Orchid Island Capital, Inc.

Good morning and welcome to the fourth quarter 2024 earnings conference call for Orchid Island Capital. This call is being recorded today, January 31st, 2025. 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 risks 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. Thank you for joining us today. Hopefully everybody has had a chance to download the slide deck and they can follow along with us during the call. As usual, we'll be following the slide deck loosely. And just to give you kind of an intro of how we plan to proceed, we are going to make one slight change this quarter. Jerry Sintes, our controller, has joined us. He will go over the financial results. I'll walk you through the market developments, which are the things that occurred in the market that shaped our decision-making and the positioning of the portfolio. And then Hunter, the chief investment officer, will walk you through the portfolio and hedge positions and things that we did during the quarter with the portfolio. So with that, I will turn it over to Jerry, and he will walk us through the financial highlights. Thank you.

um starting on page five um we're showing a net income of seven cents per share for the fourth quarter um compared to 24 cents per share for the third quarter a book value decreased from 8.40 cents at q3n to 8.9 cents at 1231. um total return per quarter was 0.6 percent on annualized And that includes a 36-cent dividend that we declared during the period. On page six, we present some other portfolio metrics. At the fourth quarter, we had $5.3 billion in MBS assets. Our leverage ratio decreased slightly to 7.3 times equity. pre-paying speeds increased to 10.5 CPR compared to 8.8 CPR in Q3. And our liquidity at 1231 was approximately 53% of that. On page seven, we present year to date, full year income of 57 cents per share compared to a loss of 89 cents per share for 2023. Book income, book value went down from $9.10 at the end of 23 to $8.09 at the end of 24. Our total return for the year was 4.73%. And our dividend for the year was $1.44. Our initial calculations show that 96% of that was paid out of re-taxable income and 4% out of return of capital. On page 8, we present our financial statements for your review. We're not going to get into the detail of that here. And with that, I'll turn it back over to Bob.

