Operator: The next question will come from Rick Shane with JPM.
Rick Shane: There were some comments about incremental investments in the agency CMBS business. And when we look at Slide 6, it’s actually — the economic returns aren’t mentioned there. I’m curious if you could help us understand that a little bit better. I’m assuming the attractiveness is the lack of prepayment optionality and the lack of negative convexity that you see in the Agency book at this point. Can you just sort of walk through how you approach that business a little in more detail?
V.S. Srinivasan: This is Srini. Thanks for the question. Basically, Agency CMBS is almost like a bullet cash flow and with spreads north of 110 basis points. you will earn all of that. It’s like OAS or MBS. So at 110 basis points of trend [ph], you assume like a 7x leverage, it gets you to about SOFR plus 10%. So it’s in the high — mid- to high teens. But the advantage of that over MBS is just that you don’t have slippage, you generally tend to earn the entire amount. And if you just go back 2 years, these spreads were at 15 basis points. So this is at a pretty attractive level for a cash flow that is very little optionality or very little risk.
David Finkelstein: And also, as I mentioned, Rick, the technical landscape for Agency CMBS is better than Agency MBS.
Rick Shane: Got it. And is that consistent with your strategy of hedging further out on the curve? Or is it, I guess, tied to because of the longer, more predictable duration of the agency CMBS?
V.S. Srinivasan: I think we — when we buy the CMBS, we think of it as buying it on a swap basis. So we would hedge the duration completely and own it on a swap basis.
Rick Shane: Okay. And what are the durations that you’re assuming associated with them just so we understand how to think about how that’s going to impact the hedge book?
V.S. Srinivasan: I mean the duration on these will be right around 8 years. They’re very similar to 10-year treasury cash flows.
Operator: The next question will come from Eric Hagen with BTIG.
Eric Hagen: So first question here, I mean how are you guys feeling about the shape of the capital structure, just the mix of common and preferred? How much leverage to common stock you’re willing to tolerate at these spread levels?
David Finkelstein: Yes. So look, we entered this period with very little capital structure leverage. We average around 12% to 13% of our capital in preferreds. With common deterioration, we’re up to 15%, which is still quite low, certainly relative to the sector and particularly when you consider the alternative businesses that are less levered from a balance sheet standpoint. And the way we look at it is we do have a floating rate preferreds, obviously, now. And the fact that the curve steepened as much as it did, the cost of our preferreds on a forward basis didn’t increase much at all, while the asset side of the equation actually became a lot more ample. And so from a cost of capital standpoint, preferred actually looks more reasonable today than it did, say, at the end of the second quarter.
We do have capacity to increase it, but that market has been closed really. There’s been a couple of bank deals and not much else. To the extent we can refi at some point, we would look at it, but it’s not there now, and we’ll see how that market develops.
