Dynex Capital Inc (DX) 2021 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the Dynex Capital Third Quarter 2021 Earnings Results and Conference Call. (Operator Instructions) Thank you.

I would now like to turn the call over to Alison Griffin, Vice President, Investor Relations for opening remarks. You may proceed.

Thank you. Good morning, everyone, and thank you for joining us today for the Dynex Capital Third Quarter 2021 Earnings Conference Call. The press release associated with today's call was issued and filed with the SEC this morning, October 27, 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.

As 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 will, believe, expect, forecast, assume, anticipate, estimate, project, plan, continue and similar expressions identify forward-looking statements. These forward-looking statements reflect our current beliefs, assumptions and expectations based on information currently available to us and are applicable only as of the date of this presentation. These forward-looking statements 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, 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.

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

Good morning. Thank you. Thank you, Alison, and thank you, everyone, for joining our third quarter call. As many of you know, who have followed us for a long time, we manage our shareholders’ capital for the long term. One of our core strengths is understanding the environment in which we operate, positioning forward and adjusting that position as the environment changes.

We believe the beginning of this decade marked a major change in the global economic and capital markets environment. It has been a great environment for Dynex to build on our solid track record of industry-leading performance, as you can see on Slide 12, including a 21% cumulative shareholder total return since December 2019.

As we finished the third quarter, we continue to be excited about how we have performed during this period and how we have positioned our balance sheet for the future. We're in a unique moment in history, and we believe every asset management team around the globe will be challenged by unforeseen surprises as we have already continually witnessed over the past 22 months.

At Dynex, we believe this environment calls for patience, discipline and flexibility. We also believe this is a great environment for our stakeholders as we expect to see attractive opportunities to deploy capital. Our experienced management team has proven time and again that they have a flexible mindset to successfully navigate any operating environment and to generate above-average cash dividends and a solid economic return for our shareholders.

And with that, I'm going to turn it over to Steve and Smriti, who will give you far more details around the specifics of the third quarter.

Thank you, Byron, and good morning, everyone. For the third quarter, we reported comprehensive income of $0.09 per common share and a total economic return of $0.06 per common share or 0.3% for the quarter. We also reported earnings available for distribution of $0.54 per common share, a 6% increase over the last quarter and well in excess of our $0.39 quarterly common stock dividend.

On a year-to-date basis, we -- through the third quarter, we have paid $1.17 in dividends. Book value per common share declined modestly to $18.42 from $18.75 or 1.8% primarily from economic losses on the investment portfolio principally in lower coupons relative to our hedge position. As Smriti will discuss later in her comments, we've recovered this decline post quarter end with the curve steepening, which has occurred since then.

Beginning this quarter, consistent with others in our industry, we have renamed our non-GAAP earnings measure to earnings available for distribution from core net operating income. All prior quarters have been relabeled to earnings available for distribution. There have been no changes to the calculation of the non-GAAP measures and the adjustments made to reconcile the comprehensive income, the earnings available for distribution are identical to those previously used to reconcile the core net operating income.

We believe that the cash and earnings available for distribution more accurately reflects the principal purpose of the measure and will serve as a useful indicator, but not the only indicator in evaluating the company's performance and its ability to pay dividends to common shareholders. Other factors that are considered in the dividends to common shareholders include our taxable income, total economic return, gains and losses, including carryforwards for tax purposes and our outlook for future performance.

Turning back to the discussion of the performance. The increase in earnings available for distribution was driven by multiple factors. First, our earning asset yields improved 3 basis points, while overall repo borrowing costs were down another 3 basis points. The improvement in asset yields was largely attributable to slower prepayment speeds during the quarter as we benefited from adjustments to the overall prepayment profile of the pass-through portfolio through asset purchases.

Agency RMBS prepayment fees were 11.3 CPR versus 19 flat CPR in the second quarter. Secondly, TBA drop income contribution improved by 5 basis points primarily from continued dollar roll specialness during the quarter. The funding cost benefit on dollar rolls versus repo and RMBS was approximately 60 basis points during the third quarter versus 49 basis points last quarter. And third, average earning assets increased as we deployed equity capital proceeds raised in both second and third quarters. Together, these items drove a 4% -- 4 basis point increase in our adjusted net interest spread to 2.1% for the quarter.

