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Dynex Capital Inc (NYSE:DX)
Q1 2021 Earnings Call
Apr 28, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Dynex Capital First Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your first speaker today, Alison Griffin. Please go ahead.

Alison G. Griffin -- Vice President of Investor Relations

Good morning, and thank you for joining us today for the Dynex Capital First Quarter 2021 Earnings Conference Call. The press release associated with today's call was issued and filed with SEC this morning, April 28, 2021. 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 our disclosures filed with the SEC, which may be found on the Dynex website, under Investor Center as well as on the SEC's website. This conference 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. Joining me on the call is Byron Boston, Chief Executive Officer, and Co-Chief Investment Officer; Smriti Popenoe, President and Co-Chief Investment Officer; and Steve Benedetti, Executive Vice President, Chief Financial Officer, and Chief Operating Officer.

With that, it is my pleasure to turn the call over to Byron Boston.

Byron L. Boston -- Chief Executive Officer, Company-Chief Information Officer and Director

Thank you, Alison. Good morning, and thank you all for joining us today. I'm extremely pleased with our first-quarter results, which Steve and Smriti will review in more detail in a minute. Our current total economic return for the quarter was 7.2% on a quarterly basis, and we have generated a total economic return of 34.8% over the last four quarters, averaging 8% per quarter. We achieved this during an unprecedented time in the markets. Most importantly, since this new era in history began in January 2020, we have outperformed our industry and other income-oriented vehicles with a 27.1% total shareholder return as noted on Slide five. Our performance during the first quarter continues to demonstrate that Dynex has the skills and experience necessary to navigate the current environment. The Dynex team relied heavily on our deep experience in managing the embedded extension risk in a mortgage-backed security, and we use this tactical expertise to take advantage of the environment. We created value during the first quarter in four ways. We've managed the existing portfolio, optimized our capital structure, raised equity, and invested capital to generate an excellent return for the quarter. We have been strategically focused on our investment strategy at capital allocation as well as simplifying and enhancing our capital structure. We have been executing the strategy to grow the company to drive operating leverage and to improve our common stock's liquidity while balancing our equity capital.

This quarter was unique in providing us the opportunity to raise $128 million in new common equity and invest that capital accretive. We also called our higher coupon preferred Series B, further optimizing the right side of the balance sheet. Both decisions added to earnings and book value in the first quarter and our view -- and in our view, will strengthen our performance over the long term. Now from a macro perspective, we're at a critical inflection point in the global economy as the pandemic evolves in a disparate fashion and the impact of government responses and the vaccine takes hold. We are preparing in our usual disciplined manner for multiple scenarios. And as we have said before, surprises are still highly probable given the geopolitical backdrop. We firmly believe that we can deliver value to our shareholders across multiple market scenarios, as Smriti will elaborate in her comments. This remains a very favorable return environment with funding costs anchored and the curve steeper. We believe the liquidity and flexibility inherent in our agency-focused strategy are essential for a highly uncertain global environment with many complex and interrelated risks.

Now I'll turn the call over to Steve and Smriti to give you more specifics about our returns and our balance sheet composition.

Stephen J. Benedetti -- Executive Vice President, Chief Financial Officer, Chief Operating Officer and Secretary

Thank you, Byron, and good morning, everyone. The first quarter continued the excellent performance for the company. For the quarter, we recorded a comprehensive income of $1.76 per common share, a total economic return of $1.38 per common share or 7.2%, and a core net operating income of $0.46 per common share. Overall, total shareholders' capital grew approximately $100 million or 15% during the quarter as we raised $128 million in net common equity through two public offerings, as Byron noted, redeemed $70 million in higher-cost preferred equity and added approximately $36 million in capital from excess economic return over dividends paid. The excess economic return was largely driven by our hedging strategy as we actively managed our position and timed our hedging adjustments as the curve steepened during the quarter, resulting in gains of $166 million, more than offsetting the impact of higher rates in our investment portfolio. Book value per common share during the quarter rose $0.99 or 5.2%. Absent the cost of the equity raises, book value grew approximately 7.5% during the quarter. Core net operating income to common shareholders sequentially improved this quarter to $0.46 from $0.45 in Q4, principally resulting from lower G&A expenses and the reduction in the preferred stock dividend with the redemption of the remaining $70 million in Series B preferred stock outstanding mid-quarter. Average earning assets marginally increased to $4.3 billion as we opportunistically deployed the capital raise throughout the quarter. At quarter-end, leverage was 6.9 times shareholders' equity, and earning assets were $5.2 billion.

