Orchid Island Capital, Inc.

and thank you for standing by. Welcome to the Orchid Island Capital Third Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Melissa Alfonso. Please go ahead.

Good morning, and welcome to the third quarter 2025 earnings conference call for Orchid Island Capital. This call is being recorded today, October 24, 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 Delegation Reform Act of 1995. Listeners are cautioned that such forward-looking statements are based on information currently available on the management's good faith, believe 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.

Thanks, Melissa. Good morning. I hope everybody's doing well, and I hope everybody's had a chance to download our deck. As usual, that's what we'll be focusing on this morning. And also, as usual, it's on page three, just to give you an outline of what we'll do. The first thing we'll do is have our controller, Jerry Sintes, go over our summary financial results. I'll then walk through the market developments and try to discuss what happened in the quarter and how that affected us as a levered mortgage investor. Then Hunter, I will turn over to Hunter. He'll go through the portfolio characteristics and our hedge positions and trading activity. And then we'll kind of go over our outlook going forward. And then we'll turn it over to the operator and you for questions. So with that, turn to slide five, Jerry.

Thank you, Bob. So on slide five, we'll go over financial highlights real quickly. For Q3, we reported net income of $0.53 a share compared to $0.29 loss in Q2. Book value at 9.30 was $7.33 compared to $7.21 in June 30. Q3 total return was 6.7% compared to negative 4.7% in Q2. And we had a $0.36 dividend for both quarters. On page six, our average portfolio balance was $7.7 billion in Q3 compared to $6.9 billion in Q2. Our leverage ratio at 9.30 was 7.4 compared to 7.3 at 6.30. Prepayment speeds were at 10.1% for both Q3 and Q2. And our liquidity was 57.1% at 9.30, up from 54% at June 30. So I'll turn it back over to Bob.

Thanks, Jerry. I'll start off slide nine with market developments. What you see here on the top left and right are basically the cash treasury curve on the left and the silver swap curve on the right. There are three lines, and each red line just represents the curve at June 30th. The green line is as of 9.30, and then the blue line is as of last Friday. And on the bottom, we just have the three-month Treasury bill versus the 10-year note. So what I want to point out, basically, the curve is just slightly steeper for the quarter, just reflecting the fact that with the deterioration labor market, the market's pricing has fed cuts, and so the front end of the curve has moved. Uh, if you look at basically the movements on these two lines and it's the same for both from the red to the green line, that just reflects the deterioration of the labor market. Ironically, when the quarter started, the first event of the quarter was really on the 4th of July when president Trump signed into law, the one big beautiful bill act. And initially the market sold off 10 years point slip sold off by about 25 basis points. And at the end of July at the Federal Open Market Committee meeting, the chairman was actually fairly hawkish. That was on July 30th. But then quickly on the 1st of August, the non-farm payroll number came out. It was weak, but also it was very meaningful. Downward revisions. And that kind of started a string of events which started to paint a very clear picture of a deteriorating labor market. The QCEM, which are the revisions to prior payroll numbers through the first quarter of 2025. were much more negative than expected. And then, in fact, ADP the last few months were negative. So that changed the picture. That changed the way the Fed looked at the world. And then the market started to price in Fed easing, and that's what you've seen here. What you've seen between the green and the blue line, so to speak, is what's happened since the end of the quarter. Basically, the government shut down. Absent today's data, we basically have had very little data to go on. And basically you see really what would be described as just a graph for yield. There are few securities that offer a yield worth of 4%. And the long end of the treasury curve has seen pretty good performance quarter to date. The bid continues. In fact, that's even present in the investment-grade corporate market where in spite of the fact that credit spreads are very tight, you're still seeing strong demand. And it's probably just because there's a lack of alternative investments that you can buy with that kind of a yield. But I guess if I had to summarize it, from our perspective, it was actually a net, a very quiet quarter. Rates were essentially unchanged, and importantly, vol was down, and I'll get to that more in a minute. And then, of course, the Fed's in play. So a steepening curve, low interest rate volatility, always good for mortgage investors. Turning to slide 10, on the top, you see the current coupon mortgage