Orchid Island Capital, Inc.

Good morning and welcome to the third quarter 2021 earnings conference call for Orchid Island Capital. This call is being recorded today, October 29, 2021. At this time, the company would like to remind the listeners that statements made during today's conference call relating to matters that are not historical facts are forward-looking statements subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Listeners are cautioned that such forward-looking statements are based on information currently available on the management's good faith, belief, with respect to future events and are subject to risk and uncertainties that could cause actual performance or results to differ materially from those expressed in such forward-looking statements. Important factors that could cause such differences are described in the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K. The company assumes no obligation to update such forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking statements. Now, I would like to turn the conference over to the company's chairman and chief executive officer, Mr. Robert Colley. Please go ahead, sir.

Thank you, operator, and good morning. I hope everybody had a chance to download the slide deck that we put up on our website last night because I will be, as usual, following the slide deck as I go through the process of the call. And then at the end of the call, of course, we will open up the call for questions. First of all, just kind of give you an outline of how we'll proceed. It's very much the same as it's been in the past. We'll start off with the financial highlights, go through the market developments to give you some background, help you understand our performance and positioning, then go through our results in more detail. Finally, we'll go through the portfolio hedges and assets and give you a great understanding of our positioning. All with respect to our financial highlights, Orchid Island generated net income per share of $0.20. This was net income of $0.22, including realized and unrealized gains and losses on our RMBS assets and derivative instruments, including managers' expense on our interest rate swaps. The loss of $0.02 per share from net realized and unrealized losses on RMBS and derivative instruments It does include a straight swap interest, as I mentioned. Book value per share increased $0.06 from $4.71 to $4.77. And the company declared and subsequently paid $0.195 in share and dividends since its public offering, initial public offering, that is. The company has declared $12.31 in dividends per share, including the one declared in October of this year. Total economic gain of 25.5 cents per share, or 5.41% for the quarter. That is not annualized. Moving on to slide three and four. This is, as always, we present our performance versus our peers. On the first slide, we show our results using the stock price, our work in Ireland, and our peers through September 30th. And we're calculating total return using stock price and dividends paid. At the bottom of the page, we show our peer groups, and they have changed somewhat over time as different entrants have come and gone into our space. The second page just shows you the same numbers, only using book value for purposes of calculating total return. So it's the change in book value plus dividends paid. Again, it's shown with a one-quarter lag simply because we don't have all of the results of our peers for the third quarter, although I will add that based on the early results that we have, it looks like ORCID has had a very solid quarter. Again, these numbers are presented both on a look back as of the end of the second quarter and then for each of the various calendar periods. Moving on to the market developments, I just want to pause and just, again, reiterate why we do this. As opposed to just going to our results and giving a a description of our positioning. The purpose of going through these market developments is the way we do, is we want to give you a deeper understanding of why we had the results that we had or why we're positioned the way we are and how we see things going forward. So that's why we spend time on the market developments, is we need to just give you a deeper understanding about how ORCID is doing. So moving on again to slide eight. This slide is the same slide we use every quarter, just shows you a snapshot of the various curves, both the cash curve on the left and the swap curve on the right, and then, of course, for Q1 as well. And as you can see on the left-hand side or the right, rates, at least based on this snapshot, did not appear to move at all. The only movement at all really in this quarter was a flattening of the curve. So if you look, for instance, at the five-year pointed curve, You can see that rates increased, and the long end flattened down. So we had a meaningful flattener here. And we'll talk about this a little bit more in detail. But I want to just say something about this. Well, even though on a snapshot basis, it looks like nothing really happened, if you look on the next slide, typically the top left, you can see that rates actually for most of the quarter were lower. So even though we ended the quarter with the rates unchanged, most Treasury benchmarks hit their low yield for the year during this quarter. And the reason is that we have the emergence of the delta wave of the pandemic. And that, of course, was very severe. And when it first emerged, nobody really knew just how severe it would be. And the market reacted, as you would expect. And there was this uncertainty with respect to the impact on earnings. And I want to draw a contrast between Q3 and Q4, and I think it's a very important one. When the Delta wave emerged, as I said, there was obviously a very bad development, and it caused a lot of uncertainty. But I would think it's safe to say there was a very strong consensus in the market that once the Delta wave was behind us and once the various forms of supplemental unemployment insurance and so forth were behind us in September, that the market and the economy was really poised for strong growth. I think there