With the growth in the investment portfolio and the continued favorable conditions for the TBA dollar roll market, we expect sequential core net operating income growth for the second quarter versus the first quarter. Adjusted net interest income was essentially flat as declines in RMBS pool balances were offset by an increase in TBA investments. The adjusted net interest spread was slightly lower at 187 basis points versus 198 basis points last quarter. On the balance sheet, portfolio asset yields and TBA specialness were 12 basis points lower during the quarter, which was partially offset by the benefit from lower borrowing costs, which declined five basis points. TBA drop income increased 33% during the quarter as we more heavily invested in TBAs, but at slightly lower net interest spreads as TBA specialness was lower in the quarter. TBAs continue to offer superior returns versus repo borrowings. And today, our expectations are that adjusted net interest spread will be flat to modestly higher for the second quarter depending on prepayment speeds. With respect to prepayment speeds, the increase was well within the expected ranges during the quarter. Agency RMBS prepayments speeds were 18.4 CPR for the quarter versus 17.1 CPR for Q4, while overall portfolio CPRs, including the CMBS portfolio, were approximately 14 CPR.

That concludes my remarks, and I will now turn the call over to Smriti.

Smriti Laxman Popenoe -- President & Company-Chief Officer Information

Good morning, everyone, and thank you, Steve. I will begin with a review of the markets, our performance and then cover our current macroeconomic view and the outlook. Starting with the markets, please turn to Slide 18. And I'm going to bring your attention to the line at the top of the panel that says 10-year treasuries. We've now completed an incredible round-trip in the 10-year treasury yield. As of December 31, 2019, you can see that was at 1.92%. That yield touched something like 50 basis points in the first quarter of 2020, and we've come all the way back to 1.74% at the end of the first quarter. So it's been an incredible round-trip. I just wanted to point that out. The other thing to note here is just the incredible decline in repo rates. Again, on December 31, 2019, repo rates stood at 2%. And now -- one-month repo rate now is sitting in the mid-teens, 14 basis points. So it's -- the curve is steeper, and it's been quite a ride in the markets. For the quarter, two-year treasury rates were up to four basis points, while ten- and thirty-year rates rose eighty-two and seventy-six basis points, respectively. Implied volatility on swaptions broke out of the tight range of sixty to sixty-five where it traded in the second half of last year. It increased to an elevated seventy-five to eighty basis points per day range where it remains today. Shorter tenors were even more elevated during the quarter, which prompted us to rebalance our hedges. As you can see on this chart, MBS OASs were within a range of about fifteen to twenty basis points with even wider ranges when you include intraday volatility. Agency repo rates on the quarter declined seven basis points, and this reflects significant liquidity in the front end, some technical factors that have kept favorable financing costs at record low levels. We had an excellent quarter in which the cost of our two equity raises was more than offset with active management of the balance sheet.

As Steve mentioned, book value increased to $1.44 or 7.5% on a gross basis, less $0.45 cost of the capital raises, we get to the net of $0.99 or 5.2% increase reported for the quarter. Roughly 65% of the $1.44 or $0.90 of the book value increase was due to the portfolio positioning from the existing portfolio. MBS performed very well, and our hedges were positioned appropriately for the most. As we explained on last quarter's call, we came into this quarter with a view that a steeper curve was highly probable given vaccine development and deployment, fiscal stimulus, treasury supply, and inflation dynamics. Hedging positions in the long end and options reflected this view, and this view largely played out over the quarter. The other 35% of the book value increase came from the timely deployment of capital from the two raises. As we mentioned last quarter, we expected curve volatility to create opportunities to add assets at attractive returns, and we were able to capitalize on the spread widening that accompanied large moves in interest rates. We're ending the quarter with leverage at 6.9 times, up about 0.5 times from year-end. It's important to understand the numbers behind the leverage. Earning assets actually ended up quarter-over-quarter, almost $1.1 billion higher, including TBAs. The decline in leverage also includes the fact that book value increased and the equity raise also reduced leverage. Peak month-end leverage during the quarter was 7.7 times. So the balance sheet is actually larger, even though the leverage doesn't seem to have been affected as much.