spread to the 10-year range. And then on the bottom, we have two charts that just kind of give you some indication of mortgage performance. The 10-year treasury is the typical benchmark people look at when they think of occurrences on mortgage or kind of appraise mortgage attractiveness. And this makes it look like the luster's off the rose to a large extent because, for instance, if you look at where we were in May of 2023, that spread was 200 basis points, and it's halved since then. It's 100. But I think you have to keep in mind that the 10-year treasury is a great benchmark over very long periods of time, but the current coupon mortgage does not have a duration anywhere close to the 10-year. In fact, it's about half. Most street shops use a hedge ratio for the current coupon. Somewhere around in here, we have a five-year or five or half of the 10-year. So a more appropriate benchmark might actually be a five-year treasury and, of course, swaps. We have some charts in the appendix. For instance, if you look on page 27 and you look at the spread of the current coupon mortgage to the seven-year swap in particular, and I'm just going to go there now if you don't mind. But on slide 27, I just want to give you a more accurate picture of what we're looking at. The blue line there just represents the spread of the seven-year swap. That's kind of the center point for our hedges, and this is a three-year look at. And I just want to point out that If you look at this chart, you see that we're currently at the low end of the range, but we're still in the range, whereas with respect to the 10-year, we've broken through that. I think that just reflects the fact that the curve is modestly steep, and you're basically benchmarking a five-year asset against a 10-year benchmark, and so it looks like it's tightening, when in fact it really, really isn't. And the other thing I would point out, too, and we've talked about this in the past as well, if you look at slide 28, I think this is important. because what this shows are the dollar amount of holdings of mortgages. The red line represents the Federal Reserve, and, of course, they're going through QT. So that number just continues to decline. But the blue line is holdings by bank, and they are the largest holder of mortgages that there are. You can see this line, while it's increasing, is very, very modest. In fact, what we hear, most of their purchases are just in structured product, floater and the like. And I think until they get meaningfully involved, mortgages are not going to scream tighter. So there is still some attractiveness, if you will, in the mortgage market. And I suspect that that's going to stay, as I said, until the banks get involved. If you look at the bottom left, you kind of see the performance. And as you saw, we did tighten. And if you look at this chart on the left, what is this one I show every time? It's normalized prices for four select coupons. So all you do is you take the price at the beginning of the period, you set it to $100,000. And you can see most of the move upward was in early September. And the reason I point this out is if you think of it this way, with the banks absent, the marginal buyer mortgages are basically either money managers or REITs. And what we saw around that period were, in addition to the prolific ATM issuance by REITs, we also saw two preferred offerings by some of our peers and a secondary by another of ours. So those were kind of chunky issuances. And I think that's what drove that kind of spike tighter. If you want to look at the spread of our current coupon mortgage to the five-year treasury, you see a spike down right around that date. It was over about a two week period, but since then we've kind of plateaued. And so mortgages have still retained some attractive carry. Hunter's going to get into that more detail. I don't want to rain on his parade, but I just want to point out that the mortgages, while we had a good quarter, they're still reasonably attractive on the right. You see the dollar roll market. Generally, dollar rolls are impacted by anticipated speeds. With the rally in the market, that's become a big issue. And I will just point out one of these. If you look at that little orange line, again, this is like a one-year look back. That orange line represents the Fannie Six roll. And you can see towards the end, as we enter September, with the rally, that rolls cut way off. And the market's pricing in extremely high speeds. And as a result, SPEC polls, which are the beneficiary of their call protection and perform well in a rally, have done extremely well. The cash window list that will come out every month in October this month, they did very, very well and suspect they will probably continue to do so going forward. On the next chart on page 11, again, this is very relevant for us as levered mortgage investors since we're short prepayment options. And you can see on the top, this is just normalized ball. This is a proxy for volatility in the interest rate market. The spike there, which was in early April, that was