Thanks, Jerry. Now turning to the market developments on slide 10. The biggest development, and really it was quite a pivotal quarter, the fourth quarter that is, in that the curve, the treasury curve, especially the cash curve, which had been inverted for two years, which, by the way, I believe is a record period of inversion, disinverted, if you will. The swap curve, as you can see on the right side of the page, is still slightly inverted, and that's just because swap spreads have been trending negative in a meaningful way for some time. It remains so, and so that curve is still slightly inverted. But the cash curve did disinvert, and now it's positively sloped. So mechanically, how that came about, the Fed, starting in September, lowered rates, the overnight rate by 100 basis points. But more importantly, longer-term rates went up quite meaningfully in the case of the 10-year by about 80 basis points. So the question is why? And I'm just going to briefly give you some highlight reasons why. I think you're probably all aware of them, but just to bring them in the focus for the call, I guess I would highlight five things. The first would be the fact that the economy had just been strong all through 2024. GDP was 2% to 3%, 3-plus percent. Retail sales as a proxy for consumer spending were very strong all throughout the year. Retail sales reported on a monthly basis generally exceeded expectations by economists almost all year. The labor market, which had been weakening, stopped doing so as the year came to an end. The labor market appeared to be at least leveling off, if not improving. The unemployment rate, which had been rising, stopped doing so and has settled in at a low level. inflation, which has been very sticky. It's much lower than it had been when it peaked. But as we saw today, it still seems to be stubbornly just above the Fed's target and not really making meaningful progress towards it. So it has kept the Fed from being overly aggressive and easing. Fiscal spending deficits are still very large. We don't expect those to decline. And I guess finally, with the election results in the fourth quarter, the new administration, a Republican sweep, The current administration has a very strong pro-growth agenda and, in fact, may even use tariffs, which probably, if anything, to the extent they are used, might be inflationary, at least in the near term. So for those reasons the curve has inverted, I want to walk you through some more macro variables, and then I'll finalize my comments by just kind of giving you a summary of what these things mean for us specifically. So you can see on slide 10 at the bottom, this is the spread between the three-month Treasury bill and the 10-year note. As of January 24th, last Friday, it's 31 basis points, so it is now in positive territory. Moving to slide 11, looking more specifically at the mortgage market, you can see a proxy for mortgage performance and trading levels spread to the 10-year treasury of the current coupon. While it's at maybe, say, local lows, it still remains at very attractive levels on an historic basis. As of last Friday, 125 basis points. Prior to the outset of COVID, trading levels there were typically in the 80 or so basis point range. And really the reason this is probably still the case is that one of the largest marginal buyers of mortgages, which would be banks, have not been huge buyers of late. And to the extent that were to change, I think there's a good chance we could trade back to those ranges we saw pre-COVID. With respect to mortgage performance for the quarter, On the bottom left, these are normalized prices, so the price of each coupon normalized to 100. As you can see, with rates higher, prices were down. But since year-end, they've actually stabilized quite well. With respect to the dollar roll market, they've all improved. Most of these rolls are now positive, and that's generally a positive for the sector, even though, from what we understand, a lot of money managers are overweight in the sector. The fact that dollar rolls are strong, while it may not be good for spec investing, it is generally a good sign for the mortgage market when those roles are attractive and carries present in the market. With respect to volatility, obviously a very big driver of mortgage performance. If you look at the bottom of the chart, you can see on a long-term perspective, we're still somewhat elevated, but we're very much at the local lows. And I think there's reason to believe that we might see vol come off a little more in the near term. And the reason for that, or the reason I have that view, is that it seems the market and the Fed are kind of comfortable with the notion that they're not going to have to act very quickly and they have a lot of time to normalize rates. So absent any shock in the data or anything, I think we could see, you know, very stable rate environment for the next few months. If that were to come past, it's obviously a positive for mortgages. Slide 13, we show the mortgage banker's rate and the refi index. And you can see with rates, you know, now above 7%, The refi activity is extremely low. The housing market is not doing all that well just because affordability is so low. And that can and will likely continue to keep refinancing activity low and purchase activity for that matter. The primary-secondary spread did spike down recently. We've seen that in the past. I don't think there's anything significant in that fact. And given the state of the housing market, I don't expect that to drop much lower. I think it will remain in that level. Finally, slide 14. This is just one of my favorite slides. I don't want to read too much into it, but it does point out to the fact that with elevated money supply, we have seen GDP growth. I'm not saying that there's necessarily cause and effect, but it does appear to be the case. We have had above normal growth. You can see this trend line going back all the way to 2009. By the way, this is just GDP and nominal dollars. The current growth rate is above that long-term trend. And if that continues to be the case, you would expect that the economy to continue to remain fairly strong. So now, as I mentioned, I want to just kind of go through all these developments and what they mean for us before I turn the call over to Hunter, who talks about the portfolio. First of all, with the curve steepened and funding levels lower, our cash interest expenses come down. So now our net interest income is positive, absent the effect of hedges. So we now have positive net interest spread, which obviously is very good for income. Longer rates higher, that's been a very good development for us because we have an up in coupon bias to the portfolio. So that results in slower speeds. As we'll see later in the call, they have been, in fact, slowing, which just means we get better carryout of those securities. The investment environment, as I mentioned, if you look at the spread of the current coupon mortgage as a proxy, it's still at very attractive levels. Dollar rolls, positive. That's another good development for the sector. And volatility has been low and coming off, and to the extent that continues, also a positive. So we're very constructive on the outlook for the market for ORCID and our business model, and looking forward to the extent we do get additional Fed cuts. Not sure if we will or how many. They would be a positive, of course, as well, simply because that would lower our cash interest expense. And to the extent that that curve steepens enough and we get banks back into the market in a meaningful way could also lead to tightening in the mortgage basis, which again would be good for Orchid and the business model. With that, I'll turn it over to Hunter. He's going to walk us through developments with the portfolio during the quarter. Thanks, Bob.