So this last quarter, we were active in managing all aspects of our balance sheet, both the left and right-hand side, as Byron mentioned. Our options-based hedges on the long end of the yield curve performed very well, and we actually booked gains and rebalanced into more future-based hedges to navigate the coming quarters. You can see that on Page 11. In terms of repo management, our focus on the technicals was essential this quarter to position our book to be more short-term to take advantage of falling repo rates, and we're now locking in much lower rates into the second and third quarters. Post-quarter-end, we took some profits on our 30- and 15-year MBS TBA positions. We're expecting to reinvest at wider levels. Leverage is about 6.1 times and book value is flat versus quarter-end. Turning now to our near-term macroeconomic view and outlook. We expect a range-bound environment to support MBS valuations with the ability to invest during bulks or volatility. Specifically, declining pay-ups on specified pools, historically low repo rates, and unprecedented dollar roll specialness are unique potential opportunities in our focus. In terms of rates in the curve, the front end is still anchored. The Fed has defined itself as being very patient, having an outcome-based response function versus projection-based. In our view, this means preparing for a more volatile set of outcomes in the longer end of the yield curve as the data begins to flow. And the environment has shifted from rates just moving steeper and higher to more range-bound with possible surprises in both directions. While we think the market eventually evolved into a steeper curve and higher rates, we think it will chop through some range-bound action in the interim. And the implications for Dynex, a range-bound environment is really a great environment to earn carry. And so we spend time on disciplined preparation for more volatility and surprises, we focus on the data, and we believe we'll have chances to add assets at low double-digit returns just as we did last quarter. And eventually, the steeper curve will lead to a higher return environment and wider net interest spreads. In terms of mortgage spreads and returns, Agency RMBS has been very well supported by both bank demand and Fed demand coming into this quarter. We've also had lower net supply, slower prepayment speeds and now we have slightly higher mortgage rates.

We expect strong MBS performance to continue, supported by these technical factors. And the implication for Dynex is that book values will be supported by this performance. Any discussion of the taper or technicals where demand starts to fall away from mortgages, we believe, creates investment opportunity and we're well-positioned to take advantage of that. In terms of prepayments, they remain a driver of returns, particularly in higher coupons and in specified pools. The winter seasonal slowdown that typically comes was actually very modest. Interest rates, mortgage rates specifically were lower during the season and the responsiveness of borrowers to low rates now appears to be really strong. So the implication for Dynex here is that our coupon selection and flexibility from moving between TBA and pools will still be a major differentiating factor in creating returns, and we believe, again, provides the opportunity to add assets accretive. Turning to specified pools. On-Page 19, we have a pricing matrix that just goes through by coupon, what happened to various types of specified pools over the quarter. And the first quarter unequivocally was a bad quarter for specified pool pay-ups as interest rates rose. You can see there's been a dramatic decline in pay-ups since year-end, particularly on the higher coupons. And in our opinion, this offers the opportunity to be very strategic and shift between TBA and pools, which is also supported by low repo rates at this point. And finally, just a comment on dollar roll specialness. We expect to see continued specialness in the two and 2.5 coupons well into the third quarter. And the decline in repo rates that we've recently seen has actually made pools more attractive than they were before compared to TBAs. And so we continue to look at that trade-off and invest selectively in spec pools. Over the next few quarters -- last quarter, flexibility and nimbleness were really important, and I think they both remain very key to our success in managing the portfolio. At the current leverage, which I mentioned, we had delivered post-quarter-end and balance sheet size, which is about $1 billion higher versus quarter-end -- versus year-end, we still expect core net operating income to continue to exceed the level of the dividend. And as Steve mentioned, the second quarter will include some accretive benefits of really good dollar roll levels that we have locked in through June.