was very strong belief in that. And it was just a matter of time before once this Delta wave moved past us that we would resume very strong growth, and particularly wage growth. And the Fed had talked about the transitory nature of inflation, and they thought that Once the pandemic got behind us and we had the labor shortage go away, the inflation would go away as well. Well, that was Q3. So now let's fast forward to where we are today. And as you can see, rates were moving up at the end of the third quarter. And the reason is that because people started to realize that maybe this wasn't going to be the case as we initially thought. For one, the Delta wave isn't gone, but it's certainly in retreat. And all of the various supplemental unemployment insurance measures are gone. The foreclosure moratorium is over. But we really haven't seen jobs really increase. Now, we may see more next week. But so far, they really haven't come back as quick as we thought. And also, just growth in this quarter has steadily, in terms of expectations, declined. At the beginning of the quarter, expectations were that the third quarter would have fairly strong growth. Yesterday morning, we found out it was only 2%. And while there might be some rebound into the fourth quarter, I mean, there's a lot more uncertainty with respect to 2022. So that is a very meaningful change, I think, in the longer-term outlook or medium-term outlook, if you will, that's taken place over the course of the quarter. And the other thing I mentioned is inflation. But the inflation that we're seeing now, including the data that was released this morning, is certainly challenging the transitory nature of inflation. It's starting to look like it's going to – if it is transitory, it's going to be transitory for longer. So it definitely looks like it's going to expand well into Q4 and probably into next year. If you listen to earnings calls, not by mortgage rates, but by the other companies, for instance, the S&P 500, they all tend to echo the same theme, that they expect inflation to be with us for quite a while. Now, in the U.S., the U.S. is maybe not exactly the same as the rest of the world. For instance, our energy intensity, which is a measure of how much energy prices impact our economy, has moved down over the decades. Back in the 70s, when CARS OF OIL WENT UP AND HAD A VERY DEMONSTRATING IMPACT ON OUR ECONOMY TO CAUSE INFLATION TO GO HIGHER, BUT NOW CARS ARE MORE EFFICIENT, WE'RE MUCH MORE ENERGY INEFFICIENT AS A COUNTRY, AND THEREFORE THE IMPACT OF HIGHER ENERGY COSTS ON INFLATION IN THE U.S. ARE NOT AS SEVERE AS THEY WERE. THAT MAY NOT BE QUITE THE CASE AROUND THE WORLD, CERTAINLY WHAT WE'VE SEEN FROM AUSTRALIA THIS WEEK, England, the U.K., central banks in particular there are responding quite strongly to very high levels of inflation. So inflation has definitely become the preeminent story. And these supply shortages of goods and labor are also persisting much longer than we expected. And so starting to really factor into the growth outlook, not just for Q4, but into 2022. So that's important information. not just for our immediate results, but it does matter for us in terms of positioning, because we view this uncertainty as a reason to continue to position where we are defensively in nature and basically waiting for a resolution of some of this uncertainty before we, for instance, maybe raise the risk profile of the portfolio. So we'll talk a little bit more about that in a So anyway, that was what we wanted to draw from that. Slide 10, if you just look at this slide, it really just captures the slope of the curve. And really what you're seeing is a convergence between the yield on the five-year treasury and the 30. The five-year treasury is historically the most sensitive to changes in the direction of rates. So in this case, the market is expecting short-term rates to go higher and sooner. And so you see the five-year react. Typically, the long end of the curve is most sensitive to inflation, and we certainly see that. why it's moving the way it is. That's a bit of a quandary. There's two rationales that I've seen floated, one by an economist that we follow at Cornerstone Macro. And the view there is that expressed there was that if the Fed is going to tighten more and sooner, then maybe the terminal fund rate will end up being lower. And that explains why longer term rates have come down. And the other one, it may just simply be the massive international global capital pulls that we see, especially in the rates market, sometimes can cause movements in the long end of the curve that don't really jive with what's going on with the domestic economy. But these can, in fact, and do often drive rates. And so we've seen, especially this week, meaningful moves day in and day out. on the long end of the curve that don't necessarily appear to be driven solely by domestic events. In any event, whatever reason, we are seeing a flattening of the curve. And again, for levered bond investors such as ourselves, you know, that gives us some cause. We need pause, that is. We need to see how this ultimately shakes out. Moving on to slide 11, in respect to the mortgage market, as I mentioned, I just want to remind you that we were defensively positioned coming into this quarter, defensively positioned at the end of the quarter, and will be for now. If you look at the performance of the mortgage market on the top left, we basically just showed you the performance of the various 30-year coupons. What we do here is we normalize their prices as of June 30th at mark each of the 100 and just show you the change in their prices over the course of the quarter. And as you can see, mortgages did well. Towards the end of the quarter, rates started to move higher, and it became clear that the Fed was about to taper their asset purchases, specifically at the 22nd of September at the Fed Open Market Committee meeting, when the chairman made it quite clear that a tapering of their asset purchases was on the near-term horizon. And you can see Fannie 2s and 2.5s fell off in price, and that probably reflects a combination of those two factors. With respect to