I just want to start by sort of giving a little bit of background, chiming in on what some of the points brought up, which are, And we see a pro-growth agenda from this administration. We see a market is largely priced out a lot of future Fed cuts. There's not too many more priced in, one or two last I looked. And so we're keeping with that sort of theme in the background. Back of your mind, I think we'll talk about what we've done in the portfolio. As you know, we've been building a barbell strategy. We continued with that in the third quarter. We're buying assets that tend to be a little bit shorter in nature, so up in coupon. We did put on a new 15-year 5 position. It was just $50 million in TBA. That TBA has been trading very special. It's been a good trade for us. We covered some Fannie 3 shorts. Basically, we sold some cheaper-to-deliver type of pools. We sold $190 million worth of New York and investor Fannie Threes that were paying at sort of deliverable speeds, and we covered $100 million of the short, and then we reinvested the remaining variance in New York five and five and a half, as well as a new position in a social bond. We like those. We purchased one from one of the faster servicers, but we think they're a good credit-like stories, so elbow-shift type of stories. Later in the quarter, we had to raise a little bit of capital. We purchased another 115-ish million of 200K max and FICO six and a half. As it relates to developments that have occurred since year end, we have purchased more five, let's see, 183 million 30-year 5.5s and almost $400,225,000,000 max 6.5s. And we'll talk about the hedge position on those in a moment. But again, this is consistent with the way we're trying to position the portfolio, which is higher yielding assets. The Fannie 3 portfolio that was dominated the last year, the 2023 fiscal year, We're starting to lighten up on that. Those assets have done very well. We liked them for a long time because they represented a very easy asset to hedge. They were mostly fully extended, and they offered very wide spreads. We could even hedge some of them with TBAs because the dollar rolls were negative. So that picture has changed a little bit. The FAMI 3s have improved significantly. over the course of 2024, and the dollar rolls have even spiked and are now trading positive. So we felt like it was time to take advantage of the fact that there's more spread in the market and have transitioned to a higher coupon focus. Again, we're positioning for a strong economy, potentially more inflation spook here and there, And so we're trying to keep the assets relatively short. You can see that on the next slide, slide 17. You can see kind of the migration of, if you look from right to left, our portfolio over the course of the last six months. So really building a large position in six and a half and also bolstering seven to five and five and a half, but to a lesser extent. Just briefly on funding costs, Bob alluded to the fact that we had positive net interest income above our funding costs now. In the third quarter, we averaged roughly 562 for a repo funding rate. That came down to 498 in the fourth quarter. And more recently, we're trending down to sort of a 445, 446 type of levels where we're putting on new repos. One other point I'd like to mention with respect to the funding portfolio, we have lines and MRAs in place with 27 entities, and we recently executed, in the fourth quarter, we executed our first indemnified repo, so I don't wanna go into it too much, but we are actively pursuing cash providers directly through this indemnified repo program So it's an exciting development for us. With respect to the hedge book, again, I discussed the new securities that we added during the fourth quarter. On the hedge side of the equation, we are also sort of focusing on this idea of a bear steepener, stronger economy being our biggest risk, really. So we're trying to address that risk by pushing some of the hedges farther out the curve So in the fourth quarter, we unwound, or I'm sorry, we put on, for the new purchases we put on, we did a combination of some seven-year swaps and roughly $320 million five-year and seven-year FEs and TYs on futures. We unwound what we saw as roughly $425 million equivalent of SOFR futures. So we think of those in swap terms. It was roughly $400 million. We put those on throughout the course of last year when the market was pricing in really deep Fed cuts through going out into 25, 26, and 27. So we locked a lot of that stuff in with sort of an implied terminal Fed funds rate in the very low threes. We unwound them at a time when The future cut was after the December meeting, after the December cut, and there was basically not much by way of cuts priced into the market at that point. So if the market reverses course, the economic data weakens a little bit here in the near term, we'll look to reload those positions and capture more implied Fed cuts to the extent the market cooperates with us to do that. But right now we're flat. Continuing on that theme into the into the first quarter of this year, we unwound 500 million legacy pay fix swaps, which were, you know, very low strike. But, again, one of them was a two-year, five-month expiry, and one of them was a one-year, two-month expiry. So keeping with that theme of getting the hedge out of the front end of the curve because there's not much by way of Fed cuts priced into that right now, and pushing that out a little bit further. 5s, 7s, 10s is sort of the place where we like to hang out. So there might be a little bit of a dupe duration mismatch with respect to some of the things that we've added because they're a little bit shorter in nature. But again, we're trying to position ourselves to have our assets really sort of incrementally – the assets that we're buying with incremental capital be more in the sort of – front to middle part of the curve and pushing our hedges out just slightly longer than that because we think that a sell-off, bear steepening scenario is one where companies like ours are going to suffer. Mortgages will probably suffer in that environment, so we're trying to over-hedge that a little bit. Conversely, a big rally, we think mortgages will tend to do very well into that type of move, especially if it's a rally in rates that it's driven by some kind of equity market selling off, that kind of thing could be very positive for bonds. So that's what we're trying to keep our hedges. I'll go into the next slide. A couple of slides too much. I'll leave that for you. I would just like to point out on slide 22, we are extremely flat from a model duration perspective. About 0.28 is our duration gap. If you were to take these shocks and sort of average them and see what the resulting damage would be from those two plus or minus 50 on the $5.3 billion portfolio. So very flat model-wise, and again, leaning into a bear steepener, not because we think that's necessarily what's going to happen, but because we think that's the scenario that would be the most painful for our portfolio. I'm not going to touch on 23, and I would like to turn it back over to Bob now to wrap up and give us his outlook. Thanks, Hunter.

