect the gains, as opposed to really making a big risk statement about Agency CMBS. So, we -- it was sort of unique to our portfolio. Most of the bonds we had purchased in that book were, we had bought it on par and there were, $15, $16, $17 price premiums on those positions, that we thought it was really a good opportunity to monetize. So, at this point, we're -- we feel pretty good about the remaining position. If we get chances rebalanced, or it's going to be a relative value decision between that and pass-through’s.

Trevor Cranston

Okay, got it. In terms of your --

Byron Boston

Hey, Trevor. Trevor.

Trevor Cranston

Yes, go ahead Byron.

Byron Boston

Can I take one other second on that last question just to plug. Look, a core part of our business strategy has always been capital allocation, the disciplined capital allocation. We've done it for years. And in the last 6 months, we -- because of the change in risk environment, we've had to move our money around a little more than we normally would generally you see us take a team and we sit there for some time.

But, if you look at the end of last year's portfolio versus the portfolio after the first two weeks of March versus the portfolio at the end of March versus a portfolio today, very disciplined in terms of how we're moving the capital all around in our balance sheet and where we're allocating capital. So we are very disciplined about it. We think it's – I think we’ve been -- being nimble, being our size at this point is an advantage that we can do that. And as we look to the future, we want to use that the same process that we've used in the past.

Trevor Cranston

Okay, thanks for those comments Byron. And then in terms of your interest rate positioning, I think you have hit the March 31 numbers in the slide deck. Can you say if those changed with the portfolio reductions in April, and more generally, sort of how you're thinking about the REIT profile of the portfolio going forward, given that interest rates are near zero now.

Smriti Popenoe

Right.

Trevor Cranston

How much risk you're comfortable taking that? Thanks.

Smriti Popenoe

Yes, yes. I think one of the nice things about the -- about having the Agency CMBS position is just how simple it is to hedge. So our book, actually from a net duration position is not that different. And since we sold the bonds, we've actually stayed fairly duration neutral. The positioning at this point, I would say, again is really going to reflect our broader macro view and the broader macro view is that at this point, things could go in a number of different directions, right. A lot of people think the curve is going to steepen and so if that occurs, then you push your hedges in back into the yield curve, we have some of that thought process going on. You also have the idea that the front-end of the curve is fairly anchored. So there's really no point in having hedges in the front-end. We agree with that. So as we're adding assets and growing the balance sheet, we're going to have a bias for adding hedges at the longer end of the curve, and probably, having that front-end position fairly open.

Trevor Cranston

Okay, got you. And then, last question. Can you just provide a brief update on whether or not you guys have actually had any portfolio growth or started adding agencies so far in May?

Smriti Popenoe

We had -- we've been able to find -- we've actually found that mortgage spreads are wider in mid-May here, as we've come into the month though we've been adding assets and expect to continue to do so.

Byron Boston

Hey, Trevor, the other interesting thing and I should clear this point it's come across so far, the Fed is adjusting the amount they're purchasing. We're still watching to see how far it really is the mortgage market, we don't believe the agency sector will fall out a bit. But, we definitively believe spreads could widen under certain circumstances, especially s I said brings down their purchases, and it's not a bad widening whining, that's good whining. It means that prices are just moving where to what private capital like Dynex Capital, and our shareholders are willing to assume the risk of instruments such as this. So, there's optionality in the future and I'm just taking a second just a pile on top of Smriti here, and it makes a point.

Trevor Cranston

Okay. Appreciate all the comments. Thank you, guys.

Smriti Popenoe

Thanks, Trevor.

Operator

Your next question comes from Christopher Nolan from Ladenburg Thalmann. Your line is open.

Christopher Nolan

Hey, guys.

Smriti Popenoe

Hi Chris.

Christopher Nolan

Can you give an update to book value since March 31?

Steve Benedetti

Hey, Chris. Yes, as we commented, it's not materially different from the end of the quarter.

Christopher Nolan

Great. Thanks, Steve. And then follow up question would be, given your guidance in terms of leverage and spreads and so forth. I'm sort of, ball-parking that it looks like you're targeting a return in the high single-digits for the company or return on equity. Is that fair?

Byron Boston

No, what I would say, Chris is going to depend on the risk environment. And so, if you look back at the end of what we are saying, though, is, if you look at where we were at the end of last year, and you think about my commentary over the last call a year or two, where I made really strong cases for taking higher leverage in liquid assets, and one of the main reasons was because you have the ability to adjust your portfolio. What we are telling you here, think about us, short, medium and long-term. The short-term is the next four, eight weeks, the medium term is through the end of the year, and the long-term is after the end of the year.