Liberation Day. And you can see since then, it's done nothing but come down, continue to come down. In fact, if you look at the bottom chart, this is the same thing, but with a much longer look back period. And you can see the spike there around March of 2020, that was the onset of COVID. So it's a very volatile event. But then immediately after that, you had extremely strong QV on the part of the Fed buying treasuries and mortgages. So it's kind of like a rate suppression environment where they're buying up everything and driving rates down, which is a byproduct of that is that they drive volatility down. And as you can see on the right, we're getting near those levels. Now, I don't think that means rates are going to zero, but what we are seeing is interest rate volatility being pushed down. I think part of what's behind us is the fact that we all know that next year the Fed chairman is going to be replaced when his term ends in May. In all likelihood, that's going to be by someone who's pretty dumbish, so the market expects kind of a very dumbish outlook for Fed funds and rates in general. And, of course, to the extent that that happens, and who's to say that it will, but it would also continue to be supportive for us as a celebrity agency on the S markets because mortgages, you would think, would continue to do well in that environment. Turning to slide 12, this is a relatively important slide because this really is focused on the funding markets, and this is what's really become a hot topic, if you will. So what we see on the left are just swap spreads by tenor. And if you'll notice, in the case of the purple one, which is the ten year, and the green one, which is the seven year, they've all kind of turned up. In other words, they're less negative. So we would say they're widening, even though it seems counterintuitive because the spread to the cash treasury is actually getting narrower, but it is what it is. What happened here was that the chairman recently in a public, his comments mentioned that the end of QT was in the next few months. Most market participants were expecting that in the first, if not the second quarter of 2026. So that was news. And more importantly, what we've seen since, especially this month, is that SOFR has traded outside of the 25 basis point range for Fed funds, which is between 4% and 4.25%. In fact, it's been consistently well outside that range, which points to potential funding issues, and the Fed will in all likelihood address that, and quite possibly at their meeting next week. What that means, if they end 2T, is that the runoff in their portfolio, which we saw in that chart in the appendix, is going to stop. It'll just plateau. But they'll likely do, and I don't know this, of course, with certainty, but I suspect is the case, the Treasury paydowns will be reinvested back in the Treasuries, and mortgage paydowns, since they don't want to hold mortgages long-term, will also be reinvested in the Treasuries, probably more so in bills. And what that means then is going forward, given that the government is running large deficits, is that the Fed will become a buyer of treasuries. As a result, the cash treasuries will not continue to cheapen as they have, and swap spreads, which have gotten really negative, have gone the other way. And that just reflects the anticipation by the market that the Fed, as a buyer of treasuries, is going to keep issuance in check and keep issuance from flooding the market and driving spreads wider and turn premium higher and And that is significant for us because if you look at the right-hand chart, this is our hedge positions pie chart, obviously, by DV01. In other words, the sensitivity of our hedges to movements and rates. And as you can see, 73.1% of our hedges are in swaps by DV01. So, obviously, this movement has been beneficial to us to the extent it continues. Of course, it will continue to be beneficial. In fact, I just looked at swap spreads. before I came in on the call today, and if you look at pretty much every tenor outside of three years, every one of them on a one, three, and six-month look back is at their wides, absolutely pegged, 100% of the wide. So that's a significant movement. That being said, as we did mention, there has been some issues with the funding market with SOFR being outside of the range. spreads, funding spreads to SOFR have been a little bit elevated. We typically used to be in the mid-teens. It's there to the high teens now. But the fact that the Fed is very much on top of this is good for us because it means they're going to be attentive to it and keep us from repeating what we saw, for instance, in 2019. The next slide is 13, refinancing activity. And this kind of paints a very benign picture, frankly. I just want to talk about it. If you look at the top left, You can see the mortgage rates in the red line, the refi index, and all rates have come down some. The refi index has bumped up. It's not much. In fact, if you look at the left axis, you can see we were at a 5,000 level in December of 2020, and we're far below