We are looking ahead in the next few quarters the actual data, the potential for a Fed discussion of tapering, possible technical reduction in demand away from the Fed, so perhaps banks stepping away; and overall volatility in the long end of the yield curve to offer opportunities to add assets. We're also watching carefully the evolution of credit markets, particularly the transition from -- for banks to foreclosure in residential and commercial sectors. And we think that there might be some opportunity there, but believe that develops closer to the second half of the year. In terms of leverage, I mentioned we'll continue to manage the portfolio composition and size based on the opportunities in the market. At this point, we're estimating, again, another two to three turns of capacity that offers additional total economic return power of anywhere between 1% to 3%. And just as an example, one turn of leverage invested at 10% economic return is $0.24, which represents a meaningful upside to returns from today.

I'll now turn the call back to Byron. Okay. First, let me finish with a couple of thoughts. Our team has always operated with great integrity and unwavering commitment to our values and a focus on supporting our community. Given our fiduciary responsibilities, our highest priorities are to be a reliable steward of capital, transparent in our actions, and good corporate citizens. Dynex is a strong diverse organization, building on a thirty-year vision to create a multi-generational organization that continues to stand the test of time. In our annual report this year, please take a look, we shared our purpose, core values, and vision. We live and breathe these elements in our daily work and believe this is a distinguishing factor for our company. This is reflected in our long-term industry-leading performance as shown on Slides five and six. Dynex has the highest three- and five-year returns, along with the best Sharpe ratio among fifteen peers, comprising agency and hybrid mortgage REITs. Our management team, our Board of Directors, and I are personally committed to investing alongside our shareholders. As we disclosed in the proxy, together, we are among the top five shareholders on a percentage basis in our common stock. Let me leave you with this thought. This continues to be a great environment to generate a strong economic return. We remain optimistic about our future and our prospects for 2021 and beyond. And with that, operator, I'd like to open the call for questions at this time.

Questions and Answers:

Operator

[Operator Instructions] Your first question today comes from the line of Bose George.

Bose George -- KBW -- Analyst

So first, can you give us an update just on book value quarter-to-date?

Smriti Laxman Popenoe -- President & Company-Chief Officer Information

Both the book values flat quarter to date.

Bose George -- KBW -- Analyst

Okay, OK, great. And then just in terms of leverage, can you just talk about what you need to see I mean before we see that kind of moving closer to normalize?

Smriti Laxman Popenoe -- President & Company-Chief Officer Information

Yes. I mean we're -- we've been in a range over time. Our leverage was as high as 7.7%, as I mentioned in the first quarter. It's stepped back down here post-quarter-end because we took some profits. On average, I'd say we're -- we -- over the last four or five quarters, if you look back and see, we've operated at a leverage of about 7%, 7.5% -- 7.5 times. And what it takes to get us back up there is really wider spreads and better returns. So we saw an opportunity to buy bonds at really great levels in the first quarter. We had a tremendous run just even within the quarter and coming into this quarter on some of those purchases. We felt like that had run its course, and we were reloading at this point to see if returns get better in the coming quarters. So returns have to get to that double-digit ROE for us to get back in. And I'll just make the point that even at this lower leverage level, we still expect to exceed -- core EPS to exceed the level of the dividend in the second quarter significantly relative to even the first quarter. So at this point, it's just really a risk-return trade-off, and we'll get our way back to seven times here, and it's going to be a matter of what opportunities we see.