rolls, the top two lines, the red and the blue lines, just show you the strength of the roll of those two coupons. The Fed is still very much involved, and those rolls are quite strong. In contrast, higher coupons are soft. The Fannie 4 roll has been negative. The Fannie 3 roll, absent a few spikes, has generally been negative. The key change there is that green line, which is Fannie 3s. The perception now is that as rates back up, that perhaps a 3% coupon will enter the production window and therefore enter the Fed purchase calendar and so forth. As a result, you've seen a move up in that roll. And that has, in turn, affected the spec market on the top right. I apologize, this chart's kind of cramped. It shows you five years of data. But as you can see on the right-hand side, payoffs got quite high through the course of 2020 and then collapsed during the first quarter and then recovered during the third quarter when rates were lower and then finally have fallen off at the end. And that reflects both rates being higher and, again, rolls, especially in some of the higher profonds, in particular threes, being a little stronger. And as a result, we did see some softness in those payoffs toward the end of the last quarter. Moving on, slide 12, just a snapshot of vol. Looks relatively benign here in the course of the third quarter, but over the course of the fourth quarter, it has definitely picked up with a lot more uncertainty in the market, and especially with respect to central banks, the timing of rate hikes and so forth. So we've seen vol pick up. Finally, on slide 13, these are just OAS levels. If you notice on the left, you can see the production coupons, twos and two and a half, are still quite rich. And for us, that just means that it's not the right time for us to start to meaningfully increase our allocations there, especially with the prospects of not only just papering, but potentially the pace of tapering could change to the extent the Fed had to alter their plans with respect to rate hikes. So the combination of those two are causing us to kind of stay away for now. And I'll just make one comment. If you look at some of these lines here, you can see there's a sharp drop all of a sudden. That's just because the model that we use, which is Yieldbook, updated their model, and it caused a lot of these OAS levels to drop significantly. And that's it for that slide. Just some more bigger picture comments on the markets as a whole on slide 14. Just want to draw a few conclusions from this. The top chart just shows you the quarterly returns. On the left-hand side, you see most of the fixed income markets, mortgages, treasuries, and so forth. And you can see the returns for the quarter were very, very modest, basically zero, very much unchanged. If you look at the right-hand side, riskier assets did better. But the one that really stands out is the TIPS market. And you can see the TIPS market at a very strong quarter. And basically what this reflects is people demanding more protection for inflation. So they're buying TIPS, they're building up their prices. Yields on nominal treasuries only increased modestly. So as a result, real yields declined quite a bit. And the break even, the difference between the two increased. And so a very strong quarter. With respect to the year, if you look at the bottom, you can see most of these sectors of the fixed income markets are slightly negative. It's clearly the riskier assets that have done well. And I guess the takeaway from that is at least for the first 10 months of the year, risk has done much better than haven assets or low-risk assets. Moving on to the refinancing activity, which of course is very important for us. The top left, we show the refi index versus the average mortgage rate. And what you've seen here and what you're seeing in Q4 so far is a convergence of those two lines. The refi index has remained subdued and mortgage rates are creeping higher. The bottom chart just shows you the percentage of the universe that's in the money versus the aggregate brief value index, and these both are trending down. I'll find out to say the primary-secondary spread seems to have kind of reached a floor. I don't know that there's much room for that to improve. I think that originators have basically extracted all the efficiency they can out of the process, and that spread seems stable. Now, going to our financial results, just to go through those in a little more detail on slide 17, as we always do, we show our results decompose between just the returns to the portfolio, less our expenses, and in the middle column, we show our realized and unrealized gains. A couple comments. You can see that we had some unrealized losses of a little over $11 million on the mortgage portfolio. That really just reflects a very modest movement in rates, coupled with some softness in spec pay-ups. We still do, as we have since the first quarter, have a large allocation to spec pulls and no real exposure to TBA rules. pay-ups were soft again at the quarter. That's reflected there. The hedges just reflect a modest increase in rates. So the net net of that is a slight decrease. That's the two cents that we mentioned earlier. And then as far as returns for the quarter, as you can see, the past year portfolio had a very not strong quarter. NIM did very, very well, reflecting a combination of an up in coupon bias and very low realized speeds. And I would also note that, and we'll say a little bit more about this in a minute, but Our allocation to structured assets, particularly IOs, did very well this quarter. We are using those for a number of reasons. But one of the benefits, obviously, is that they generate positive returns, positive carry. So it's nice to be able to get positive carry out of our hedges. Finally, last couple more slides here before we get into the real nuts and bolts of the portfolio. Our NIM has reflected on page 18. I just want to point out it's remained stable. The yield on our assets has declined ever since really the onset of the pandemic. Finally seem to stabilize and bounce a little bit this quarter. Our funding cost, which reflects the effect of