that. The second chart on the right just shows primary and secondary spreads, and they've just been very choppy. There's really not a story to be told from that. But what I want to focus on is the bottom chart, and what this shows is the percentage of the mortgage universe that's in the money, that's the gray shaded area. And then you have the refi index. And as you can see on the right hand side of this chart that this is there's some gray area there, but it's very modest. So again, it paints a very benign picture, but it's misleading. And the reason it is so is because this is the entire mortgage universe. Most of the mortgages in existence today, or a large percentage of them were originated in the immediate years after COVID. So they have very low coupons one and a half to two and a half, three, and they're out of the money. But if you were to do the same chart for just 24 and 25 originated mortgages, it would be an entirely different picture. It would be a much higher percentage of the mortgage universe in the money, probably be north of 50. And since we as investors in this space and like our peers, we own a fair number of 24 and 25 originated mortgages. In fact, we own to some extent somewhat of a barbell in the sense that most of our discounts are very old And most of our newer mortgages, you know, the higher coupons are lower wall. And so that really means security selection is important. And in a moment here, I will turn the call over to Hunter. He will talk about what we've done in that regard in great depth. But I just want to point out this picture that this chart is somewhat misleading. Before I turn it over to Hunter, as always, I'd like to just say a bit about slide 14. Very simple picture. There are two lines on this chart. The blue line just represents GDP in dollars. And the red line is the money supply. And what it points out is the continuing fact that the government or fiscal policy, if you will, is still very stintive. The government is running deficits between $1.5 and $2 trillion. That's in excess of 5% of GDP. And the takeaway is that in spite of what might be happening with respect to tariffs or the weakness in the labor market or geopolitical events, The government is supplying a lot of stimulus to the economy, and you can't forget that looking forward. And that's probably why, in spite of the tariffs, among other reasons, obviously, but why the economy really has not weakened materially. And with that, I will turn it over to Hunter. Thanks, Bob.

I'd like to talk to you a little bit about how our portfolio of assets evolved over the course of the quarter, our experience in the funding markets, our current risk profile, how our portfolio is impacted by uptick in free payments and give a little bit of my outlook, I suppose, going forward. So coming out of a volatile second quarter, we took advantage of an attractive entry point by raising $152 million in equity capital and deploying it fully during the quarter. The investing environment allowed us to buy agency MBS at historically widespread levels. During the second half of the quarter, Equity raised and slowed, but the assets we purchased in the third quarter were tightened sharply during that second half of the third quarter. As discussed on our last earning call, our focus has been on 30-year 5.5, 6s, and to a lesser extent 6.5 coupons. And those didn't tighten quite as much as the belly coupons, but we feel like they offer superior carry potential going forward. The portfolio remains 100% agency RMBS with a heavy tilt towards call protected specified pools. These pools help insulate the portfolio from adverse payment behavior and reinforce the stability of our income stream. Newly acquired pools this quarter all had some form of prepayment protection. 70% were backed by credit impaired borrowers like low FICO scores or loans with high GSE mission density scores. 22% were from states experiencing home price depreciation or where refi activity is structurally hindered. Those pools were predominantly Florida and New York geographies. 8% were loan balance pools of some flavor. As a result of these investments, our weighted average coupon increased from 545 to 553. The effective yield rose from 538 to 551. and our net interest spread expanded from 243 to 259. Across the broader portfolio, pool characteristics remain very diverse and defensive towards prepays. Exposure, 20% of the portfolio now is backed by credit impaired borrowers, 23% Florida pools, 16% New York pools, 13% investor property pools, 31% have some form of loan bow story, if you will. We had virtually no exposure to generic or worse-to-deliver mortgage securities, and we were net short TBAs at 930. Overall, we improved the carry and prepayment stability of our portfolio while maintaining conservative leverage posture and staying entirely within the agency MBS universe. Turning to slide 17, You can see sort of visual representation of what I just discussed. You can clearly see the shift in the graphs, the concentration building in the five and a half and six coupon buckets across