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Dynex Capital Inc  (NYSE:DX)
Q1 2019 Earnings Call
May. 01, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Sharon, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Dynex Capital Inc First Quarter 2019 Earnings Results and Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question-and-answer session. (Operator Instructions)

Thank you. Alison Griffin, Vice President of Investor Relations. You may begin your conference.

Alison Griffin -- Vice President of Investor Relations

Thank you. 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, Chief Investment Officer; and Steve Benedetti, 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 1st, 2019. 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, 2018, 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 the 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 CEO, Byron Boston.

Byron L. Boston -- Chief Executive Officer, President, and Co-Chief Investment Officer and Board member

Thank you, Alison. Good morning and thank you all so much for joining our call. Let me start the call with a brief mention of David Walrod, who passed away last month. Dave was the sell-side analysts with Jones Trading and prior to that with Ladenburg Thalmann and J.P. Morgan. Dave was the friend of the Company and his good nature, insights and friendship will be missed by all of us here at Dynex.

As I typically do, I will refer to the slide deck on our website at www.dynexcapital.com throughout this presentation. I encourage you to review the deck in its entirety. The presentation includes information intended to help our investors understand how we're thinking about the global macro environment, the return environment, our current portfolio construction, our earnings trajectory and the risks that we have chosen to take to generate income for our shareholders.

Now let's turn to Slide 3 and look at our results. Our performance during the first quarter was solid as markets rallied in volatility ebbed in sharp contrast to the fourth quarter. The low volatility environment allowed us to modestly increase leverage and regain a portion of our book value per common share, loss in the volatility of -- at the end of 2018.

As noted on Slide 3, for the quarter we posted the total economic return of 6.7%, comprehensive income of $0.46 per common share and core net operating income of $0.18. Book value increased 3.7% to $6.24 per common share, led by tighter agency CMBS spreads and to a lesser extent agency RMBS and CMBS IO spreads.

Adjusted net interest spread declined 5 basis points during the quarter to 1.19% from lower drop income on TBA's and the spread between three month LIBOR and repo rates. Let's see. Overall, our investment portfolio inclusive of TBAs grew to $5.5 billion from $4.7 billion, reflecting to the deployment of the capital raised during the quarter and we added more agency CMBS securities during the quarter in the mix between resi securities and commercial securities was approximately 60:40 or close to 60:37% at the end of the quarter.

Now let's turn to Slide 4 and 5 and let me remind you that we take a top-down approach to the markets by taking a very disciplined approach to forming a global macro view of the economy in markets and then working our way down to our individual bond selection for our portfolio. And as you can see here on Slide 4, a key tenant of our global view as best express, which we have lifted from the World Economic Forum Global Risk Report for 2019. The picture looks very complicated, but it is very reflective of the world in which we currently find ourselves. My favorite line in this report simply states that global risk are intensifying as the world is facing a growing number of complex and interconnected challenges.

Now look at Slide 5. In this world of growing uncertainty and intensifying global risk, we at Dynex believe that generating cash income from United States real estate related assets and the United States housing finance system is the most attractive investment in global capital markets today. In our opinion, the optimal portfolio for the environment is a diversified pool of highly liquid mortgage investments with minimal credit risk. Given our view of the environment, we believe long-term investors should seek and favor experienced management teams and Dynex bring significant experience and expertise in managing securitized real estate assets through multiple economic cycles.

And then finally, investors should focus on the long term as we always have here at Dynex and the long-term total return of mortgage REITs. Dynex Capital and the mortgagee REIT industry as a whole offer good long-term returns, both in our preferred stock and common equity, high single-digit to low teen returns and an otherwise low global return environment with tons of negative yielding debt and central banks holding up prices of other risky assets.

Now look at our key takeaway Slides, on Slide 6 and 7. The current inverted structure of the interest rate curve is unusual and has historically lasted six to nine months. In the near-term, our returns will be impacted by a couple of factors: three-month LIBOR, one-month repo spreads and prepayments. These factors may be a headwind to earnings.

Now look at Slide 7. Our long-term returns that we have talked about multiple times in the past continues to support our business model. Demographics support a growing demand for cash yield in addition to the fact that we just mentioned the amount of low yielding assets globally. There is a need for private capital in the U.S. housing finance system as the Federal Reserve attempts to reduce its investment in agency RMBS and GSE reform may create new investment opportunities. We have stated many times that given our view of this environment, we believe long-term investors should seek all the higher yields offered by the mortgage REIT environment and we continue to think from a long-term perspective at Dynex and we look beyond the short-term impacts that we see today that may pressure our earnings.