And literally, we're thinking short, any question you got, it's a short, medium and long-term approach. In the short-term, the world is evolving. And so, we're not going to leap to where we were at the end of December and say everything's okay, because everything's not okay. The world is evolving and we're taking a phased approach to a reinvest in our capital. So, I couldn't give you that this is something the exact target. What I can tell you is this approach, short, medium, long-term. And we're evolving our way back to a still a philosophy with that we have which is up in credit and up in liquidity is a good strategy. And I'd still rather be -- I'd rather have more leverage on highly liquid assets than lower leverage on less liquid assets. And that's just an argument we've been making for years.

Christopher Nolan

Great. Sounds good, thanks for the clarification. Be well.

Smriti Popenoe

Thanks Chris.

Operator

Your next question comes from Paul Stewart from JonesTrading. Your line is open.

Paul Stewart

Hi, it's Jason. Paul,[indiscernible] today off-today. I wanted to follow up on the question about Agency CMBS and taking leverage up there. It sounds like two of the markers perhaps could be lucrative steepening and sudden involvement. How willing are you to dial up and down and it's -- correct me if I'm wrong if those aren't our markers, what are the markers? And how long are you to dial up and down based on factors like that?

Smriti Popenoe

I think -- Hi, Jason. It is -- it's really an interesting trading environment. The -- if you look at how mortgages are trading every day before the Fed comes in, really it will be sometimes cheap than at sometimes -- they're sometimes tighter. But, really the Fed has an impact on the prices of MBS during the trading day. And then immediately after the Fed comes in and does their operation. The market is then sort of subject to the whims of originators and other investors and so on.

So, as we see the trading develop on a daily basis, we're finding pockets of opportunity where, there's nobody else providing liquidity for the sector, and you can actually go in there and buy, buy bonds at really good levels. So, it's kind of a micro trading day strategy type of environment at this point. So, we are finding good windows to add assets, even though broadly, you might say, yes, the Fed is in and mortgages are tightening, they're still these windows that are being created because of the microstructure of the market.

So, we are absolutely willing to take the leverage up and, we follow this stuff on a minute-to-minute basis. And if it meets levels, dollar price levels OAS spread levels that we like, we jump in and put the capital to work. We're talking about the steepness in the yield curve, only more as a more broader long-term thought process again here right.

So, if the curve steepens, we do expect to see extension in mortgages. We do expect that, at that point, there'll be an opportunity to take more duration risk, because you can really say, Okay, look I'm taking that long and risk, and I know the front-end is anchored. But then again, I think we're going to be fighting with like 99% of other investors in the globe at that point. So whenever, so we're cautious not to just sit around and wait for something like that to happen. If we see good opportunities to put the money to work, we're going to do it.

Paul Stewart

Okay, that's fair. Between now and the achievement of some medium-term ROE target, how willing are you to let core NOIs sort of sneak around the dividend and how does that relate to setting the dividend?

Smriti Popenoe

I'll take the, my level question, then I'll turn it over to Byron. But, again, I think at this point, right, we were going to be putting the capital to work in a disciplined manner. And so core income could be below the dividend for some time and then, maybe work its way up. I think at this point, we're just trying to be focused on capital preservation, making sure we're not running out over our skews. And then finding those good opportunities to buy the assets, we think we have -- we're going to have the chance to do that in here.

Byron Boston

And the other point here is, if you haven't recognized, the two are separate. And there's no steel rod attached between the core and the dividend. And it's a smart decision. For risk management, managing for the long-term, it's a smart decision. Our job is to generate core income cash, income for our shareholders, there are options for earning cash income are dwindling globally.

So, we're well aware of that. And when you read into -- what should you read into the holding the dividend in May should read anything really into it respectful of our share -- of stakeholders. And remember, again, back to what I just said, short, medium and long-term. In the short-term next 4 to 8 weeks, we're going to digest an enormous amount of information show you and so every other market participant globally, as the virus evolves, as the economy evolves, more bankruptcies are filed, that's, statutory income [indiscernible] brilliant questions. But, we are being very disciplined in our risk management process.

That includes what level do you have your dividend versus what do you have your core income? Positive for us is that financing costs are anchored at the lowest levels. We know we can make money now we need to be very disciplined with managers. So, our shareholders can stay in the game over the long-term.

Paul Stewart

Got it. Thanks for taking the questions and nice [indiscernible] in a tough environment.

