David Finkelstein: Yes, sure. So we’ve looked at servicers in the past and have seen a number of them come to market, and what we’ve learned is that it’s much more efficient for us to outsource servicing. In the absence of significant scale, it’s very low-margin business, and we have a considerable amount of flexibility by using multiple high quality sub-services. They are competitively priced. We have good recapture relationships. And we also have better access to assets as a consequence. We’re not a competitive threat to the mortgage origination community, and so by outsourcing services, it’s better for overall business. Now, that could change at some point, but right now, we really like the relationships we have on the sub-servicing side, and we’re going to maintain that posture for the time being.
Trevor Cranston: Got it. Okay. That makes sense. And then in light of the significant move we’ve had in rates here in April, can you comment on any changes you made within the portfolio, particularly in Agency MBS or with the hedges?
David Finkelstein: Sure. So we did actually sell early in the quarter a couple billion Agency MBS, and some of that was outright. So part of that was anticipatory and we were certainly glad we did. We will manage our rate exposure here as the market evolves. We’re currently running at about a half -year duration, which we’re comfortable with, but we’re certainly cautious. agency MBS. We think in this sell -off they’ve been better behaved, certainly in the fall, primarily because fall has been a little bit better this time around, and there’s more fundamentally positive factors in the market today than there were last year. The bar for the Fed to hike is higher today than it was last year. As we just talked about, the QT taper is likely to be underway.
The composition of treasury issuance is in a better place than it was last fall, and money is actually flowing into fixed income. So we feel a little bit better about the market in this rate sell-off than we did last year. When we were in October, it was sort of the million insight mentality, and that doesn’t exist today, and that should be supportive of the Agency market, but we’re going to stay conservative to the extent there’s more cheapening in the basis, we’re going to cover those mortgages that we bought, and we anticipate doing so, and it’s advantageous to sell early, and we trade it around. So that’s pretty much the story, Trevor.
Operator: The next question is from Eric Hagan with BTIG.
Eric Hagen: Hey, good morning. How you guys doing? Hey. It looks like the preferred stock is going to go fully floating rate by the end of June. Right now, the prep served in around 15% of the equity capital structure. How does your outlook for leverage in a position of the portfolio maybe respond to the cost of that preferred? And even at your current valuation and when you look at the environment, do you think it actually makes sense to maybe scale up with more preferred right now?
David Finkelstein: Yes. So in terms of our capital structure, you’re right, it’s probably 13.5% of our capital is in preferred, and our Series Is do go floating here in June, and how we look at it is our cost of preferred capital would be a little over 10% at that time, which is relatively high, but it’s also important to note that we’re at the highs of the rate cycle. And so when we look at our cost of prep, we look at it over a longer horizon compared to the forwards, and it does come down with ultimate Fed cuts, so to around 9% or thereabouts. And then we compare that level to the asset yield on the portfolio. And when you look at the relationship, even at the spreads today versus asset yields, that spread is actually higher today than the long run average.
So we’re comfortable with the elevated cost of preferred capital in this floating rate environment, even with the Is going floating, which is — will have a relatively immaterial cost burden, less than a $1.00 a quarter, it’ll add to our prep costs, so not that material. And then with respect to potentially issuing more prep, we like our capital structure where it’s at. The prep market hasn’t really opened up. There’s been a couple of very recent bank transactions, but generally speaking, it’s still relatively quiet to the extent it does, and we get some firmness and pricing in mid to upper single digits call it, to be able to issue and potentially even refile. We would certainly look at it, but we like the low leverage in our capital structure as it stands, and we’ll keep an eye on that market.
Eric Hagen: Yes, I mean, along the same lines, I mean, as you guys scale up with the MSR, is there room for unsecured debt just as a kind of more effective duration match maybe versus using secured?
David Finkelstein: Well, look, we have $3.5 billion of essentially cash and Agency MBS on the balance sheet, so we don’t need the debt. And right now, as I mentioned in my prepared remarks, a lot of that capital funding MSR is coming from excess liquidity and we do have ample warehouse capacity and we compare that warehouse capacity and the cost of warehouse financing through debt markets and the fact of the matter is that issuing unsecured debt would be funding that MSR at a cost that’s much higher than term committed warehouse financing and so it wouldn’t make sense for us and particularly given the fact that we don’t need the liquidity if we go to the debt markets so certainly it’s not something we’re actively considering.
Operator: The next question comes from Kenneth Lee with RBC Capital Markets.
Kenneth Lee: Hey, thanks for taking my question. Good morning. Just one for me. You mentioned in the prepared remarks that dividends are set appropriately for 2024. Wondering if you could just further flush this out. Is this dependent upon rate volatility to potentially decline, or does it depend on a certain Agency MBS spread range? Thanks.