Offsetting these items was an increase in G&A expense of approximately $800,000. The majority of the increase related to legal fees related to a contingent matter that we have previously disclosed in our SEC filings and which is now has been fully briefed for the court. We do not expect these costs to repeat going forward.

From a portfolio perspective, from quarter-to-quarter, we reduced our investment portfolio, including TBAs by approximately $500 million, mostly through reducing our investment in TBA 2.5. This occurred towards the end of the quarter and resulted in adjusted leverage declining by nearly a full turn to 5.9x at the end of the quarter. As noted on Slide 23, our investment portfolio is approximately $4.8 billion at September 30, with $4.3 billion invested in agency RMBS and TBAs.

From a hedging perspective, we reduced the notional balance of our hedges by a similar amount. The overall notional balance of our hedges at September 30 was $4.3 billion, as indicated on Slide 19, with the bulk of the hedges protecting book value from increases in rates in the long end of the curve. Overall, total shareholders' capital grew approximately $18 million during the quarter, which includes approximately $28 million in new common equity raise due at the market offerings in the quarter. Year-to-date, we have raised approximately $224 million in new capital at a gross price before commissions of $18.80.

Our market capitalization adjusted for all shares outstanding is $650 million today versus $420 million at the beginning of the year, substantially increasing the liquidity of our stock for our shareholders, while at the same time, unlocking the operating leverage in our business. Our stock price is virtually unchanged year-to-date, and our total shareholder return for 2021 is 6.9% through yesterday. That concludes my remarks.

And I will now turn the call over to Smriti.

Good morning, everyone, and thank you, Steve. I'll briefly discuss performance drivers for the quarter and then turn to our macroeconomic outlook and portfolio construction. We communicated last quarter that the risk of a whipsaw in rates was substantial. During the quarter, the 10-year treasury yield touched a low of 1.13% twice and entered -- ended the quarter virtually unchanged at 1.46% with a 44 basis point intra-quarter trading range.

We also indicated, during the quarter, that we had maintained a portfolio structure hedge with the long end of the yield curve through July, and we continue to hold that hedge position through today. Book value on September 30 was at $18.42, and thus far, as of October 22, book value is up between 2% to 2.5%. Our trading discipline and top-down macroeconomic centric approach continue to serve us well and remain the cornerstone of our decision-making framework.

Leverage at the end of the quarter stood at 5.9x, down from 6.4x at the beginning of the quarter. As Steve mentioned, we decreased our exposure to convexity by selling TBA Fannie 2.5 and to add to dry powder to make future investments. With the recovery in book value quarter-to-date, leverage stands at 5.6x and the liquidity position is over $500 million.

At this current level of the balance sheet, we expect earnings available for distribution to continue to meet or modestly exceed the current level of the dividend in the fourth quarter with any excess returns providing a cushion to capital. Book value will continue to fluctuate with the level of interest rates and mortgage spreads. Future book value volatility is mitigated by our low leverage, substantial levels of liquidity and the dry powder that we have to deploy capital opportunistically.

Turning now to our macroeconomic outlook that is the foundation for our positioning. The global economy is in a period of transition to a post pandemic environment. And as such, we expect to see new risks and new opportunities develop over the next few quarters. In the very short term, we are focused on specific risk events on the horizon, including the announcement of the taper, resolution of the debt ceiling, passage of any fiscal stimulus, a possible leadership transition at the fed, the composition of the new fed and international risks such as the Japanese elections and spiking fuel prices to name a few factors.

In the intermediate term, the speed of reopening, adjusting to living with COVID, inflation pressures from supply imbalances, labor shortages, fuel cost spikes are all having differing impacts across economies. Global central banks are adjusting their post pandemic strategies as inflation and growth trajectories are uneven and disparate across the globe. While most global bank policy remains highly accommodative, several have begun raising interest rates and have moved to hawkish language as inflation has accelerated. In the near term, U.S. data points to stronger growth, higher inflation and a tighter labor market, but the durability of these trends remains very difficult to parse out.

On the strength of this information, it is very clear that the fed is planning to taper later this month. That looks very likely to happen. In our assessment, it is still too early to arrive at conclusions on long-term trends for inflation, labor market and growth. And for this reason, the timing, the pace and the number of fed hikes is less clear. I must point out that the levels of inflation that we are experiencing and inflation expectations are among the highest in the last 20 years, and we are truly entering uncharted territory as global central banks attempt to exit their emergency interventions in the financial markets, trying to balance growth and maintain their inflation fighting credibility.

