Doug Harter: Thanks. Can you just talk a little bit more about the decision to raise capital through the ATM and kind of how you view the tradeoff of near-term dilution versus future returns from that capital?
Byron Boston: Sure. So really, I appreciate the question, Doug. I think one of the things that we think about the main thing we think about is the spread between the return on investment versus our all-in cost of capital. That is the main driver of capital issuance at all times here at Dynex, we think about what can we invest the capital in and when we adjust the all-in cost of capital for dilution in the near-term? Are we able to earn that back over time? How quickly can we earn that back? And one of the key points about this particular environment and when we talk about it as being a sustained return environment that is favorable is that we feel like the investment opportunity a) is sustainable and b) it’s the return on investment is higher than our all-in cost of capital.
So it is a very accretive investment environment. And when we see periods like this, it makes a ton of sense for us to go get the dry powder, so that we have in our pocket to be able to put the money to work at the right time.
Doug Harter: I guess when you are doing
Rob Colligan: Go ahead.
Doug Harter: Sorry, if I could just get one clarification
Rob Colligan: Yes, go ahead.
Doug Harter: Before you add. Yes, just I guess when you are thinking about that €“ is that kind of assuming kind of static spreads? And in that cost of capital and I guess, if you were to think about the $0.28 of dilution, I guess at what points in the quarter were those shares issued? And would there have been some appreciation on the assets that you bought that would offset that dilution?
Smriti Popenoe: Right. I mean, look, book value is up since quarter end, right. So we have already gotten appreciation on anything that was issued last quarter. And I’ll remind you guys, when we talk to you for our third quarter results, we were reporting book value in the 12.95 to 13ish area, right. But we have had a massive increase in book value since the lows of the fourth quarter. And the existing shares at the time have benefited in all of that. So, yes, we do feel like there is, we are investing capital at levels that are accretive to our shareholders relative to the all-in cost, including what we paid to issue the capital in the fourth quarter.
Rob Colligan: Hey, Doug. Just one other thing too, when you think about what happened in the fourth quarter, there were times in the fourth quarter when new investment opportunities had a return of north of 20%. So I understand that there is a temporary dilution factor, but the opportunities were there that we could put investments on the pile of investments that will deliver returns for years to come and that’s why it made sense for us to add capital during the fourth quarter.
Rob Colligan: You should also note we are long-term investors. We are building our company for the long-term. So, there are some definitive statements. We have no desire to be as large as the largest companies in this industry, zero. We are going to continue to go, build up our technology and processes, our capital base over time. With €“ it will add resilience. It will add liquidity for our shareholders. And then when we think about costs, costs are costs, where is my technology costs, where is the issuance costs, can we generate a return above our costs. And so, I will direct you to some of the charts that we have shown you. I love the one, especially on Slide 9, because that’s the way we think about it. And if you look at the far bar, fourth quarter €˜22, you will see it says $19.51.
Look at where we are today. That number is probably closer to $20. And over time, we will think about that, it’s like a buoy in the water with a rising tide. So, costs are costs. We are building our company for the long-term. We have no desire to be as large as some of the largest balance sheets have been. Our nimbleness is extremely important to us and it’s been extremely valuable especially this decade so far.
Doug Harter: And I guess just one follow-up on that. I mean to the extent that, like Rob said, you saw returns in the 20% range at points during the quarter. How do you weigh kind of temporarily letting leverage increase to take advantage of that versus raising new capital and then kind of if spreads tighten, just kind of letting leverage naturally come down. Just kind of that thought process versus.
Smriti Popenoe: Yes. I mean I think a big one there is thinking through the risks and the risks of allowing leverage to continue to ride up, okay. And in this particular macroeconomic environment where you do have the possibility of surprises, such as what happened in September and October, you want to be very, very thoughtful about allowing your leverage to rise into those kinds of events versus taking some action to address increases in leverage. So, there is a big difference, actually. When you have surprises like the ones you had in September and October, it wasn’t readily apparent, which direction things were going to go. And in those types of environments, we have chosen to not expose our shareholders to going out of business risk.
We have chosen not to do that. So, there will be times when we take up leverage or allow leverage to write up in that situation. That was not one of those times. So, we think very long and hard about the risk reward of making those types of trade-offs. When there is existential risk involved, we are not going there. In other times when there is a reasonable chance that we are going to recover capital from allowing leverage to write up, it’s a different trade-off. But last quarter was not that type of an environment in our opinion.
Doug Harter: Okay.
Byron Boston: And I think decision was made from a long-term perspective.