Byron L. Boston -- Chief Executive Officer, Company-Chief Information Officer and Director

Bose, I didn't quite hear all of your comments, but I could -- you were breaking up a little bit on my end. But I just want to emphasize that when we say this is a great environment, one of the things behind the word great is, what we saw in the first quarter was some intra-quarter volatility that you as an analyst or even other investors may not see unless you're in the mortgage market. That gives you great opportunities to invest. And I think from a macro perspective that the markets will continue to give us opportunities. It's a great environment. With our refinancing costs fixed, the markets are going to continue to give us great opportunities to invest and manage our leverage. So we are very tactical and very strategic about every decision we make, and we'll continue to be that in the future.

Operator

Your next question comes from the line of Doug Harter with Credit Suisse.

Doug Harter -- Credit Suisse -- Analyst

Smriti, you talked about specified tools declining -- the payoffs declining in the quarter. Can you just talk about how they performed versus hedges and versus expectation? And just kind of comment into a little bit more detail as to maybe where you see opportunities there [Indecipherable] TBAs?

Smriti Laxman Popenoe -- President & Company-Chief Officer Information

Yes. It's a great question because, again, performance is all about your hedge ratio. And with specified pools, there's a couple of different nuances. One is that when rates do go up, you have the TBA underlying that is going to extend and the specified pool pay-up, which also "extends" by declining when rates go up. So your duration on specified pools, which helps you a great deal when rates go down, can actually hurt you if you don't have it modeled correctly and think through all the components of how the cash flows change as interest rates rise and the curve steepens. In general, I would say that specified pools moved in line with their duration. Pay-ups on higher coupon specified pools came down, right? But the dollar price of the underlying TBA did not come down as much. And so that was an offsetting factor. So in general, I would say the surprises in spec pools were simply the magnitude of the decline in pay-ups. I mean you can see in the 3% coupon, there were pay-ups in the 6.6 points above TBA, and these things were trading at $110 price, and they're now substantially lower. So hopefully, if you own those, you were running them for a very long duration and you have that hedged correctly. Our spec pools have been lower pay-up spec pools in the 2% to 2.5% coupon. We've always thought of those as longer duration instruments, and you can see the hedge performance for the first quarter was very good, and that hedge ratio was sort of captured accurately. In terms of where the opportunity is at this point, right, there's opportunity in the 2.5% coupon in -- that's where we see the biggest area here because you can see, for example, New York, only pools have come down substantially. The 110,000 max, which we don't show on here, but those are areas in which we find attractive returns relative to the repo. And then finally, I will say, just in terms of returns themselves, the TBA still offers very good returns when you include the role. And I've mentioned this on calls in the past, it's not just your level of financing relative to repo rates that matter. As rates go up, the yield on the underlying cheapest to deliver also goes up. And so the nominal carry being offered by TBAs right now are high relative to year-end. So all of that factors in. The only thing I would say is that it's just -- it's just a -- because repo rates are so low and pay-ups have come down, the relative attractiveness of specified pools now starts to become a good option for us to diversify away from TBAs.

Doug Harter -- Credit Suisse -- Analyst

I appreciate that. And then just one last. As you think about your hedge construction today, it seemed like you guys increased the treasury futures position. Just -- I guess, how do you weigh that versus swaps versus options in today's environment?

Smriti Laxman Popenoe -- President & Company-Chief Officer Information

Yes. We really prefer treasury futures in terms of flexibility. We have not yet wandered back into swap land given the uncertainty around LIBOR. And the swap market is still a developing market. So we have that on our radar with respect to the ability to sort of lock-in financing rates, but still don't believe that that's necessarily a liquid and flexible enough option for us at this point. On the options side, very interestingly, we saw implied volatility really pop in the first quarter. So that allowed us to sort of taking some of the hedges, rebalance out of the options, and put on more plain vanilla duration-based hedges. And that's a function of two things. One is that we took profits on something that went up. That was great for us to do. The second thing was, from here on out -- we've had a massive steepening in the yield curve. And from here on out, we're just -- our macro view is that the markets and we are in a wait-and-see mode to be able to range-bound trade for the next few quarters until we see real data, and we start to see what the next direction is in terms of how the yield curve will evolve. So at this point, we feel we can be somewhat patient in looking at that positioning. And the last piece on that, Doug, is that from -- we have been using options and futures and swaps and -- to do a lot of the movement in our portfolio to rebalance for rate moves. It's now shifting to an environment where we might actually be able to start to do rebalancing on the asset side. So you could go up in coupon. You could have more specified pools. There are other ways in which you can adjust your hedge ratio, if you will, to manage the market. So for that reason, we've been OK having the futures position on and then working our way into either options or a different coupon profile. Those are some other ideas that we have going into the next few quarters.