So please turn to Slide 14 to 17. We're skipping over our macro view which is outlined through Slide 8 through 13, it's exactly as we outlined a couple of months ago and you can -- it's fully outlined in our document. And if you look at Slide 14, and let's discuss our portfolio construction. We'll focus on prepayment risk, leverage and liquidity. Our portfolio is constructed for interest rates trading within a narrower historical range as it is explained in our macro view, approximately 40% of our portfolio is invested in commercial mortgage-backed securities which offer the ultimate and prepayment protection, while 60% of our portfolio was invested in residential securities where 90% of our investments have prepayment protection in the form of loan characteristics that limit the incentive to refinance. The characteristics such as lower balance loans, high LTV loans, geographic specific loans and loans with low weighted average note rates.

The other point I want to reiterate about our portfolio construction is that we are very comfortable in this global environment using higher leverage on highly liquid high credit assets, especially given the durability of the financing markets. Our portfolio construction also allows us the flexibility to rapidly pivot to other opportunities when they arise.

And then finally, let's turn to Slide 19. This is where we end all of our calls, we like this long-term chart, we emphasize the fact that we are focused on the long-term. You can take note that we made a change in this slide by including the S&P 500 Financials which we compared to other quarters, you'll see the S&P 500 as a whole there's nothing unusual in terms of where that line sits versus the other three. But we really want to point out that for those of you who do have a requirement to be exposed to financials, you can see the relative attractiveness of holding Dynex Capital over the last 12 years or so relative to the overall S&P 500 Financials index.

So, as we said again, I'm going to just reiterate, we believe that the mortgage REIT sector and the, especially, Dynex Capital offer attractive long-term returns both in our preferred stock and our common stock. We bring to the table a very experienced management team. Our portfolio is constructed for what we consider to be a lower narrower range than we have historically seen. In interest rates, it's diversified between commercial securities and residential securities.

We appreciate you joining our call today and we are opening the call for questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from Eric Hagen with KBW. Please go ahead.

Eric Hagen -- KBW -- Analyst

Thanks guys and congrats on a solid quarter. Can you just maybe guide us to the prepayment expectations for the portfolio in this second quarter, just given kind of the rallying rates that we saw during the first quarter? Thanks.

Smriti L. Popenoe -- Co-Chief Investment Officer

Hi, Eric. It's Smriti. How are you?

Eric Hagen -- KBW -- Analyst

Hi, Smriti. How are you?

Smriti L. Popenoe -- Co-Chief Investment Officer

Good. So, this -- we are expecting prepayment speeds to rise in the second quarter relative to the first quarter. The models right now are projecting anywhere between 30% -- 20% to 30% increase in the speeds. And it's about 25% on the most sensitive bonds. And we believe that the S-curves in the models right now are pretty severe. Our entire book is probably more in the 10% to 15% increase relative to the first quarter.

Eric Hagen -- KBW -- Analyst

Okay. And then when we kind of translate that to an earnings impact, are we talking somewhere in the range of kind of $0.005 to a maybe a $0.01 of earnings? Or are we talking something maybe a little bit more than that?

Smriti L. Popenoe -- Co-Chief Investment Officer

Probably a little bit more than a $0.01, a $0.01 to $0.015.

Eric Hagen -- KBW -- Analyst

$0.01 to a $0.015. Great. Thanks for that clarity. The second question is just on the mix of the overall portfolio. I'm looking at the yield table that you guys show for the quarter and just kind of looking at the difference between the RMBS agency, RMBS and CMBS. I noticed in the delta there and in Byron's opening comments, you guys talked about the narrower range for interest rates which I guess on its face implies that there is lower volatility in the market. So, just thinking about the CMBS segment, I mean intuitively you have to lever that maybe a little bit more to achieve the same kind of total return for the portfolio. Just how are you thinking about the mix between RMBS and CMBS just given that kind of 50 odd basis points in the yield pickup you're getting for the RMBS? Thanks.