Our team at Dynex is navigating the coming months by preparing for elevated uncertainty, higher volatility and the increased probability of surprise factors. We are also preparing for the impact of a more complex, turbulent and evolving domestic and international political situation. These factors lead us to maintain an up in credit, up in liquidity position to position most of our hedges on the long end of the yield curve and to hold significant amounts of dry powder for investment during bouts of volatility and most importantly, to hold a very flexible portfolio and to have a flexible mindset to respond to evolving conditions.

Let me now discuss our market outlook and portfolio construction. The portfolio today is constructed with lower leverage that reflects the uncharted territory we are in. Our hedges remain focused on the 7- to 10-year part of the curve, reflecting the interest rate risk on our longer-duration asset portfolio. We have selectively added hedges through the year in the 5-year part of the curve and options remain a core holding. Page 8 in the slide presentation shows our current sensitivity to interest rates.

From a financing perspective, we expect that front-end rates will remain low, close to 0 through most of 2022, providing a solid base from which to generate returns. However, we're not taking this for granted, we are selectively and strategically locking in lower financing levels by taking longer-term repo. On Slide 20, our weighted average contractual days to maturity of our repo book was about 169 days at September 30 as we targeted longer tenure for our roles between 3 months and 10 -- and 12 months. Roughly 50% of the book had a contractual maturity that fell in the 6- to 12-month range. We continue to target longer-term roles at opportunistic levels.

Turning now to agency MBS spreads. It's really a mixed story between fundamentals and technicals, and we believe spread volatility will be driven by macroeconomic events versus factors specific to the MBS market. The fundamentals for agency RMBS are still challenging as we see many factors that will keep refinancing levels higher and net supply elevated. The structure of the mortgage finance industry is drastically different today. There are more public nonbank mortgage companies subject to quarterly profit metrics now than any other time in the last 20 years. This will be a major factor in driving competition to keep mortgage rates low despite higher nominal treasury yields, and this will keep the pressure up on net supply.

Government policy also favors broader access to refinancing with potential modifications from the GSEs to loan level pricing adjustments, therefore, lowering the mortgage rate that's available to consumers, once again, meaning that higher coupons remain vulnerable to prepayments and lower coupons susceptible to supply. The technicals for RMBS are also challenging as the fed begins to exit, and it is unclear whether bank demand will continue at the same level as early in 2021.

Market psychology and agency MBS spreads is bearish with many investors holding underweights and strategists recommending neutral or underweight positioning. With this backdrop, we believe agency RMBS spreads could widen up to 10 to 20 basis points as the taper begins to be implemented, but we think this is more likely to happen during bouts of volatility.

Page 9 on our slide presentation shows our portfolio sensitivity to changes in credit spreads. We also expect agency RMBS spreads to be more volatile and directional, widening in rallies and tightening in sell offs. We do expect to increase leverage in these situations, and we are always looking for a good window to make this adjustment. We expect to make an initial adjustment in leverage back up to 8x and when appropriate up to 10x. Longer term, we believe there will be good support for MBS spreads. The fed's balance sheet will create a powerful stock effect that will limit spread widening.

Demand for money managers as MBS become a high-quality alternative to corporate bonds and lower net supply from potentially higher rates will also provide an additional buffer against wider spreads. We believe that holding a flexible, liquid, high credit quality position, even as spreads widen, we can manage both sides of our balance sheet to position for solid long-term return generation.

So to wrap up, the steep yield curve and low financing costs support our opportunity to generate solid returns for our business. We expect this to continue well into 2022. Book value is higher versus quarter end by 2% to 2.5%. The portfolio is well positioned for returns to cover or exceed the current level of the dividend today. The low leverage that cushions book value and dry powder to drive forward earnings growth provide a solid foundation for return generation.

Specifically, we are entering the next few months with over $500 million in liquidity, almost an all-time high for Dynex, relatively low leverage of 5.6x. That puts us in a solid position to navigate the environment and limits the risk to the existing portfolio. We have dry powder for at least 3 turns and up to 5 turns of leverage. Each turn of leverage invested at 11% return adds roughly 1% or $0.24 per share incremental return annually. This is significant upside to the 9% dividend yield on our common shares that are trading somewhere between 94% and 95% of book value today.