our hedges, continues to inch down. The net effect is we've got a very stable NIM, and we have a slight uptick for the quarter. The near term, I think it looks well for the balance of the year. I'll say why in a moment here. Just moving forward, slide 19, really don't need to say anything about this. This is just historical information. And frankly, slide 20 as well just shows you kind of basically the in-picture of how we run the portfolio versus our peers. Now let's get into a little more of the details of the portfolio. If you look on slide 21, this is our capital allocation. What I want to point out is, you know, obviously we had a fair amount of capital raising this quarter as a result using our ATM. And as a result, the portfolio increased by approximately 22%. While that did increase, we also increased our allocation to IOs. It went from increased by approximately 3% in percentage terms, but in dollar terms, it increased by almost 50%, 48% or so. So we've continued to add IOs as a hedge instrument. As we mentioned, we see the Fed tapering on the horizon, some non-zero probability that it could be a little faster than maybe the market expects. As a result, you would expect mortgages to be a little soft. And we think IELTS 1 are a good hedge for upgrades, but also maybe a little less sensitive to mortgage basis widening. And that's why we've increased that allocation. The right-hand side just shows you the roll forward of the various sub-portfolios. Now turning more to the portfolio, slide 23. You can see that while we don't have last quarter's slide deck I will point out that as we've grown the portfolio, increased the size, it's generally stayed the same in terms of this layout in terms of coupons and allocations. The 3% coupon remains our largest concentration. For instance, the weighted average coupon on our 30-year portfolio is 2.96. It was 2.97 at the end of the second quarter, so essentially unchanged. the wall of the portfolio is actually lower than it was at the end of the second quarter. So even though we've had the passage of three months' time, the portfolio is actually a lower wall, and that just reflects the fact that we've added low-wall assets to the portfolio, and we have slightly upticked the allocation to specs. One thing I do want to point out is if you look at that 30-year line, we have nearly $4 billion in market value exposure. And those assets prepaid for the quarter at 7.6 CPR. That's lower than turnover. Very, very good outcome. The yield being derived from that type of asset with that type of dollar price is somewhere in the neighborhood of 2%. And funding costs, you know, even hedge funding costs at around 50 basis points. That's very nice of them. I did mention that we increased the allocation to IOs. We have more line items here. And I'll talk about our hedges in a moment. And then after the call, Hunter can take the Q&A. We can give you some more detail on how we've selected the various IOs we have. Slide 24 just shows you the slight uptick in the allocation of the specs. We historically have owned specs in lieu of TBAs. And the higher quality assets we've added, generally New York storage or lower loan balance, did uptick slightly this quarter. And then finally on slide 25, this is really critical for us to show you in particular this 3% cohort. If you look at each month presented here, September, August, and July, or the quarters looking back, you can see that our allocation to that sector has done very, very well relative to the cohort as a whole. And that's a combination of those low realized speeds. and the higher coupons on the asset are what generate the net interest margin that we are able to do, and that really is what drives our economic performance and dividend. Slide 26, again, it's just more historical information. It just shows you that speeds, which are the green line, have remained very subdued. They're much lower than they were even in 2019. So even though we've been in a predominantly much lower rate environment, speed's been well uh maintained in in the near term uh outlook is favorable um with rates slightly higher in the seasonal i would expect speeds to if anything be slightly lower for the next few months uh the next slide just gives you our leverage uh it does look like our leverage dropped uh that's somewhat misleading uh technically as of 9 30 our leverage ratio was 7.2 But as I mentioned, we've been raising capital through the ATM. It was somewhat backloaded in September. We took in a few big chunks of cash towards the end of the quarter and deployed those in the monthly auction cycles in very early October. So we added another turn of leverage since then. And really, since REG settled for 30-year mortgages in October, our leverage ratio has been around 8.2. So it is still flat. That being said, as I mentioned, we're generally defensively positioned. And given the uncertainty surrounding the outlook, we anticipate continuing to do so. So that leverage ratio will probably stay somewhere in the low to maybe mid-8s. And then finally, our last slide is on the hedges. We have had some changes since quarter end. This table depicts simply the look back between June 30th and 930. But since the quarter end, we have added some TVA shorts. We've added some long-end shorts in the future space in the 10-year ultras. And then with respect to our swaptions, we did basically restructure some of those, increase them in size. rose raised the strikes on those and the maturity dates were extended we did a lot of that just by taking some profits and building those positions so uh the hedge book continues to grow as the portfolio does as well just one general note though i would say that we are relying much more on ios and swaptions and and to a lesser extent futures to hedge uh versus swaps uh swaps obviously will have a direct impact on our funding cost in terms of paying six receiving 40 until the Fed starts to hike. So the hedge allocations have been mostly in swaptions and IOs, and to a lesser extent, futures versus swaps. And that's about it. With that, I will open up the call to questions. Operator, we can take any questions you might have.