Smriti L. Popenoe -- Co-Chief Investment Officer

Sure. Yeah. That is a very interesting trade-off actually. So the way I would think about it, Eric, is that we have constructed the portfolio to respect a 2% to 3% range on the tenure. And we are very cognizant that we could spend a good portion of time at the lower end of that range relative to the higher end of that range. So, the CMBS and the prepayment protected securities actually perform in the lower end of that interest rate range. And then the coupon selection helps us perform in the upper end of that interest rate range. And in reality, as you look at the returns on agency RMBS, yes you're right, in the low volatility environment, they do offer you know anywhere from 20 basis points to 30 basis points incremental return relative to the agency CMBS. But that 20 basis points to 30 basis points can rapidly disappear when you have situations -- where you're moving down in rates very quickly and then staying there for some period of time.

So we're making that -- pretty actively. And you also have pointed our correctly that the Agency CMBS, they would need to be levered more than the Agency RMBS to generate the same return. And the reason we get comfortable with that is because of roll down. And what that does is essentially just with the passage of time, you actually earn back somewhere like 5 basis points per year on an Agency CMBS because of the locked on nature of the cash flows. So, we are more comfortable with that locked out nature of the prepayment protection and the roll down levering that cash flow higher. And that's what -- that's that risk return trade off that we have.

Eric Hagen -- KBW -- Analyst

Excellent color. Thank you very much.

Byron L. Boston -- Chief Executive Officer, President, and Co-Chief Investment Officer and Board member

Hey, Eric, let me add one other thing here.

Eric Hagen -- KBW -- Analyst

Oh, yeah. Thanks, Byron.

Byron L. Boston -- Chief Executive Officer, President, and Co-Chief Investment Officer and Board member

On Slide 9, we outline -- this is the same slide we used in our last quarter, which is kind of why I skipped over the macro. It says more time between 2% to 3%. I think it's really important to understand the dynamic that we're describing there. And we describe an even broader range by trying to show on Slide 10, this broader range of 2% to 4%. And we're trying to draw a connection between amount of global debt.

So we created dynamic, where we say as you move down toward 2%, if you're not going to -- if you're not going to have a global crisis that's going to be a sustainable crisis, you're going to go through 2%, we believe will bounce right back up. We believe there are factors that will push rates back up again. And then we talk about moving toward 3%. And we talk about factors that can push rates back down.

And so, even when you're thinking about this risk, so often with prepayments, everyone thinks of prepayments as if, oh, wow, you're going to drop to a low rating, you stay there. The dynamic that we're describing in this range, and again, that's -- no one has a crystal ball. We're just assessing the factor that we see in front of us as the dynamic of pushing rates down for some period of time and then bringing rates back up again. And likewise, it is the same in the other direction.

So let me just, again, get to that macro view, behind and how we think about prepayments. There are tons of scenarios, you can draw scenario where rates drop and you stay there, or you can draw a scenario where rates drop and they come back up. And that's kind of the way we try to outline this narrower range. You notice I didn't say volatility. That's kind of a theorem, just really bringing it down to what we call street man's language, which is a narrower interest rate range than we have seen historically. Does that make sense? And can you tie that back to the thoughts on the prepayments?

Eric Hagen -- KBW -- Analyst

Yes, that was good clarity. Thank you very much, Byron.

Operator

And your next question comes from Trevor Cranston with JMP Securities. Please go ahead.

Trevor Cranston -- JMP Securities -- Analyst

Hey. Thanks. Good morning. The question on the three-month LIBOR versus repo spread that you guys commented on briefly in the prepared remarks. Can you give us any indication of how much that impacted results in the first quarter kind of versus how much it will impact the second quarter, given where that spread stands today? Thanks.

Smriti L. Popenoe -- Co-Chief Investment Officer

Sure. Yeah, hi, Trevor. So, thank you for that question. The way we think about it is, so the three-month LIBOR to one-month repo spread has narrowed from a wide level of about 45 basis points sometime in 2018 in the third quarter and sitting right around 10 basis points to 12 basis points today. So, it's a narrowing of about 30 basis points, 35 basis points. And the way to think about that is with respect to the size of any one repo position, relative to their swap position. So, we are paying fixed on our swap position.

We're receiving three-months LIBOR. But then we're actually paying up on the funding side using a one-month repo rates. So the wider that spread is between three-month LIBOR and one-month repo, the more net interest income benefit you get and that net interest income benefit has been declining since the third quarter from a benefit of 45 basis points to about 10 basis points to 12 basis points today and that affects entire repo position that is covered with interest rate swaps

So, if you go back and look at, I think our swap coverage relative to the repo book was somewhere around 80% last year, it's a little more like 100% this year. That should give you a sense for how big that number is. It's really quite significant. And just as a heuristic, it's obviously, if you have a $1 billion swap book and that basis declines by 10 basis points, you can do the math it's pretty significant.