Operator

Your next question comes from the line of Eric Hagen with BTIG.

Eric Hagen -- BTIG -- Analyst

So when we look at Slide 18, and we see the negative OAS in the 2% and 2.5% coupons, how do you think investors should square that with the really healthy return that you guys are generating with 7 times leverage? Like in other words, where are you guys maybe not hedging that allows you to earn that higher spread? And then second question, can you just maybe hone in on some of the rebalancing that you expect if rates do back up further? Like where is there maybe some more extension risk in the coupon stack? And can you share what types of specified pools you guys are buying to?

Smriti Laxman Popenoe -- President & Company-Chief Officer Information

Sure. Yes. So I always have a saying, which is you can't eat OAS. So yes, you've got this OAS, but you can't eat it. And I think the big difference just in terms of where returns are just nominally, the yield on Fannie 2s started the year at 1.4%, and we're now at 1.9% on Fannie 2s. So just the nominal yield is fifty basis points higher. The other thing that the OAS doesn't show you is the specialness in the role. So that's an additional 20 to 40 basis points of return that you're getting. So our performance in 2s and 2.5s and how we performed in the first quarter is less a function of the OAS and more a function of the mortgages performing well due to the technical factors from Fed and bank demand. So mortgage prices didn't move as much. They didn't move as much as OAS or duration even suggested, right? And the second piece is just our hedge positioning. So our hedge positioning was in the back end of the yield curve. And we had options on the back end of the yield curve, and that's what we were hedging. So you asked the question, what weren't we hedging? We were hedging the back end of the yield curve, and that's where we expected most of the move. What we weren't hedging was the zero- to five-year part of the yield curve, which didn't move as much, right? So the back end of the yield curve is what we were hedging. That's how the return got generated. In terms of 2s versus 2.5s, again, the important thing to remember on these two coupons. 2s, I would say, look to us more like duration or curve trade; and 2.5s have more convexity and prepayment risk. So you're combining those two things by investing in those coupons. At some point, the risk in 2.5s, especially with lower dollar prices in that coupon has shifted to where that prepayment risk in that coupon has actually come down, right? So that's another reason for us to include 2.5s in the mix of our coupon selection at this point. The spec pools that we're purchasing, are either state-specific spec pools. So New York is a big place for us to place. Florida is another state that offers something like almost 30% lower speeds than the typical TBA, cheapest to deliver.

We haven't yet played in the loan balance space. But we're really looking at the coupons and the spec pool areas where specified pool pay-ups have come down substantially, and those are areas where we think that there's value. Your second question was about rebalancing and what we expect to do as rates go higher from here, OK? So I'm going to answer that in two ways. One is our macro views from here is that we actually are going to be somewhat range-bound until the next catalyst comes through for a move in the markets, either higher and steeper or lower and flatter. And we think both of those events are actually quite probable. So we have to be ready to rebalance in either direction. We're choosing at the moment to have fewer hedges in options because options prices have gone up a lot and there's a lot of demand for puts. And so we think that that's maybe not as efficient a way to buy up rate protection. We think we can actually manage the asset side of the balance sheet a little bit more flexibly to address any kind of rates up the type of scenario. And then we have to be ready, and this is why we have futures, to be able to withstand the rates down. So the hedging is going to be more of a day-to-day, quarter-to-quarter type thing. And any purchases of options from here will probably be more balanced in terms of both call options and put options, quite frankly, because that's kind of how we're seeing the macro environment. And then you asked a question about extension. At this level of rates, Fannie 2s are probably pretty fully extended. 2.5s have the most negative convexity between the two of those coupons. And then obviously, the 3% coupon is a very negatively convex coupon as well. So those two coupons, in our opinion, will be where most of the duration drift occurs and that's why you need to be ready to be very flexible on the hedging side.