Smriti Popenoe

Thank you.

Operator

Your next question comes from Matthew Howlett from Nomura. Your line is open.

Matthew Howlett

Thanks for taking my question. Good morning, Byron. And first of all, let me congratulate for job in the quarter that really stands out, you're probably going to have the best performance of any mortgage rate. So, I want to lead-off by asking you about capital management here and obviously the [dry powder]. I want to talk about buybacks stock, obviously, whether you're like or not, you're grouped in this, you're in this mortgage rate space right there. Space is dislocated everyone that big this kind of book, you guys included even with the sale performance.

How do we think about buybacks? And then you get a habit [indiscernible] policy that have yielded so much higher than everybody else? I mean, basically, we can tell, what's the -- how long are you going to do that if you're not going to be rewarded by the capital markets for it with, assuming you'd like to grow over time. So, just talk a little bit about capital management and being grouped in this space here. That's really dislocated.

Byron Boston

Yes, first half, is we hold the dividend made that is not that that much money. Great thing about having a monthly dividend is you're getting just up-to-date information. We can be more precise about our adjustments and shareholders can get a monthly payment, but it's just not that a much bigger deal from a capital management perspective. We're not necessarily holding it here to get some type of reward for it. When we are though, is, as we said, earlier, a phased approach in analyzing the current risk environment.

So that's literally what it reflects. We're in this phased approach in terms of analyzing the overall risk environment. So buybacks, we have the ability to manage, as we said, some time ago, we are -- we look at both sides of the balance sheet. We like to aggressively manage both sides of the balance sheet. If we make a decision to invest a $1 into an agency mortgage backed security, we will also be evaluating why should we take a $1 I buy back stock or buy back preferred?

So, we're pretty disciplined in our process in terms of how we think about that. And really think about -- if you think about Dynex Capital, think about the fact we have a long-term vision, which absolutely is essential that we're very, very disciplined risk managers. And so, we're in a period for the short-term, everyone happens to be. We're in a period where we are assessing the overall global environment, and what's the overall best risk reward and positioning of our portfolio, that we should take. Smriti and Steve do you want to add any more specifics around this.

Smriti Popenoe

I think the only other thing to say here Matt is just the performance is the foundation on which we build our future ability to grow. And then, the second thing is just that, the business model itself as Byron mentioned, they're just long-term positive factors here that you can put together a nice stream of income with, one that we think is an above average return. And overtime, that is something that's still in demand in the globe. So, lots of fundamental long-term positives. I think that will be good for the business model. In the near-term, it isn't going to be clear to everybody. But overtime, I think that that starts to differentiate and probably will drive.

Steve Benedetti

Probably just on, the capital markets, the cost of capital. You internally run, you are only focused clearly -- you clearly would maximum like to grow long-term, says the company as we do. Yes, we would like to go over the long-term.

Matthew Howlett

And any I just want your structure you should be able to do I mean the financial crisis. So, a lot of mortgage debt that raised a lot of money grew significantly, and you seem you have done it [indiscernible] positioned there, but you're out again to the equity market aren't cooperating remarks core markets aren’t cooperating,[indiscernible] buybacks really stands out here today . And on that note, I mean, with the CMBS gains, are there -- is there going to be this taxable income requirement with some of the gains or is that can offset – could be offset by some of the marks in 1Q other derivative losses, on 1Q, just curious on taxable income, which everyone also have to buyback.

Steve Benedetti

Yes. So Matt, let me take that one. Last year, we did have some return on capital. This year, the first quarter dividend character would be all capital gain, the way that tax rolls work on derivative transactions, your hedges that you lift they're amortized over the original period of the hedge. So there are some carry-forward amortizations from prior years, offset some of these gains that we may be taking. So I would think about it as the character for the first quarter is capital, the character for the balance of the year will depend on sort of the further transactions from this point forward. That depending on sort of the size of what we might sell going forward.

Matthew Howlett

Got it. I appreciate it. Congrats and thanks everyone.

Operator

Your last question comes from Jay Weinstein from Wealthspire. Your line is open.

Jay Weinstein

And I always like to get the last word in. So this company in its current form is really as you mentioned earlier build, at a rapid kind of build up as a portfolio in 2009 and 2010. Having gone into that, 2008 period, if I remember correctly, about two-thirds to one leverage or something like that. I think you really became a much more normal REIT in a very – in a pretty quick fashion if I remember correctly.

Byron Boston

Correct.