Thank you, sir. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw a question, press the pound key. Please stand by while we compile the Q&A roster. Your first question is from Jason Stewart from Jones Trading. Your line is open.

Hey, good morning. Thanks for taking the questions. Hey, how are you, Bob? To start with the funding costs and your outlook for the fourth quarter, there's a couple of markers on the horizon, and we typically see a little bit of pressure going into year end. What's your expectation for just overnight repo, not considering swaps, but have we seen the bottom here? Do you expect any pressure, or do you see this pretty smooth sailing through the end of the year?

I'll just say a brief word and I'll turn it over to Hunter. As we always, when we approach quarter and year end, always anticipate that pressure. So we always tend to try to start layering in some fundings over quarter end. So that's no different than this quarter. And I'll give it to Hunter to talk about levels. Yeah, we continue to see a... high amount of demand for collateral. So, you know, we get tapped on the shoulder every few days or so with the counterparties looking for more assets from us that they can put on our repo books. I haven't seen a lot of pressure. I'll say that, you know, just anecdotally when you're two or three months from the turn, You know, counterparties tend to try to, you know, bake in a little bit of that uncertainty. It's no more than a basis point or two right now. So, you know, if we're rolling something at 12 basis points for one month, we could probably do it over year-end for, you know, 13 or 14. So not seeing a lot of pressure and still seeing a lot of demand for assets, do you think?

Gotcha. That's great. Thank you for that, Colin. And then in terms of operating leverage, I know that there's a calculation for the management fee, but what's your expectation as you continue to grow the equity base and the portfolio for the rest of the operating line items? I mean, should we continue? Should investors expect to see operating leverage, or are you expanding the platform at all? How should we think about that going forward?