the three graphs. These production coupons remain the core of our portfolio and continue to offer the best carry profile in the current environment. Now I'd like to discuss a little bit about the funding markets. The repo lending market continues to function very well, and ORCID maintains capacity well in excess of our needs. That said, we observed friction building in the funding markets, particularly during the weeks of heavy Treasury bill issuance and settlement. These dynamics have led to spikes in overnight SOFR and the tri-party GC rates relative to the interest paid by the Federal Reserve on reserve balances. particularly around settlement dates. This is largely attributable to declining reserve balances and continued heavy bill issuance. ORCA typically funds through the term markets, which has helped insulate us from some of the overnight volatility, but still term pricing has been impacted. We borrowed roughly SOFR plus 16 basis points for most of the year, but in recent weeks that spread has drifted up a couple of basis points, say SOFR plus 18 more recently. Looking ahead, we expect the Fed to end QT potentially as early as next week's meeting and begin buying Treasury bills through renewed temporary market operations. If and when this occurs, it should provide positive tailwind for our repo funding costs, especially if it's paired with further rate cuts by the FOMC. This would help with the continued expansion of our net interest margin. Just wanted to make a brief note about this chart on this page. Might seem a little bit counterintuitive. The blue line on the chart represents our economic cost of funds. This metric, as you can see, is kicked slightly higher in spite of the fact that rates are coming down. And this is really due to the fact that as we've grown, there's a diminishing impact of our legacy hedges on the broader portfolio. So, recall that this, This metric economic cost of funds includes the cumulative mark-to-market effect of legacy hedges. So it's sort of akin to the rate paid on taxable interest expense with the deferred hedge deductions factored in. On the other hand, the red line, which has been moving lower, represents our actual repo borrowing costs with no hedging effects. As the Fed cuts race, any unhedged repo balances will benefit directly from this decline. As of June 30th, 27% of our repo borrowings were unhedged, and that increased to 30% more recently, modestly enhancing the potential benefit to lower funding rates. Turning to slides 19 and 20, speaking of hedges, on September 30th, ORCID's total hedge notional stood, as I said, at $5.6 billion, covering about 70% of our borrowings. repo funding liabilities. Interest rate swaps total $3.9 billion, covering roughly half the repo balance, with a weighted average pay fixed rate of 33.31% and an average maturity of 5.4 years. Swap exposure is split between intermediate and longer dated maturities, allowing us to maintain protection further out the curve while taking advantage of lower short-term funding costs. Short futures positions totaled $1.4 billion, comprised primarily of SOFR 5-year, 7-year, and 10-year treasury futures, as well as small position and ear swap futures. On a mark-to-market basis, our blended swap and futures hedge rate was 3.63 at $6.30 and 3.56 at $9.30. You think of this metric as the rate we would pay if all of our hedges had a market value of zero at each respective quarter end, a par rate, if you will. Our short TBH positions totaled $282 million, all of which were, I think, Fannie 5.5s. A portion of this short is really part of a bigger trade where we're long 15-year 5s and short 30-year 5.5s. So a 15-30 swap structured 2.5 production against rising rates in a spread-widening environment. The remainder of the short position was just executed in conjunction with some pool purchases late in the quarter, following a period where spreads had tightened materially. So we didn't want to take the basis exposure quite yet. ORPA held no swaptions during the quarter, which was fortuitous because there was a sharp decline in volatility. At June 30th, approximately, as I mentioned, approximately 27% of our repo borrowings were unhedged. That figure increased to 30% by September 30th. This increase reflects the impact of the market rally and the corresponding shorter asset durations, which allowed ORCA to carry a higher unhedged balance while maintaining minimal interest rate exposure. In other words, this shift does not indicate that the portfolio was less hedged. In fact, at June 30th, our duration gap was negative 0.26 years. And by September 30th, it had grown to negative 0.07 years. So still highlights a very flat interest rate profile. Speaking of which, slides 21 and 22 get a real pitch sense of our interest rate sensitivity. ORCID's agency RMBS portfolio remains well balanced from a duration standpoint. with overall rate exposure very tightly managed. Our model rate shock showed that a plus 50 basis point increase in rates we estimate would result in a 1.7% decline in equity, while a 50 basis point decrease would