Michael Burry just closed his hedge fund. The investor famous for predicting the 2008 housing crisis, and who recently revealed that he was betting against big tech – specifically Nvidia (NVDA) and Palantir (PLTR) – deregistered Scion Asset Management this week, effective Nov. 10. More News from Barchart In a letter to investors, he wrote: “My estimation of value in securities is not now, and has not been for some time, in sync with the markets.” Perhaps the greatest twist of irony is that while Burry ...

Core Insights - The mortgage REITs have identified an opportunity in agency-backed mortgages due to historically high spreads, leading to significant capital deployment in this sector [1][2][4] - Dynex Capital (DX) exemplifies the trend among agency mREITs, having raised over $3 billion to expand its investment portfolio in agency MBS [2][15] - The tightening of mortgage spreads has resulted in substantial mark-to-market gains for mREITs, with 30-year mortgage yields dropping from approximately 7% to 6.5% [7][11][31] Group 1: Market Dynamics - Agency-backed mortgages are considered nearly as safe as U.S. Treasuries, with the added risk of prepayment and duration risk [5] - The recent increase in mortgage rates over the past five years has led to many mortgages trading at a discount to par, making prepayment potentially profitable for mREITs [6] - The tightening of spreads has been beneficial, with a notable drop in 30-year mortgage yields contributing to gains in mREIT portfolios [7][11] Group 2: Investment Strategies - Many mREITs have followed a similar strategy to Dynex by issuing equity to capitalize on high mortgage spreads, which has diluted common shareholders but benefited preferred shareholders [17][31] - AGNC Investment has also expanded its agency RMBS portfolio through equity issuance, leading to increased asset value amid spread tightening [15][31] - Preferred shares of mREITs are viewed as more attractive investments compared to common shares, with many trading at discounts to par and offering high dividend yields [33] Group 3: Future Outlook - The anticipated 3Q earnings reports are expected to reflect significant gains in book value for mREITs due to the recent tightening of spreads [31][32] - The market may not yet fully recognize the gains experienced by these companies, which could lead to a shift in sentiment and a reduction in the risk premium for both common and preferred shares [32] - There is potential for investment in common shares, but preferred shares are generally considered the better option due to their higher yields and discounted prices [33]

Financial Data and Key Metrics Changes - Total investment income for Q1 2025 was $36.5 million, a decrease of $1 million from Q4 2024, primarily due to a decline in interest income [13] - Adjusted net investment income (NII) for Q1 2025 was $18.5 million, compared to $18.1 million in Q1 2024, with adjusted NII per share at $0.54, down from $0.59 year-over-year [9] - Net asset value at quarter end was $677.9 million, or $19.39 per share, compared to $655.7 million, or $19.33 per share as of 12/31/2024 [9] Business Line Data and Key Metrics Changes - Originations totaled $115.6 million for Q1 2025, with $102.1 million invested in seven new portfolio companies [10] - Debt investments amounted to $111.6 million, with first lien securities accounting for approximately 94% of the total [10] - The debt portfolio was valued at approximately $1 billion, with 79% consisting of first lien investments [11] Market Data and Key Metrics Changes - Deal activity in the lower middle market was described as modest, continuing the trend of lackluster M&A activity [7] - The company expects continued activity in the lower middle market, albeit at lower levels than before [30] Company Strategy and Development Direction - The company focuses on investing in high-quality companies with resilient business models and strong cash flow generation [7] - The management believes the current economic environment may present interesting investment opportunities, particularly in periods of high volatility [12] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the portfolio's resilience against macroeconomic challenges, noting that most portfolio companies are domestic with limited tariff exposure [11] - The outlook for originations in Q2 2025 is positive, supported by a strong investment pipeline [12] Other Important Information - The company declared a total dividend of $0.54 per share for Q2 2025, consistent with the previous quarter [9] - The company ended Q1 2025 with $545.6 million of debt outstanding, with a net debt to equity ratio of 0.7 times [15] Q&A Session Summary Question: Impact of tariffs on portfolio companies - Management indicated that direct exposure to tariffs is limited to just over 5% of the portfolio, and plans are in place to manage risks effectively [24][25] Question: Conditions for M&A market rebound - Management believes that uncertainty is the primary factor affecting the M&A market, and stability rather than the removal of tariffs is needed for a rebound [28][29] Question: Prepayment risk among top-performing companies - Management acknowledged prepayment risk but noted that it is a common aspect of the business, with some companies expected to be refinanced [47][49] Question: Update on distressed investment in Quest software - Management expressed confidence in the long-term outlook for Quest, despite current challenges, and noted that the risk profile is reflected in the investment's valuation [51][52]