Just kind of reiterating what we've already said. The barbell strategy we think is a very appropriate strategy for the market. We do have an up in coupon buys to it. We do have kind of a bullish view of the market and the economy, and we think the administration will be very pro-growth. And we think the risk of a recession is extremely low. That all being said, we also think that the Fed has made it quite clear that they have no compelling reason whatsoever to start or continue to ease aggressively. I think we'll see. We may not see any more. Who knows? It might be one or two. But we think that to the extent we do as a positive, we don't see a reason for them to hike. And we expect long-term rates to be out of where they are, slightly higher under pressure. Deficit spending is probably here to stay. And inflation has been very sticky and the growth of the economy is very strong. So very good carry for the bonds that we own. Higher rates are good for premiums. And as Hunter said, we've moved our hedges off the curve. So to the extent we do get a more meaningful sell-off in the long end and those bonds start to extend, We have much longer duration hedges in place to help with the convexity of those. So that's pretty much it. I will turn the call over to questions. So operator, please instruct and we will answer any and all questions.

To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again.

Please stand by while we compile the Q&A roster. Our first question comes from Jason Stewart with Janie Montgomery Scott.

Your line is open.

All right. Thank you, guys, for all the details today. Maybe we can start with a book value update, year-to-date, if you don't mind.

Sure. Just because some of our peers have already announced this week, and I believe in all cases they gave book value as of last Friday, just so we can have an apples to apples comparison. Our book value was unchanged as of last Friday. In fact, our daily estimate, which is not a gap or not an audited number, but just an estimate, was literally unchanged to the penny as of last Friday, 809. This week, mortgages have had a good run, so we're up about a percent this week.

Got it. Okay. Thank you for that. And then if I could just shift to, you know, ROE, you know, where you see ROEs on a go-forward basis, maybe on an economic basis. And if you don't mind footing that, thanks for the taxable income number. That's helpful. And footing that to where you see taxable income. I mean, and I guess I'm coming at it. I'll just start there and we'll follow up if you don't mind.

Yeah. Well, as I mentioned, the way we ended the quarter, interest income is positive. So, Even though for the year the taxable income number was pretty much covered, as I said, 96% of the dividend, the trend was positive. So I think we ended the year, the fourth quarter was probably a higher percentage. So we're entering the year on a good note there. ROEs, you were just saying we could get as well north of 150, maybe 200. Yep. If you can get to 200, obviously, our leverage has been on the low end of the range. We didn't stress that point on the call, but we're in the low to mid sevens, even today, still in the low, like seven and a quarter. If we were to stay there, close to 200 over, that's 14s plus the unlevered return, so you're comfortably into the mid teens at a relatively low leverage level.

The swap curve is very flat, so we will leg in leverage as i guess as kind of the basis moves around so we're things have tightened up a little bit so we're on the tighter end but when we think about the investing environment swap curve is very flat um you know so pick your point and it's going to be low four percent pay fix right and um you know i think six percent yields are achievable with an open coupon strategy especially in some some sort of specified pool that's going to pay relatively slow um so you know high fives to low sixes. So I think 200 basis points is right in the sweet spot. And, you know, pick your pick your leverage ratio from that point.

Right. And I would say the risk to that some rally, obviously, you know, because we have an upper bias. So to the extent we do get a rally, you know, the economy softens, whatever, you know, then those numbers are a little, you know, probably not obtainable. But the way we see see things evolving, we think that that is doable. Got it.