Operator

Your next question comes from the line of Trevor Cranston with JMP Securities.

Trevor Cranston -- JMP Securities -- Analyst

Question on the portfolio composition and, obviously, the TBA position becoming a larger part of the portfolio. Can you talk about any considerations with respect to REIT tests if TBAs were to remain kind of the -- more than half of the portfolio over the balance of the year? Does that -- does that bump up against any issues with either income or asset tests that are something you'll need to consider over the course of the year?

Stephen J. Benedetti -- Executive Vice President, Chief Financial Officer, Chief Operating Officer and Secretary

Trevor, it's Steve. We've looked at that, and we're comfortable with TBAs at this level versus our exposure, if you will, on REIT test or compliance with REIT test in the [Indecipherable] test. We don't see that as an issue at this point.

Trevor Cranston -- JMP Securities -- Analyst

Okay. Got it. And then as you guys think about the Fed potentially announcing taper at some point, maybe later in the year, can you share your thoughts around sort of how you think the MBS market is likely to react to that? Obviously, we've already had pretty significant movement in rates and a lot of extension. But I guess just in terms of MBS performance, can you guys kind of talk through how you see that playing out once that taper is announced?

Smriti Laxman Popenoe -- President & Company-Chief Officer Information

Yes. Thanks, Trevor. That's actually a really good question. So again, I think people think back -- hear the word taper and they think back to 2013. We don't believe this is anything like 2013 because you have a Fed that is much more focused on forwarding guidance and telegraphing what it is they're going to do. And if they're even thinking about, thinking about, thinking about it, we're going to know well in advance. So the biggest factor on the taper is actually what percentage of the market the Fed is buying relative to the net supply in the marketplace. Right now, the Fed is absorbing a significant amount of that. And you also have incremental demand from banks and other investors. So in our view, the way this -- the announcement itself is -- won't be a surprise necessarily. And what is going to end up driving mortgage returns is going to be technical, which is good old supply versus demand. And one of the favorite things for mortgages coming into this quarter has been higher rates, slower speeds, and less supply. So you really have to see two things happen. As the Fed starts to step away from the market, the net supply will start to get bigger. And in our opinion, that should naturally make mortgage spreads wider if there's nobody else to step in and take in that demand. So that's an opportunity, right? But we don't see -- unless we have a really significant communication screw-up from the Fed to where it's a market surprise, just a knee jerk, spread widening, crazy widening, that's not the highest probability scenario here. The highest probability scenario on the taper in our minds is literally how does the Fed gradually extract itself in the market? What is the impact on net supply? What other investors step in to take that incremental slack? And quite frankly, we think that's a great time for us to be positioned to take up that slack.

Operator

[Operator Instructions] Your next question comes from the line of Christopher Nolan.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Nice quarter. On the strategy front for capital, given where your share price is, where are you thinking about raising additional capital? And I realize that your leverage ratio is low. But given the comments, there's a potentially attractive market opportunity out there, is the thinking to raise more capital? And would it be preferred or common? Full detail would be great.

Byron L. Boston -- Chief Executive Officer, Company-Chief Information Officer and Director