The most important principles for the environment we're in right now, and this is how we're operating our discipline and patience while continuously assessing the environment as it will take time for the economic picture to become clear. We stand prepared for the risks, and we're ready for investment opportunities as they arise.

I'll now turn it over to Byron.

Let me wrap up with a couple of comments. Dynex Capital is the oldest REIT focused solely on financing real estate assets in the United States. We've encountered and navigated every market environment for 33 years. Today, we are building a resilient organization to last the next 33 years and beyond. We're making investments in people, processes and technology that will allow us to rapidly adjust to a world that is destined to change. We're also focused intensely on maintaining your trust by how we manage our risk, how we treat our employees and how we positively impact our community at large.

We are positioned for this environment, and we're excited about our opportunities. Through our years of experience, we have learned that the best opportunities can appear at the most uncertain moments in the capital markets. Please look at our journey on Slide 11 and join us as we continue to build our company on the foundation of ethical stewardship and excellent performance over the long term. Thank you.

And operator, we're open for questions.

(Operator Instructions) Your first question comes from Doug Harter of Credit Suisse.

This is John Kilichowski on for Doug Harter. First, thanks for the color around leverage here. And I see as we're at 5.6 turns now, you mentioned that 8 turns seems to be that target. What would you need to hear from the fed to start to take that up? And kind of what would be the pace of taking that to get towards that 8x target?

John, thank you for the question. So I guess we -- I'm not necessarily waiting to hear from the fed. I think it's really a question of finding the right moments of volatility and the market reaction to potentially things that the fed says, that would help us to make those investments. We're really expecting the next 6 months to give us those chances. There's a lot of factors in play here between now and March of next year. The curve volatility would be something that we would use as an opportunity to invest. So I think what you can think about us is, yes, we do want to take the leverage up to 8x. We do think we'll get the opportunity to do that selectively over the next 6 months.

And then just to put it in context of where returns are today, it's not that returns today are bad, returns today are actually quite good. It's just that we believe that we'll get a chance to really enhance existing returns during periods of volatility. So existing returns in low coupons are really quite solid. So we always have the option to take this leverage up, and we're just looking for that extra ability to put the alpha back in the portfolio. So I would say, in the next 6 months, we're expecting volatility to help us make that investment decision to get us back up to that 8x target.

Great. And just sort of on that comment you made about returns in low coupons. Could you just give me an idea of how attractive TBAs versus spec pools are and what those returns are and -- the level of returns are in each of those?

Sure, yes. So again, the local ones are still really the place in which we find the most attractive returns, 2s and 2.5s. Unadjusted for the roll, you're seeing sort of low double digits, 10% to 12% types of returns depending on where you hedge on the yield curve. Once you include the roll, you're adding another 3% to 5% returns based on the dollar roll at this point. So roughly, minus 30 to minus 50 basis points on the roll for implied financing. In 30 years, we're actually seeing outstanding financing costs in the 15-year market as well in the TBA position. So that's really providing an incremental 3% to 5%. But look, you're already adding that on to double-digit returns even without that on the TBAs.

Your next question comes from Trevor Cranston of JMP Securities.

Another question on the leverage. I guess in the very near term, as you guys look at the market, if we see spreads on MBS kind of roughly stay flat over the short term or even grind a little bit tighter, are you guys looking to reinvest pay downs? Or in that type of environment, would you potentially let leverage even continue to drift lower from where it is today?

That's a good question, Trevor. So we have tended to allow the leverage to drift down. Having said that, I think, again, in bouts of volatility, we would expect to make some type of investment decision, either on the asset side or the hedging side to add to returns. So I think the idea is 5.6x is a relatively good position. It might drift down a little bit lower, but really not looking to delever a whole bunch from this level.

Okay. That’s helpful. And then to follow-up on the comments you just made about the incremental returns that roll financing is providing in low coupons. Can you talk a little bit about how you expect the roll specialness to behave and evolve once the fed actually starts to implement taper?

Sure. Yes. So there's really 2 different components to that. One of the reasons there's a supply factor and a demand factor as well as the overall level of the asset yield itself. And typically, what you'll see here as the fed tapers we should see the specialness in dollar roll financing decline. But it also depends on the level of interest rates and what the current coupon is at the time.

So there are situations where you have coupons that are not being created, for example, in the 2% coupon, not really being the major supply coupon for the moment. The specialness in that coupon could persist for a little bit longer. The fed owns a lot of that coupon in their balance sheet. But you should see that level of specialness decline. And really, we anticipate as the specialness declines, the asset yield will typically adjust higher to reflect the lack of that specialness.