Trevor Cranston -- JMP Securities -- Analyst

Okay. That's helpful. And then my second question was looking at the interest rate sensitivity tables in the appendix on Slide 27. I guess -- you know the book value sensitivity to the downgrade scenarios looks like it's increased. I was just curious, if you can give any color around that kind of those you know just sort of tied to the fact that given how much rates have already declined? You were more comfortable that they didn't have as much room to go further down? Or just what the reasoning was for that change? Thanks.

Smriti L. Popenoe -- Co-Chief Investment Officer

You're right. I mean, that's exactly. We saw the rally and that happened late in the first quarter as a bit of an overreaction to what Chairman Powell had said as well as everything else that was really happening fundamentally in the economy. And so obviously this represents a snapshot of -- on March 31st of the book. And so it will show that type of sort of asymmetric return profile. I think the 10-year note on March 31st closed at 240 and that's what that reflects -- relative to the end of December.

Trevor Cranston -- JMP Securities -- Analyst

Okay. Great. Appreciate the comments. Thank you.

Byron L. Boston -- Chief Executive Officer, President, and Co-Chief Investment Officer and Board member

Hey, Trevor. One quick follow-up from your first question. If you look in our press release, we show the average pay swap, pay fixed rate and receive rate and you can sort of see what happened during the quarter and then you can kind of look at to Smr's point, you kind of look at where the curve is today and you kind of back into the impact on what the change basically from where we were at March to what the first quarter looks like?

Trevor Cranston -- JMP Securities -- Analyst

Okay. Great.

Byron L. Boston -- Chief Executive Officer, President, and Co-Chief Investment Officer and Board member

(Multiple Speakers) What the second quarter looks like in terms of the three-month LIBOR rate versus the one-month LIBOR rate.

Trevor Cranston -- JMP Securities -- Analyst

Great. Got you. Okay. Thank you. I'll do that.

Operator

The next question comes from Doug Harter with Credit Suisse. Please go ahead.

Doug Harter -- Credit Suisse -- Analyst

Thanks, Byron. I know you were talking about just the level of rates being in a tight range. But can you talk about, how you think about leverage and portfolio construction as we go through this environment that's generally characterized by low volatility? But we have these bouts of -- spikes of volatility and kind of how you want to be positioned you know during the periods of relative calm?

Byron L. Boston -- Chief Executive Officer, President, and Co-Chief Investment Officer and Board member

Yeah. So, our main line and I've probably said it for the last four years here at Dynex, four or five have been bouts of volatility periods of calm. And when we look at, I mean one of the main points here, the key, what we call our money theme at the beginning of this presentation is simply that, we look at leverage on these liquid assets in a more comfortable fashion today than even we looked at them a year ago. And the reason is really right within the global risk environment.

And the financing markets are in our opinion are more durable. We use a quote in the document here from Chairman Powell, speaking of the overall durability of the financial system. We think about the credit quality of these assets. Smriti already pointed out that on our DUS portfolio is my favorite is even if you really take a widening in spreads because of the leverage that the DUS paper rolls down the curve nicely as it seasons. So, you do have some cushions from that impact.

So, let me just be real clear that, one of our most key points here today is that we feel any investor whether you're an individual clearly passive investors or if you're institutional investor and you're managing equity or you're looking for returns that you know leverage from high quality high liquid assets is a very attractive trade in a globe with this much risk and that does mean our higher leverage on these sectors. If you -- and by higher leverage if you compare coming out of 2008, right, you are really concerned about leverage coming out because you're not sure about the financial system. You're not sure by how many people have repo lines, how many people will be durable with their repo lines. We have far more visibility to that today than we had in 2008.

And I would also argue that the financing markets are more durable today than they were in 04 or 03 or 02 to 1998. So for highly liquid assets when you started to talk about leveraging credit assets that's a different story. So we have an opinion on that, it may different in some others, but I'll stand by that opinion and I will bring on a ton of historical information about on how credit assets have performed in bouts of volatility versus how the liquid assets have performed. Smriti you want to add anything on that.

Smriti L. Popenoe -- Co-Chief Investment Officer

I do. Go ahead Trevor, did you want a follow up with that.