Sorry, I was muted. Chris, this is Byron. I understand we're very thoughtful about how we raise capital. So I'm going to just reiterate what I think Steve and Smriti said. It was a great first quarter to raise capital, to have capital in our pocket because the opportunities were fantastic. We still believe the opportunities are fantastic, and we have a long-term strategy for building our company. So I'm going to be a little long-winded, but I'm going to make sure you understand the principles in which we operate. We have no desire to mimic the largest companies in the business. We're very, very opinionated about being a nimble company, and there's only so large we want to grow. So we're not reckless. We're not just running to grab capital. We don't earn fees because we charge you fees for the amount of capital that we have under management. So we're very thoughtful about this. And we're being very opportunistic, which is what you saw in the first quarter. We saw a phenomenal opportunity to raise capital, so we raised capital. And we were in a position to take advantage of what I call the second or I mentioned the second, this kind of intra-quarter volatility, whether it's in spreads and hedge valuations or whether it's in specified pool levels or TBA levels, there's enough volatility -- intra-quarter volatility right now for skill team to give us the opportunity to really generate returns for our shareholders. So from a long-term perspective, we are thinking still to grow our company. We would like to give our shareholders more liquidity in our stock. We would like to attract those shareholders who want to see more liquidity, have not invested in Dynex Capital to date. We believe every investor should have an opportunity to own this management team. We believe we have the most skilled and experienced management team. We'd like to make ourselves available to every shareholder to do that. But to do that, we need to continue to add more liquidity to our stock. That's what we've gotten the feedback from some of the largest shareholders who say, well, we really like you, but your liquidity in your stock is not that great. So those are some of the principles that we have -- that will drive us as -- our decision-making as we look forward into the future.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Great. And the dividend. Given that you guys are earning the dividend quite handily, I would think the dividend would have to go up just because of your REIT status. Is that a fair look at it?

Byron L. Boston -- Chief Executive Officer, Company-Chief Information Officer and Director

Well, let me -- I'm going to let Steve give some of the technicals on the REIT rules. But let me just say this. We are a dedicated management team to generating cash income for our shareholders. That is the key focus of Dynex Capital. However, we're also very focused on our total return experience. What we don't want to do is attempt to pay a dividend that is not in line with our macroeconomic outlook. Right now, we're in a very uncertain economic environment. The world is evolving still. I know we're like 15 months since the whole pandemic started, but the fact of the matter is, this is still an evolving health crisis, it's still an evolving economic situation. And as such, our macroeconomic view will be at the core of our thought process around the dividend. At this point, Steve, you can jump in here and just give the real technicals around how much we're forced to pay out or how much should we have to pay? We've got flexibility. The most important message I want to leave you and our shareholders. We are committed to generating cash income for our investors, but we're so committed. Not trying to give generally too much cash income that we blow you away with the decline in book value or major book value correction. So we're managing our risk. Steve, do you want to give any technicals around what limitation we may have in terms of dividend?

Stephen J. Benedetti -- Executive Vice President, Chief Financial Officer, Chief Operating Officer and Secretary

Yes, sure. Chris, the -- just thinking about the first quarter, I mentioned $36 million in excess economic return over the dividend, some of which is realized and some of which is not realized, and you think about that as potential taxable income. We have carryforwards from many, many years ago that have not yet expired that we can use to manage the dividend requirement as well as some losses from some -- from hedging activity many years ago that we also are carrying forward that can offset that distribution requirement at this point. So we have the flexibility, as we sit here today, to be able to, from a technical REIT test compliance -- distribution requirement perspective, be able to manage the excess earnings and retain those to grow the capital base. So we have that flexibility. It becomes then a strategy, as Byron just alluded to.

Operator

And there are no further questions included at this time. I'll turn the call back to Mr. Boston for any closing remarks.

Byron L. Boston -- Chief Executive Officer, Company-Chief Information Officer and Director

Thank you, operator. Thank you all for joining the call. And for those of you who are investors, we really appreciate you owning Dynex stock along with us at the management team and at the Board level. And we look forward to seeing you next quarter during our second-quarter conference call. Thank you. Have a wonderful day.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Alison G. Griffin -- Vice President of Investor Relations

Byron L. Boston -- Chief Executive Officer, Company-Chief Information Officer and Director

Stephen J. Benedetti -- Executive Vice President, Chief Financial Officer, Chief Operating Officer and Secretary

Smriti Laxman Popenoe -- President & Company-Chief Officer Information

Bose George -- KBW -- Analyst

Doug Harter -- Credit Suisse -- Analyst

Eric Hagen -- BTIG -- Analyst

Trevor Cranston -- JMP Securities -- Analyst

Christopher Nolan -- Ladenburg Thalmann -- Analyst

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