I would say that... With respect to the platform, I can't really say that we have any plans for that. Otherwise, we should continue to benefit from scale. We have two variable costs. The biggest one by far is the management fee, and the second one is just our repo funding cost, which is much, much smaller. But we continue to benefit from it as we grow, and we're at a point now where The management fee is at 1% fixed basically from now on. So every dollar of capital we raise, our weighted average management fee should come down. And most of the rest of the cost structure is fixed, so it gets diluted. So we should continue to see a dilution of the cost structure as we grow. Almost all the capital we raised in this period was done at that lowest marginal management fee rate, and we don't really anticipate our fixed costs increasing materially. So, you know, those two things will contribute to operating leverage going forward.

Great. Thanks for that. And then last one for me, and I'll jump out. I didn't hear a book value update. I heard the update on the hedges, and it looks like, based on my math, you closed them out to nice profits today. Do you have a book value update for us, quarter date and 4Q?

We don't have a hard number, but I would say it's down somewhat. That would reflect, you know, increase in rates and spec softness. Yeah. The softness that Bob referred to on this slide 11 and specified pools resulting from In his comments, he was discussing the threes specifically, which we have a lot of exposure to. We continue to see weakness in specified pool payups for the first few weeks of the new quarter. So a little bit of a give back there. attributable to this crazy role market with Fannie Threes. But, you know, so, you know, it's tough to comment on the value of this early in the new quarter because things can change so quickly, but we're down a little, down very marginally. Yeah, it'll be very important to see how we do next week. You know, as we get into November, we have the auction cycles. because we really haven't seen as much trading activity in the second half of October we've had for the last really year. We've gotten into a cycle where you have a typical auction cycle at the beginning of the month, then you get a mid-cycle list, and occasionally you even get some, you know, fated cash window list in the last week of the year, or month, rather. We did not get that. So there is some uncertainty on the level of payoffs, so the market will be very keenly dialed into next – I think the cash flow is going to be Tuesday next week. So we'll see where those levels are, and that will give us an update. I would say based on what we've seen today, though, a book is down. I don't have an exact number, but I'm guessing it will be probably 1% or 2%, but I can't give you anything more specific than that.

That's perfect. Thanks for the call. I appreciate that. Thank you.

Your next question is from Christopher Nolan from Lattenberg-Palmin. Your line is open.

Hey, guys. Hey, Bob, on your comments in terms of the overall yield curve environment, is it fair to say that your expectations are for a flatter yield curve?

Yeah, that definitely looks like it's going to continue to be the case. It's easy to explain what's going on in the front end of the curve. The long end of the curve is much more of a challenge. I tried to give my best guess of what's going on over my comments. This week in particular, every day it just seems, intraday, we get big moves. You walk in and New York has an open yet and London hours, the markets flatter and then it turns around and goes the other way and then Europe closes and we go back the other way. Very challenging week. But going forward, I think that inflation, assuming it's going to continue to persist, stretch the bounds of transitionary, if you will, that's going to keep the front end of the curve soft. What goes on in the long end is who knows, but it's hard to imagine the curve not going to stay pretty flat. By the way, I didn't mention it in my prepared remarks, but The spread between fives and thirties at one point was north of 150 basis points. It's less than 75 as we speak. So it's dropped by half in a very short period of time. So it's likely to continue to do that. And there seems to be some contagion between what's going on amongst other central banks and what's going on with the Fed. It's great that we have a meeting next week so we can get some clarity in that regard. But You know this week that the Central Bank of Canada stopped QE, and they're going to raise rates. Australia was amazing. They have yield curve control there, and they just stopped participating. Apparently they're ending that program. They've done nothing to stop the run-up in yields. I was just checking yesterday. The yield on the Australian two-year, which was slightly negative in mid-September, is approaching 50%. and move meaningfully again today, I understand. And then the same thing in, you know, the U.K. You know, it's moving rapidly, and it seems to be influencing market expectations here, which, again, all these forces are just going to drive the curve flatter.