Doug Harter -- Credit Suisse -- Analyst

Yeah, it's actually, Doug (inaudible) I guess I was thinking more about you know I guess how you think about -- or your ability to absorb your comfort with absorbing you know kind of book value volatility, your economic return volatility over you know during that period, you know, I guess given the comfort you would have in the financing system that you just described?

Smriti L. Popenoe -- Co-Chief Investment Officer

Yeah, I mean, that's an interesting trade off as well. I think the way we're thinking about it is we're designing the book to have the ability to perform in a 2% to 3%, 10-year note range, obviously, Byron mentioned the larger range. We're very cognizant of that for respecting the probability that we're going to spend more time at the lower end of the range than the upper end of the range. We think about the credit quality of the book, the fundability of the book and the flexibility of the book. And the reason you take on the additional leverage is that it gives you the flexibility it allows you to earn a return from a liquid asset and then it gives you the flexibility during the bouts of volatility to adjust yourself. So during a bout of volatility we're evaluating whether the bout of volatility is going to turn into something very bad, and in that case you have the liquidity in your portfolio to exit your positions pretty close to where you marked hopefully, right and liquid assets have demonstrated time and again. From 1981, I would argue to you guys that 30 year MBS have been that type of asset that you can sell in a disruption. So if something's going really poorly you have the ability to exit your position. And then if there's a bout of volatility where you actually have an opportunity to deploy capital then you can accept that temporary change in your book value and you have the liquidity and the flexibility to be able to add in that environment.

So that's really the big idea -- the big idea is you keep a liquid position. You have a liquid portfolio. You keep a big position of liquidity cash and unencumbered assets. This is something we pointed out a couple of quarters ago. Having that cash and unencumbered asset position allows you even with a higher leverage to manage through those bouts of volatility. So if the bout of volatility is going to turn bad you have exit -- you can exit your positions because you have liquid assets. If it's something that you think it's temporary you have the cash and the capital to be able to deploy during that -- that scenario. So that's really why we're saying right now it's behind this is the thinking behind the current construction.

Byron L. Boston -- Chief Executive Officer, President, and Co-Chief Investment Officer and Board member

And Doug, let me point out the -- as Smriti, mentioned 1981, that's because when I started my career. And I've been in the capital committing seat and we talk about an experience management team. I wasn't an investment banker or within analyst or some other peripheral role, I've been committing capital. And these capital markets both on credit and mortgage backed securities for almost 40 years at this point. And so if you look back historically and you do the research on it you will see that the agency securities securities backed by the U.S. government have held up through every single crisis.

In other words you've been able to get liquidity you either sell the securities or you can borrow against them. That's really important when you talk about bouts of volatility that may come from so many different uncertain factors. Globally you don't know where the bout of volatility may ultimately come from. So we feel very comfortable when we look back especially the most recent as 2008. In 2006, leveraging credit assets looked like it was great. By 2007 the dramatic term was a function of liquidity. In other words those assets go from being looking liquid to being completely a liquid within a matter of hours actually it was pretty amazing. So that's what factors into what we talk about long term returns, long term investors we have a lot of retail investors, we are speaking to them. We are telling you that from a long term perspective when we look at the globe and this amount of risk that we are more comfortable taking this type of liquidity risk with the higher leverage, we've got liquidity to cushion the book value volatility that's what you do assume, you assume some book value volatility in that process and we believe it's the best investment opportunity versus others such as leveraging a more illiquid deep credit assets. (Multiple Speakers) Go ahead.

Operator

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

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Byron. It sounds like to me that you guys are anticipating narrower investment spreads and higher leverage going forward. Is that fair?

Byron L. Boston -- Chief Executive Officer, President, and Co-Chief Investment Officer and Board member

No, I mean, I think it's hard to predict on the spread. This is like last -- that the end of last year, spreads wide now immediately, right and it gave you an opportunity, they've wide -- they've come back in. But there's still wider than the type of last year. So, it's almost we talk about this like a second of bouts of volatility and periods of calm. It's hard to predict exactly where those spreads will be. However, in terms of leverage, we are saying that we are more comfortable with the higher leverage than we are -- than let's say 2008, 2009, 2010, 2011, 2012, 2013, 2014. We're definitively saying that we believe one of your best opportunities is higher leverage on higher liquid assets. Now in terms of net spread, and Smriti, if you might want to comment on it. But Steve, but yeah, we are saying that in the short-term, prepayments or the spread between three-month LIBOR and one-month repo could pressure net spread that it has recently.