Jay Weinstein

It's hard, now you're in a low leverage position, not under one-to-one, but quite low compared to the industry. It's hard for me to perceive both your comments and with the world, like any kind of catalysts or trigger that would say, okay, the trigger buyer and Smriti to say, okay, we're actually going to take up asset size, take up, go down liquidity, down in credit like you mentioned? Can you see that anything like that, in that environment happening? Is there any way that comes through?

Byron Boston

Well, let me start [indiscernible]. So let's compare. Let me make a comparison to what happened in ‘08. So, and let me say exactly what we did in ‘08. So, we – and we started rebuilding this portfolio in January of 2008. And we were in the middle of a crisis. We deployed an agency mortgage backed security strategy for the first year to year and a half. Now, and while we did that, we always made it clear that we were not an agency only REIT. We felt given that risk environment, not only did we deploy an agency only strategy, we deployed a short duration, agency only strategy leaning on arms. Now what was the big difference between then and now huge difference, the curve was steeper, the Fed took rates to zero, but there was an enormous amount of steepness in the curve. In fact, you should run on Bloomberg, as it go back around 2008 versus today run the yield curve.

It's amazing when you see that huge differential. Now, there's still plenty of money that can be made today. But, that is a big, big, big difference. Here's the other issue with the 2008 situation. And I think if you go back to that first annual meeting that I remember I spoke at that that point, the crisis had blown up. We knew what the situation was. We knew there were bad loans being made. We knew they were in the subprime arena, and it had blown up. And because it was an endogenous shock, I mean, it came from inside of the system, we could actually make predictions from that.

So, the other big difference, endogenous versus exogenous shock, we have a shock that is happening outside of the system. It's a health crisis, of which none of us happens to be a doctor or scientist or a research professional. So, it is a huge difference in terms of how you perceive the risk today versus at that point in time. But again, let me go back and recount history. We went into an agency strategy for about a year and a half. And then we moved into a CMBS strategy, using really only AAA securities. Then a few years -- a couple of years later, maybe a year or two, we will starts to go down in credit, we went down into the BBB sector, we went down into some non unrated securities, and there were phenomenal opportunities. In fact, we were the only ones purchasing it points in times in terms of IO, multi-family securities, we didn't have any competition. It was unbelievable.

This time around the Fed stepped in immediately, they stepped in with a ginormous bazooka. A lot of those opportunities have literally been nullified because they put in enormous matches underneath the corporate market, they put it underneath the loan market, they put it underneath the -- there's still some lingering areas and some non-agency but unrated CMBS or RMBS, but it's still not enough yield, for the overall macro [indiscernible] that you're still taking is with this exogenous shock that's still creating this uncertain, global economic event.

So I'm opening, give me some real play-by-play of what the difference is now versus the strategy that we deployed in 2008. That strategy was absolutely designed for 2008. This strategy is designed for today and one of the big issue today is for the next four to eight weeks, we're going to find out about this virus.

We're going to find out about the economy. All we know now is that we tried to stop the economy. But, do we really know, how many people are going to be permanently fired? How many are not going to pay rent? How many are not going to pay their mortgage? So we take our leverage up to 9x times leverage, what we would be telling you right now, we do that tomorrow. We know exactly what's going to take place.

And we just don't think we should do that for you. So, Jay, your long-term shareholder in Dynex, you've been around a long time. We believe the key to this business model is longevity. So I'm glad you asked the question about there's a direct comparison between 2008 today, I can keep going. I can tell what you do every single investment and every thought process we had back in 2008 versus what we're thinking today.

Steve Benedetti

I keep telling people I said they're totally different. So, that was a financial crisis. And at the end of the day, had a much less of an effect on the real economy for a shorter period of time. While they bailed-out the financial system. This time the financial system has worked incredibly well given the stress on it. But as you say, this is an exogenous for us that we don't really have any ability to forecast much of anything.

Jay Weinstein

I think, [indiscernible] everything you just said. Anyway, well, thank you as always.

Byron Boston

Thank you, Jay. We appreciate it.

Operator

We have no further questions. I turn the call back over to the presenters for closing remarks.

A - Steve Benedetti

Thank you all so much for joining us on our call today. You can see there's a lot to talk about. It's simply a fascinating moment in history. Again Dynex Capital, we're playing for the long game, we believe the best success will be -- if we can stay in the game, our shareholders can stay in the game, our creditors can stay in the game and all of our stakeholders can stay in the game. Thank you again. And we'll look forward to you joining us at our next conference call.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.