So there's a little bit of a push me, pull you type scenario. But once again, don't forget, you're already looking at relatively solid returns without the specialness in the dollar roll market at this point. So that is somewhat icing on the cake at the moment, which we expect to decline over the next 6 to 12 months. It won’t be immediate is the main point. It's not going to be like tomorrow. As soon as the fed tapers, we don't expect the roll to really like collapse.

Your next question comes from Bose George of KBW.

This is actually Mike Smyth on for Bose. So my first question is one kind of on the macro backdrop. When you think about the taper, some fiscal policy uncertainty and what's going on with inflation and how that all relates to interest rates and volatility. I was just wondering kind of high level what scenarios keep you up at night? And then what scenario is kind of the best case for agency MBS investors?

In terms of interest rates, you mean?

Yes.

Okay. Yes. Well, everything, I have to say, the environment is such where I think there's not much sleep to be had period. We are in a very unique environment, as Byron mentioned. This type of scenario has not been really experienced by the globe ever. And so we are up at night a lot, thinking about the risks and where these surprises could come from. So one of the key ways in which we manage our position is we're not here trying to predict what's going to happen. But instead, what we do is actually prepare for different scenarios to make sure that we're ready with a game plan in the event XYZ happens. So that's a real key in terms of how we position ourselves and how we respond to what happens in the market.

From here, significantly flatter yield curves or inverted yield curves would be scenarios that would be challenging for fixed income securities in general, mortgage securities in particular, right? So any time the curve flattens or inverts, I think you have that challenge. That's not in the -- necessarily the base case expectations in the market, but that would be a scenario, I think that would be challenging for agency RMBS. Other than that, I think, in general, you've got to think about agency RMBS a very liquid asset. Just because the fed is tapering does not necessarily mean lack of support for agency RMBS because of the stock effect of that balance sheet. So you will really see longer term good support for MBS spreads until the fed basically reduces the balance sheet and stops reinvesting. That reinvestment is a very powerful positive factor for agency RMBS.

And again, I can't emphasize enough how difficult it is to basically say, if X then Y in this type of market. There are so many factors in place that the market could price one thing today and price a different thing tomorrow. And that's where when you really have to understand what the underlying factors are and make sure that you know what position you're in and why you're in that position.

So today, the curve is flattening. A few days ago, it was steepening. We're ready to manage through all these gyrations. And we have a game plan for these scenarios. And the thing that keeps us mostly at night is just the potential for surprises, which is really massive at this point. So we're respecting that by having a low level of leverage. We're respecting that. And that's -- sometimes the best way to avoid risk is to not own it. And that's how we've expressed that in our low levered position.

Great. I appreciate the detailed response. And just one more question. Are you seeing any changes to or hearing any chatter with regards to MBS demand from banks just given the pickup in loan activity?

Yes. I mean I think that is a wildcard. As I mentioned, the technical factors in MBS, they're not that great, right? So you've got a net seller coming back into the market in terms of the fed, potential -- as this economy starts to pick up and loan demand starts to pick up, there's going to be less reason for banks to own this asset class or buy this asset class. It hasn't happened yet, but that is a wildcard. And without that, I think that's why you're going to really -- you're going to see potentially some challenges in MBS tightening too much from here. So if you look at the balance of risks, probably not too much tighter, a little bit wider, maybe not too much wider, but so spread volatility in the MBS market itself is not what concerns us. It's really the macro volatility that concerns us and has us in the position that we're in.

Your next question comes from Eric Hagen of BTIG.

Is there a point at which you guys need to move back into a larger concentration of pools versus TBAs to satisfy the whole pool test? Can you share how much flexibility you have on that front?

Eric, yes. So I'm going to let Steve describe to you the flexibility around that. We have tremendous flexibility around the whole pool test. That is actually not the main driver of the percentage of TBAs that we hold. So we are well in compliance with that. But I'll let Steve just describe how we think about the percentage of TBAs and what the metric is that, that's the relevant metric for that.

Eric, Smriti is right. The -- from a whole pool perspective, the value of the TBA is the net fair value. And so it's not a gross notional. So it doesn't really count that much against you from a whole pool perspective and managing to the 40 Act. From a REIT income perspective, you do want to make sure you're managing the exposure to your income test, the 75% test, the 95% test, particularly the 75% test. So we do watch that at these levels. And I think we've commented in the past on this at these levels, we're very comfortable being able to manage the REIT income tests for the TBAs that are on the balance sheet today.