Okay. And then on the ATM program, do you have handy what the discount to book was for the issuance in the fourth quarter?

No, I don't have it. I think for the year we were around 17 cents for the book. We were running around. We try to, I think we've said in the past, you know, when we're close to book or above book will sell. I think we were generally in the, 97.5% to 99.5% range when we were selling. We didn't sell a ton of stock in the fourth quarter. I think it was $36 million. So we had done much more in the third. The fourth quarter, the impact on book, I'm guessing, is less than a penny.

Okay. I guess, Bob, where I'm kind of coming to all this is I'm trying to figure out how much book value degradation you're willing to sort of accept, I mean, if we have a 18 to what is the dividend on spoke seven 17.8% dividend book, um, I guess based on the numbers you gave, you're, you're very close to that on a taxable basis. Um, just short of how you're thinking about maintaining the dividend, which is, you know, obviously it's, it's a great yield. Um, but it's definitely north of where some of your peers are pegging ROEs and just trying to put together how you're thinking about the dividend. versus maintaining or growing book value? And I know there's a taxable element to that, but that's really, I guess, where I'm trying to go high level to that question.

I would say that the trend this year, as I said, was in our favor. So we're, you know, obviously it depends on where the stock's trading and we don't want to do much of a discount, but if we're going to be earning those kind of levels on a gap basis or a taxable basis, I guess you should say, and we can maintain that dividend level, we're not foreseeing an increase, a meaningful seeping of the curve. But if we can maintain that level and basically earn what we pay, and with some upside, I think, as I mentioned, I think mortgages are still attractive. We've been staying there for a while. Who knows how long they stay that way. But there is upside, which would offer some book value appreciation potential. But if we can earn this dividend on a taxable income basis and with minimal costs on the book value, if you're selling shares to the ATM, I would plan to continue to do so.

Okay. I would add that, I would add that the, the money that we've been, the assets that we've been acquiring with the incremental capital are adding to the earnings power of the portfolio. So, and that's not to say that the legacy portfolio is, you know, worse. It's just, you know, we have that, We have that lower coupon part of our barbells already built. We don't really expect it to grow much. And so the growth has been in higher income earning assets. So, you know, as you've seen over the course of the year, we've added a lot to 6% and 6.5% coupons. 6% is largely when they're kind of hanging out around par. So, you know, I don't think our numbers are that far. You know, 200 basis points over at 7x leverage is, you know – over 16.5% return, plus we're still earning almost 4.5% on unlevered capital in the money market funds, right? So I think high teens is kind of where we're at right now.

And also, I'm wishful thinking maybe, but it would be nice to see the stock trade at a lower yield as a result of price appreciations. I mean, to the extent we're earning this dividend and we're paying out, you know, 96% of the dividend on taxable earnings trending higher, you know, you would think that the stock should not be trading at a discount. I don't control that, obviously. But, you know, we've seen our peers, especially this week, all now, I believe, Dynex, Analy, and has joined the agency in trading at a premium to book. And I think that that is, you know, in our case, justified. I haven't seen it yet, but I think it's very much justified given what we just said about the nature of the dividend we're paying. So, you know, that would be helpful in a meaningful way for us to the extent that would have come true.

Yeah, I guess I would just pull that all together. You know, I don't think the stocks are traded to discount the book either, especially if you're using front assets, shorter duration assets, you're hedging the long part of the curve. you should have a pretty good risk profile. I guess where I'm struggling is, you know, I don't think any of the peers have noted ROEs close to 20. I mean, they're mostly in the 16 to 18% range.

So I guess... I think that's probably... No, that's what we said. There was 200 over, but 100 was saying 16%. Yeah. 16%.

That's on incremental capital as well. We have part of a portfolio that doesn't, you know... Again, we're... What we're discussing is – or what I was trying to articulate was what we've been doing with incremental capital is putting it to work in some of the higher earning assets. So across the entire portfolio, ROE blends out a little bit lower than that. But I think there's no reason why we couldn't continue to add in the upper coupon portion of the book. And I think it fits our strategy right now.