Stephen J. Benedetti -- Chief Financial Officer and Chief Operating Officer

Yeah, that's basically what we're saying. That's correct.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Okay. Looking at this from the dividend perspective. For the additional shares issued, I'm assuming that you'll need leverage ratios to go north of nine times adjusted to begin to cover the incremental shares. I mean, am I missing something?

Byron L. Boston -- Chief Executive Officer, President, and Co-Chief Investment Officer and Board member

Well, let me just say, I'm definitely comfortable. We've moved leverage up in one-term type increments. So, we've been very disciplined in our process. You go back two years, we started talking about taking leverage up. And now we're kind even -- we're pointing out more. So, yeah, we've been moving leverage up in one-term increments. We could see a day where spreads wide now and you say you take a leverage up, during a tight time period and when times are better, you bring leverage back down and that's ultimately how we look over the long-term, again long-term view in terms of managing our overall leverage. Smriti, do you want to add to this?

Smriti L. Popenoe -- Co-Chief Investment Officer

I think that one of the things we have to consider as we have observed in the earnings deck. Is that right now, we're sitting with the Fed on hold, right. And we're sitting with that one-month, three-month repo spread at a historic high and short-term prepayments be that are rising and could continue to raise further. So yes, net interest spread is going to be pressured, right. We are also saying that historically these flat are inverted yield curves that typically resolve themselves within six to nine month period. And eventually, you get an environment that supports higher net interest spreads. And underlying some of our thinking is to opportunistically take that leverage up when assets widen or cheapened enough, and that opportunity presents itself, also considering the fact that ultimately the Fed will end up supporting a steeper yield curve.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Okay. Great. And then, I guess, final question for further equity raises, I mean, the current equity rates that was slightly diluted to book value per share. Would you take the same type of dilution for future equity raises?

Stephen J. Benedetti -- Chief Financial Officer and Chief Operating Officer

Hey, Chris. It's Steve. That's something that will consider the trade-off, you're right, there was a modest solution to book value per share. But when you look at the return opportunity at the time then we took that capital down. We -- frankly, we took the capital down, when spreads were probably their widest and then we're able to deploy it. We were able to deploy it at ROEs that were a couple 100 basis points or higher. It's over the marginal return was earlier in the year and at the end of last year for the -- Byron said. So it's that kind of trade-off, giving up a little bit of book value and order to add assets now. When you are adding those assets that wider spreads, you've also potentially can get some of that book value back as spreads tighten on those assets that your -- that you've added at wider spreads. And then the construction of the DUS that we buy, they're longer duration assets. And as they roll down the curve and you'll get some book value back on that as well, so...

Byron L. Boston -- Chief Executive Officer, President, and Co-Chief Investment Officer and Board member

So in the other key point strategically, it is valuable in our opinion that we continue to be very disciplined about how we grow our company over time. We believe that -- whereas we don't believe that larger scale will be a predictor of longer term returns. They haven't been in the past. You can go back, as I pointed out in past calls, you can go back and look at larger companies. But we do think there is value to our shareholders by continuing to grow and scale up our asset platform. We do believe that when you think about institutional investors, passive investors and retail, those are the three groups now. And that's different than 10 years ago. 10 years ago, it was retail and just institutional. Now, you got the passive investors. There is value. One of these groups very concerned about relative market cap, relative size, and we believe that the more interest we get from that will bring value to the rest of our shareholders by just bringing more liquidity to our stock, bringing a larger bid to our stock, et cetera, et cetera.

So we do have in our strategic plan a desire to grow the company. We want to be very, very disciplined about how we do that. And we -- in what we consider to be a shareholder friendly manual, sometimes it may be above both or slightly below both, but over time we believe that it will be accretive to earnings and book to value over the long term.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Great. That's it for me and thanks for your earlier comments on (inaudible).

Operator

(Operator Instructions) You have a question from Eric Hagen with KBW. Please go ahead.

Eric Hagen -- KBW -- Analyst

Thanks for the follow-up. I noticed that the level of dollar roll specialist (ph) has appeared to maybe go away or be very, very small at this point. I'm just curious how we should think about the overall mix within the 30 year fixed rate exposure kind of bucket or segment between pools and TBAs. And maybe even how that's changed in the first quarter or the first month of the second quarter? Thanks.