And then should we expect an increased capital allocation for IOs in the fourth quarter?

We had soft target at 25. I think we're at 21 and change. I would say we're probably going to continue to move in that direction.

Great. And then I guess on page 23 you have in the portfolio characteristics your asset sensitivity. Are you planning to position this a little bit more where you have a little bit of neutral sensitivity towards a 50-bit rise in rates? Yes.

Short answer to that is yes. And I would say that, you know, one thing is we've been raising capital. It's been coming in quickly, particularly this last quarter. So sometimes we add assets and, you know, we try to do so uniformly, but get a little head behind in one or the other. So we will continue to add items, as I mentioned. Since quarter end, we have increased the hedges. I mentioned we added to our treasury shorts, ultras. We added some TBA shorts. We added some IOs. And we repositioned some of our swaps. And so the profile would look differently today than it did in quarter end. But, yeah, the short answer to your question is yes.

Great. Thank you. I'll get back in the queue.

Again, to ask a question, please press star 1 on your telephone. Again, that's star 1 on your telephone. Your next question is from Mikhail Goberman from JMP Securities. The line is open.

Morning, gentlemen. Thanks for taking my question. A few of my questions have already been answered, but just wanted to get your thoughts on what you're seeing for agency MBS spread, widening, or tightening going forward, and how you're thinking about positioning the portfolio, A, assuming Ceteris Paribus kind of We kind of putter along the way we are now, although we've obviously seen quite a lot of volatility last week, as you mentioned. But assuming you expect a flatter yield curve going forward, and also in maybe a more volatile scenario where you have a massive, not massive, but heightened, perhaps, spread widening. Thanks.

I'll take that. I would say that... Well, I'll turn it over to Hunter in a second. One thing to keep in mind is that we certainly see the good days and bad days for mortgages, and we pretty much have a pretty good feel for that. So that will tell you kind of what we expect. But the thing you have to keep in mind is that everything else is very rich also. And to the extent there are many, many multi-sector asset managers out there, which there are, they are relative value traders. So mortgages, by nature, can never get too rich or too cheap or long. So that's just kind of an overriding principle. So, yeah, mortgages are rich. So is everything else. Tapering is on the horizon. The market knows that. But we also have bank demand, which tends to represent an additional floor, if you will, in addition to the Fed, simply because as the Fed pumps reserves into the system, they find their way to banks, and banks have to invest these reserves, just kind of the opposite of where we were in 19 when they were depleting reserves, and we couldn't get repo because the banks were all up against their liquidity ratios and so forth. Now it's the exact opposite. They have too much cash, so they're buyers. So, yeah, I mean, I would say... tapering is key next week. If they give us something that's different than what the market expects, you're going to see a knee-jerk widening. But then what happens? You know, it just represents a buy opportunity. So that's kind of the way I look at it. I don't know. No, I totally agree with that. I think that every buying opportunity has been well-received over the last year or so, I guess. You know, obviously we've sort of been a state of free fall right after the pandemic outbreak. But, you know, Fed stepped in, cured up the market. And since then, any marginal wideness has been met with buying. And on the, I think, yield front as well, every, you know, we definitely see yield-based buyers step in every time rates increase marginally. And those are, you know, typically sort of unlevered money stepping in and then levered money stepping in when things widen out on a spread basis. As to your question, I think if we continue to sort of gyrate around in this range, I don't think things will change meaningfully. I think we'll continue to see slow growth. emergence of burnout in the portfolio. And then I think if we do have some sort of an inflation scare or something that, you know, for us, I think that's what we are most concerned about is a breakout to higher rates caused by something like inflation. That seems to be sort of on the back burner right now or less of a concern for the market, but something that we always have to keep our eye on. The nature of the way we're positioned in premium MBS specified pools, in that type of situation, I think the portfolio does relatively well for the next 25 or 30 basis points. We could see spreads tight on our assets just due to the fact that our refi incentive is disappearing. we increased that exposure through the use of IOs as well. And we've been really focused on positioning and really cuspy mortgage assets that are going to really have a dramatically reduced incentive to refi in the next 25 to 50 basis points. That's why a lot of times you'll see our profile skewed a little bit, where it'll look negative to the up 50. I think that's because empirically we've observed that those assets, the types of assets that we typically hold, do well in that scenario. That's also why we've tried to not play chicken with the Fed, being in production coupon TBAs, a little bit unique in that regard. We have been trying to resist the allure of the drop market in Fannie 2s and 2.5s, just on a relative value basis, and horribly negative OASs. And our concern is that those are going to be the first assets to widen into a taper. So those are my thoughts. Just one other thought I might add is that in terms of a – of all events, something that the market doesn't see coming. If you look at the market pricing and compare that to what Powell said at the September Fed meeting when he basically implied that tapering will be done mid-summer, and if you look at the year-to-dollar market or the Fed funds futures contracts, you see that the Initial tightening right after that. Obviously, that's very much in contrast to the last cycle when there was a long pause from when QE ended to the first hike. So the market is very much at odds with a repeat of what happened the last time. And who knows how it plays out. But let's say, for instance, that inflation continues to get worse, whatever, and the Fed concludes that they have to bring forward their tightening. We would presume that they don't want to be tightening, raising the Fed funds rate at the same time they're buying assets. So they would then accelerate the tapering. In that event, that's not what the market's currently expecting, in spite of the fact what the Fed funds market's telling you. In that event, you would see the production coupons soften quickly. And for investors, they might just say, okay, we're going to just sell these lower coupons. They may leave the space, or they go up in coupon. And that's kind of how we're positioned today. for that to happen. So I don't think there's a chance that they're going to not taper or extend the taper, you know, unless, you know, the economy does something that is not currently, you know, visible. So I think the risk is that they're forced to accelerate the tapering, in which case you would see the production coupons probably soften up, and that would benefit us. In that type of environment, we are – in a fairly enviable position to the extent that our leverage ratio is lower than it typically is um not as low as some out there that are waiting for this sort of buying opportunity moment but we definitely have another turn or so of leverage that we could um quickly add uh in a buying opportunity type of moment. But perhaps more importantly, we have been pretty successful lately in raising capital and would definitely use that leverage, so to speak, as a way to add cheaper assets in that we saw that type of scenario play out. Got it. Thank you, gentlemen. That's very, very helpful. Thanks, Patel.