Just to walk you through the marginal return on capital just so we're clear. Swap spreads are all right in the very low 4% range. So that's our hedge instrument. And we can get yields on assets in the very high fives, if not six. So you're close to 200 over using a fairly conservative leverage multiple of 7.25 on around up to 200 over. That gets you in that 14-plus percent range. Plus the return on levered capital, it gets you up to about 16. So that's what we're saying is the return on marginal capital today is around 16%. and that reflective of the fact that we started 2024 with a lower yielding portfolio and still managed to pay out a $1.44 dividend, 96%, which was taxable income. I think that trajectory plus the return of marginal capital, we're comfortable where we are. I think the stock should trade at a premium to book for that reason. Whether or not it does, I don't have any control over that, but we're comfortable with where we are.

Okay. All right. I appreciate the help walking through that. Thank you.

Yep.

Thank you. Our next question comes from Jason Weaver with Jones Trading. Your line is open.

Hey, guys. Good morning. Thanks for taking my question. Hey, Bob, I appreciate your comments on the outlook, but I'm interested in your thoughts on what's priced in. So could you speak to how you see the incremental risk to spreads under the Fed moving towards more of a holding pattern versus possibly even reversing to a more hawkish stance?

I think the market and the Fed are fairly in line in terms of the number of eases. It's depending on the day between one and two over the course of a year. And inflation, we saw today, I think the three- and six-month annualized numbers are still in the low twos. They're not there. So I think what's priced in is what we agree with. We're very consistent with that view. The hawkish outcome would be if it reaccelerates, and in which case you'll probably see potential of a pricing in heights, but also probably a sell-off in the long end. And that's what we're kind of talking about how we're positioning with our barbell strategy. We're using higher coupon, low-duration mortgages hedged long. So as Hunter said, that's what we see as the greatest risk, is a turnaround where the market bear steepens, and that's how we're positioned hedge-wise.

And in that case, if we were to move more hawkishly and that caused, for say, a decline in the equity market causing a flight to quality, Would that be beneficial to MBS spreads as well? How do you see that?

Well, the problem is when those kind of scenarios play out, you always get a spike involved, and that's never good for mortgages. You'd start to see the market sell off and repricing the Fed, and you'd have a vol spike. So in the short term, it would be probably detrimental to mortgages and REITs in general. If we settled in at a much higher rate environment with a steeper curve, At the end of that, that would be a very good investment opportunity, stable carry environment, but getting there would probably be painful. Got it. Got it.

Thank you very much.

Thank you. Our next question comes from Eric Hagan with BTIG. Your line is open.

Eric. Hey, good morning, guys. Good to hear from you. So is there a level of yield curve steepness where you might have more appetite to, you know, like deliberately extend your duration gap to maybe express, you know, more of a view on rates or spreads and historically what, what would you say is the widest duration gap you guys have deployed in the portfolio?

Um, model duration gap, I don't know, year and a half maybe. Yeah. Um, yeah, we've been talking about that this week about, you know, mortgages had a good run. Is this the time to maybe, uh, extended duration a little bit but you know days like today we'll probably see a lot of profit taking you know that's still very much relative value asset there's not a huge marginal buyer out there banks are fairly active but not as meaningfully as they've been in the past money managers are generally considered to overweight the sector and mortgages lag corporates in the fourth quarter so are they going to have a huge run not without, I think, the banks coming back in a meaningful way. And, you know, they're just not there. And I think you need a steeper, meaningfully steeper curve for them to get meaningfully back in. And then there's the whole issue about balance sheet constraints and do they have the capacity to do so. You know, certainly with deficits running where they are, these auctions, you know, growing slowly over time. You know, the fact is that the debt of the government has grown much faster than the equity capital basis of the banks. So, You can do the math. Eventually, they just don't have room. Right.

Yeah, sure. You know, I think I heard you guys say you don't expect a lot of spread widening in the current coupons if long-term rates are coming down. Can you maybe unpack that a little bit and share why you don't expect, you know, a lot of widening when there seems to be a lot of maybe refi risk in these higher coupons? Appreciate you guys. Thank you.

Yep. Yeah, their convexity is quite poor. That's why we have paid, you know, gotten some spec pulls where we can. We've actually moved into some slightly higher quality loan bail versus like the, you know, cheaper, cheapest forms. You know, the problem is you have high gross wax in these pulls, you know, 100 basis points over the net. And we saw briefly last fall that when they got the money, they prepaid fast. So we have up to quality in those forms.