Got it. Okay. Good. Good to know that you have the flexibility there. Okay. So being in the TBA and hedging with futures, I guess, commands, you could say a fair amount of attention and fine tuning, if you will. Can you shed light on how active you guys are in flexing in and out of those positions and turning over the portfolio right now?

Yes, Eric. So again, when I look back at this past quarter with the 10-year note touching 1 13 a couple times, the most important thing we did was actually not doing anything. It was hard. And so that takes discipline. It takes understanding the market that you're in. It takes understanding why the market moves the way it moved. So the only repositioning that we did last quarter was really getting out of that convexity risk in the 2.5.

And then we've methodically started to layer in some hedges in the front end of the yield curve in the 5-year part of the curve, and we've been doing that all year really. But beyond that, we do not want to over trade or over manage the position. So we do have some very core principles by which we're thinking about our hedge ratios and where we hedge on the curve.

But again, the second -- this third quarter was a quarter in which you could have really made a lot of mistakes over hedging. We don't think this is an environment where you're supposed to make many, many small decisions. We've chosen to -- and we think this is the right strategy, which is you really want to have a core position, and then you make adjustments around the edges. If anything, our biggest expression of the risk that we see in the market right now is the level of leverage that we have and how much dry powder we have to be able to add to that incremental return as we see opportunities come in.

Your next question comes from Jason Stewart of JonesTrading.

I appreciate the comments on elevated prepays and capacity in industry. And I was hoping you could sort of dig into that a little bit more. It sounds like maybe models overestimate burnout in your opinion. But when you look through up in coupon and spec pools, do you think there's anywhere to hide? Are there any pockets of value that you think remain out there?

So yes, there's always places to hide. It's just a matter of what price you're willing to pay and whether or not you get value for the money when you pay that price, right? So if you look at low balance 3.5s or 4s or anything of that nature, seasoned paper that's already somewhat burned out, there are definitely places to hide. And people with big positions in those coupons, have places to hide. If you're trying to enter that trade today, I think that's an expensive way to purchase call protection.

So I think that is a lot of IO risk and we've been hesitant to take that risk. We feel more comfortable really keeping our position in the lower coupons. I also think, structurally, there are many things that are fundamentally in play here to destroy returns from IOs in general, right, because there's -- the government policy is against you, the competition in the industry is against you. There's just structural factors in here that, over time, are just going to erode these returns. It may not show up in the pricing today.

But over time, I think if you're trying to buy this call protection at the price today, it's less likely that you're going to get value for your money over time. And for that reason, that's what explains our positioning. But there's no reason to believe that people who are already in the trade or have that position on won't realize value from that. It's just challenging to pay today's prices for that protection and expect that you're going to get value for money.

Right. That's helpful. So it sounds like you believe that whoever ends up being FHFA's head continues to push the credit box, at least marginally wider?

Absolutely. And it's already happening.

Okay. Great. And then, Steve, I just want to clarify 2 quick things. I make sure I wrote it down correctly. On the $800,000 of increased expenses, how much of that was onetime versus the operating platform expansion?

90% of it’s onetime.

(Operator Instructions) Your next question comes from Christopher Nolan of Ladenburg Thalmann.

On the question of the operating expenses, Steve, any sort of guidance you can give in terms of where you think operating expenses would be in coming quarters?

Yes. I think if you adjust, Chris, for that onetime, you’d get a pretty decent run rate.

Okay. So you expect it to be fairly steady?

Yes.

Okay. And then a follow-up question, the $27.9 million equity raise, is that net or gross of underwriting fees?

That's going to be net of all costs related to that issue.

At this time, there are no further questions. I will now turn the floor back over to Byron Boston for any additional or closing remarks.

Last word to our shareholders. This is a complex global environment, and you have a very seasoned management team, very disciplined and very comfortable in operating in a complex environment.

So with that, we thank you for leaving us with your savings. We intend to continue to manage for the long term in an ethical manner. And we look forward to you joining us for our call to discuss the entire year early in the first quarter of 2022. Thank you so much. Have a wonderful day.

Ladies and gentlemen, this concludes today's event. Thank you for your participation. You may now disconnect.