Your next question is from Kevin Jones, investor. Your line is open.

Hello? Hello, Kevin?

Yeah, I didn't have a question. I just called in to listen.

Oh, well, glad. Thank you for doing that. Well, it comes to mind, Joe.

I'm at a loss for words. All right.

Well, thanks for calling. Have a great weekend.

Keep doing what you're doing. Keep doing what you're doing. Thank you. All right. Thank you. All right. Thank you.

Again, to ask a question, please press star 1 on your telephone. Again, that's star 1 on your telephone. We do have a follow-up question from Christopher Nolan from Lattenburg-Talman. Your line is open.

Hunter answered my TBA question. But, well, I got you guys. What's the management perspective on doing additional equity raises?

Well, the TBA, the ATM is something we want to continue to use. We've done secondaries probably. Obviously, as you know, we don't do a lot of those. We have done them. There are benefits to the ATM. The cost of capital is cheaper. You get the money in kind of slowly over time, so it makes it easy to invest. You don't have to do it all at once. And, you know, if the stock, you know, our basic mantra is when the stock is trading above book, we consider raising capital. When it's trading below, we consider buying it back. And then we always factor in market investment opportunities at the time in both cases. So, Today, the investment opportunities are okay. They're not spectacular. And the stock had been trading at a premium to book, so it was accretive. So in that instance, if that were to continue, we would probably be still inclined to continue to use the program.

Thank you.

Again, to ask a question, please press star 1 on your telephone. Again, that's star 1 on your telephone. There are no audio questions at this time. I will turn a call back to Mr. Coley.

Thank you, operator. Thank you, everybody. Appreciate you taking the time to join us. And certainly enjoy all your questions. To the extent you have additional questions that weren't answered, you have to listen to replay. And when it calls, please feel free to do. The office number is 772-231-1400. We'll always be glad to take your questions. Otherwise, we look forward to talking to you next time. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.