That's the other side of the barbell, really, that we've been talking about. Mortgage spreads are still relatively wide by historic standards. The really low coupon stuff has tightened up a little bit. We have been focusing on in like five and five and a half, which I'm not crazy about as like a coupon, but in specified pool space, some higher quality stuff there, like we put on some New Yorks. Those are Those are solidly discount coupons right now, and so the pay-ups on those pools is relatively low. So that half of the portfolio, a little less than half of the portfolio, the threes, three-and-a-halves, the fours, four-and-a-halves, the fives, the five-and-a-halves, we expect those to do well into that rally scenario. The longer-duration stuff, like the Fannie Threes, we would expect them to grind tighter as rates came down and spreads tightened and offset some of the erosion and book that would come from the higher coupon portfolio lagging. So that's the other side of the strategy. We didn't really talk about too much today because, like we said, we sort of have been thinking and focusing on the bear steepener, strong economy type of scenario. But there's definitely still a large portion of the portfolio that's designed to do well in a rally.

And I'll just add, one thing we have seen in this backup is that the loan balance pulls, premium loan balance pulls, I'm sorry, discount loan balance pulls have performed very well, especially with any seasoning. And they're very much in demand as a result. But, you know, we've seen Not so much the very lowest loan balance, even the 150s, pay very well as discounts, mid-teens. So those are pretty attractive returns.

Thank you. Our next question comes from Mikhail Goberman from Citizens GMP. Your line is now open.

Hey, Mikhail. Hey. I just hope everybody's doing well. Just to clear up the current book value that you mentioned, does that include today's dividend or are we going up 1% and then taking the dividend out?

No, that's inclusive of the dividend. So up 1% this week. Great.

And, you know, obviously you guys covered a lot of territory. I guess if I could just maybe get your thoughts on MBS, your outlook for MBS supply and how Any potential GSE reform might affect that? And just in general, any thoughts on any potential regulatory changes coming down the pike with the new administration? Thanks.

Yeah, that's certainly getting a lot of press now, regulatory reform, that is. I don't think it's going to happen. That's just my personal view. I think that given the fact that housing is at an all-time low in terms of affordability, and rates are high. Anything that would make that worse, I think, is just political capital that's not worth spending. You have a new administration. They've talked about what they want to do. They're talking about tariffs and tax cuts. That doesn't seem to me like that's the place they want to spend their capital, making the housing market less affordable. It may happen, but I give it a low probability. In terms of supply, I think it's, you know, I've already started to see a few of the street shops lower their estimates for the year. I think that probably continues.

Yeah, I think that the banking sector is already in, has a lot of fresh scars on it. And, you know, given the regulatory environment that they're dealing with, I don't think it would be very likely to see, you know, the GSEs privatized and now all of a sudden, you have an enormous portion of their holdings become private label credit. I don't see how they would be able to comply. Those two concepts of, you know, like Basel III and GSE privatization are kind of not congruent with one another.

Yeah, I mean, that's a great point. Nobody makes that point at all. I mean, if you were... Actually, we have a... He's got a chart in here in the back. Yeah, we do. If you look at slide 26, give you a second to get there. That shows mortgage-backed security holdings by commercial banks and the Fed. If all of a sudden you change the risk weighting on all those, that would be devastating for the banks. All of a sudden, these are no longer an agency. They're a private label. That would be very challenging, especially given the environment we're in where bank balance sheets are fairly constrained as it is. Having to take up more capital as a result of that would be Very challenging to do.

And the one type of entity that stepped into the bank's place as they lost deposits were money managers, which often have very strict investment guidelines. I think it would create a lot of chaos, I guess is what I'm getting at.

Great. Thank you for your thoughts, guys, and best wishes going forward. Thanks. Yep. Thanks, Mikel.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone. Again, that is star 11 to ask a question. I'm showing no further questions at this time. I would now like to turn it back to Mr. Robert Colley for closing remarks.

Thank you, operator. Thanks, everybody. If anybody does have any questions that come up after the call, please feel free to call or if you listen to the replay, the office number is 772-231-1400. Always willing to take any and all calls. Otherwise, we look forward to speaking with you at the end of the first quarter. Thank you.

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