Operator: Your next question comes from the line of Christopher Nolan from Ladenburg Thalman. Your line is open.
Christopher Nolan: Good. How are you? Bob, the comments that you made on your cost of funding were interesting. Should we imply from this that you’re negative spreads are a thing of the past going forward?
Robert Cauley: On a hedge basis, they are. Yes. We’re pretty fully hedged. Like I mentioned, I said a couple of times, with all the swaps we have in place in particular, that on an absolute gap basis, Yes, it looks negative because we don’t use hedge accounting and we don’t advertise premium and discount. So on the face of the income statement, it will still appear negative. But as we disclose, particularly in the deck, when you take into account the effect of the hedges, it is far from negative and it’s actually north of 200 basis points. So the only thing that could change that, I mean, really, is naming. I mean, if we were to say it started growing the portfolio substantially and had to add new hedges, even at that, you still can get attractive funding.
Just looking at the screens yesterday, with the rally, 10-year swap spreads were around 350 basis points. So if you were to, for instance, add any coupon north of 3%, 3.5%, you can get positive spreads. So it’s not really hard to maintain that NIM. Expand it might be hard, but I would say, Yes, I think you’re right. We’re in pretty good shape and we’ve got locked in funding hedges that should keep our spread at a fairly attractive level going forward.
Christopher Nolan: Okay. So that’s positive for the dividend in terms of incremental decreases, right?
Robert Cauley: Yes. And then, like I said, if we did get any eases, it’s pretty much all upside from there, right? Because you’re just taking the absolute repo interest expense down and that’s almost at the bottom line.
Christopher Nolan: Great. Final question. The comments you made on the banks were interesting. Given that we’re facing potential carnage in commercial real estate, in your experience, what has been the performance of mortgage backs when the banks are going through a commercial real estate correction?
Robert Cauley: I don’t know if I have any specific answers in mind. Typically, the lack of credit exposure in the sector tends to bode well for the sector in those types of environments. When you have a credit event, whether it’s commercial real estate or corporates, high-yield investment grade, the asset sector, especially from the perspective of a multi-sector asset manager, usually does well. In fact, Hunter and I were just at a conference last week, and there were numerous investors of different types. One of the panels they had were people who managed either endowments or pension funds. They were quite bullish on mortgages. Asset managers are fairly overweight mortgages. This group, we still found them quite attractive.
Any type of credit evolution, a negative one, just makes them look all the more appealing because they are attractive from a historical perspective, and they have no credit risk. I would think that would bode well for us. The negative with the banks, though, is that a large number of banks acquired a lot of mortgages, especially lower coupon mortgages. You found out last year, to the extent they were very far underwater, and they were forced to sell them, there’s a source of potential selling pressure. That’s why lower coupons had a rough day the last two days, just because of this New York Community Bank issue. If they were forced to liquidate, they might be selling some mortgages. That is a bit of an overhang to the mortgage market. If they were forced to liquidate, that’s a problem.
Just having losses from the perspective of asset managers who are not banks, it’s a positive for the mortgage sector.
Hunter Haas: I’d just add that our last three really pronounced episodes, if you will, for agency REITs, we came out of the global financial crisis and the early days of the pandemic. We certainly had funding pressures, spread widening, liquidations occurring, and taper tantrum as well was a point. Agency mortgages always performed relatively well, even if there were some very dire days during the pinch of the liquidity moments where people were getting stopped out. What we find is that, to your point about the commercial real estate market, a lot of times people are selling the most liquid things because they’re the most liquid. Sometimes that creates a lot of pressure for agency mortgages. That was as pronounced as we’ve ever seen it in the last year or so.
People were selling what they could, not what they should, to a certain extent. If you’re all along some commercial real estate and you’re losing money because of that, your leverage is obviously increasing, whether it’s deposit leverage or repo leverage, whatever kind of leverage you employ. In the last year or so, agency mortgages have been the relief valve for people to go ahead and bolster their liquidity positions. That’s been tough for us. It could certainly happen again, but I think we’re at levels that are relatively wide enough that money starts coming in pretty quickly to the extent that we retrace the wide. I think those levels in particular, in and around 200 basis points over funding, we’ve taken a couple of runs at those levels and things have at least so far firmed up pretty quickly when we get to those extremes.
Operator: Your next question comes from the line of Jim Fowler from Kingsbarn Capital Management. Your line is open.