Smriti L. Popenoe -- Co-Chief Investment Officer

Sure. Yeah. Eric, the issue there, what I would say, there are a couple of things that will affect our decision to change that mix. One is going to be the UMBS implementation that is going to happen in June. So we're just waiting to see how that works out in terms of the dollar rolls and that really affected the level of dollar rolls at this point. And that's a technical factor obviously. So that's something that has put some pressure on the rolls.

The second thing that put pressure on the rolls was just the -- the small period of time that we spent below 250 on the 10-year note and mortgage rates got to 4%. That caused a declined at the end of the first quarter. We've actually seen a pop back in the rolls. April, just so you guys know, April speeds came in across the board much, much lower than the street had projected. So that's been a real positive in terms of how that's evolved. Now, we do expect speeds to pick up in May and June. That's reflected in the rolls. But I think having April speeds come in better than expected was very positive for the roll market. We have less exposure to 4.5s than we did before. So that has not -- for us, that dollar roll decline hasn't affected us as much. But what I would say is from the end of the quarter, we may have seen somewhere between 10 to 20 basis points of improvement in the implied financing rates.

Eric Hagen -- KBW -- Analyst

Okay. Great. Do you have a sense for...

Smriti L. Popenoe -- Co-Chief Investment Officer

But for now, I think our mix is going to be relatively stable, pools versus TBA, until we get through this UMBS stuff.

Eric Hagen -- KBW -- Analyst

That's helpful color. Do you have a sense for how book value did in April? Can you give us an update there? Thanks.

Smriti L. Popenoe -- Co-Chief Investment Officer

I think it's been fairly stable to slightly higher. The spreads on Agency CMBS continue to come in. We've seen a little under performance in the 30 year sector just because of supply. It's been stable.

Eric Hagen -- KBW -- Analyst

Got it. Great. Thank you very much for the follow-up.

Smriti L. Popenoe -- Co-Chief Investment Officer

Sure.

Operator

(Operator Instructions) And we do not have any questions at this time. I will turn the call over to the presenters.

Byron L. Boston -- Chief Executive Officer, President, and Co-Chief Investment Officer and Board member

Let me just point out here, because I listen to the questions that are here. And they're very interesting, because I think back to 2006, I think back to the late 1990s. I think back to the 1994. I think back to the late 1980s. If you look at Slide 10 and Slide 11, and these would be my last comments. But I'm just thinking about how you the analyst community is trying to sort through all the complexities.

We started this presentation off with a very -- if you go to the World Economic Forum Risk Report, I think it's a great one, and then on Slide 10 and 11, this really starts to put in a couple of very simple terms this environment. You got enormous amount of global debt and you can see what has happened to yields. They have narrowed enormously. If you follow Japan and you go back and look at their charts, you'll see their yields narrowed down to such narrow trading regime. I'm not using the word volatility. That's a nice theoretical word to use in your model. Let's talk about the reality of a narrow interest rate range. An enormous amount of global debt that leaves the global economy fractured.

If you look on Slide 11 you'll see enormous increase in central bank balance sheets. And that's the back drop by which we get to our opinion that higher leverage on high quality liquid assets is an attractive trade. And it's enough to get through this period. It also backs up our opinion, if you look historically at those periods that I point out, the shorter duration of period, six to nine months of structures of yields and interest rate curves that we have seen historically.

It's hard to predict the future, because of all the factors that are changing. But it is important to understand history. And because we are saying that we -- you're talking to a very experienced management team, from our accounting team, to our investment professionals, we are very disciplined in our approach. But I understand the complexity and the question that you guys are trying to answer and trying to get to. But I would urge you and all of our investors, retail, passive and institutional, take a long-term view. With this type of dividend yield offered by both our preferred in our common, it can cushion any type of most of the book value volatility that you will get over time.

So with that, we thank you so much for joining our call. And we look forward to chatting with you again in three months.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 44 minutes

Call participants:

Alison Griffin -- Vice President of Investor Relations

Byron L. Boston -- Chief Executive Officer, President, and Co-Chief Investment Officer and Board member

Eric Hagen -- KBW -- Analyst

Smriti L. Popenoe -- Co-Chief Investment Officer

Trevor Cranston -- JMP Securities -- Analyst

Doug Harter -- Credit Suisse -- Analyst

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Stephen J. Benedetti -- Chief Financial Officer and Chief Operating Officer

Eric Hagen -- KBW -- Analyst

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