reduce equity by 1.2%. So again, it's very low interest rate sensitivity, at least on a model basis. The combination of higher coupon assets and intermediate to longer-dated hedges reflect our continued positioning that guards against rising rates and a steepening curve. This positioning is grounded in our view that a weakening economy and lower rates across the curve while potentially introducing short-term volatility should be positive for agency MBS and the broader sector in general. as such environments are often accompanied by stress in equity and credit markets, and investors often seek safety in fixed income and REIT stocks. Conversely, if the economy remains strong or inflation proves sticky, we would expect a corresponding rise in rates and a basis widening in the belly of the coupon stack, with outperformance shifting to shorter-duration, high-coupon assets, which are currently lagging due to prepayment exposure. And that's a perfect segue to slide 23, where we talk about our pre-payment experience. This has been something that we've largely glossed over for the past couple of years, other than a brief period of time following a 10-year brief run at 360 last September. In the third quarter, including the September speeds released in early October, Orbit experienced a very favorable prepayment outcome across the portfolio. Lower coupons continue to perform exceptionally well. 3s, 3.5s, and 4s paid at 7.2, 8.3, and 8.1 CPR compared to the TBA deliverables, significantly slower at 4.5, 2.9, and 0.7. 4.5s and 5s paid 11 and 7.5 CPR for the quarter, versus 2.3 and 1.9 on comparable deliverables. Among our low premium assets, which are 5.5, largely throughout most of the quarter, these were largely in line with the deliverables. 6.2 was our experience, 6.2 CPR versus 5.9. However, in the most recent month, generic 5.5 jumped up to 9 CPR, while our portfolio held steady at 6.3, really underscoring the benefit of pool selection and the relatively low wall of the portfolio. In premium space, sixes and six-and-halves paid 9.5 and 12.2 CPR for the quarter compared to 13.8 and 29.5 on TBA deliverables. As refi activity spiked in September, the various forms of call protection embedded in our portfolio produced very sharp divide, though. In the most recent month, R6 has paid 9.7 versus 27.8% for the generics, and R6.5 has paid 13.9 versus a 42.8 CPR on the generics. So you can really see the benefit and potential carry above and beyond TBA for those coupons. Overall, the quarter's results highlight our discipline pool selection. where call protected specified collateral continues to deliver materially better prepaid behavior than the TBA deliverable, as I mentioned. Just a few concluding remarks from me. In summary, we experienced a sharp rebound in the third quarter, more than offsetting the mark-to-market damage done during the volatile liberation day widening in the second quarter. Orkin successfully raised $152 million during the quarter and deployed the proceeds into approximately $1.5 billion of high-quality specified pools. The pools were acquired at historically widespread levels and will serve a meaningful driver of increased earning power for the portfolio in the coming quarters. While our skew towards high-coupon specified pools and bear steepening bias resulted in slight underperformance relative to our peers, with more exposure to belly coupons, we remain highly constructive on our current asset and hedge blend. We believe our positioning will continue to deliver great carry and be more resilient in a sell-off, particularly given our call protection and limited convexity exposure. Looking ahead, we're very positive on the investment strategy. So I have mentioned several factors that could provide Significant tailwinds to the agency RMBS market and our portfolio for the quarters ahead are continued Fed rate cuts, the anticipated end of QT, a renewed Treasury open market operations to help stabilize the repo and bill markets, potential expansion of GSE retained portfolios, a White House and Treasury Department that are openly supportive of tighter mortgage spreads, We also continue to see strong participation from money managers and the REITs, as Bob alluded to. There's potential for banks to reenter the markets more meaningfully as funding and regulatory capital conditions improve. Taken together, we believe the current opportunity in agency RMBS is still among the most attractive in recent memory, and we're well-positioned to capitalize on that. With that, I'll turn it over to Bob.

Thanks, Henry. Great job. Just a couple of concluding remarks, and then we'll turn it over to questions. Basically, just to reiterate kind of our outlook, I think that it's kind of hard to say where we go from here in terms of the market and the economy. I think that we're possibly at a crossroads. On the one hand, we've seen a lot of labor market weakness, and it's gotten the Fed's attention, and they appear ready to cut rates, which could lead to a prolonged low-rate environment. We also see a lot of resiliency in the economy, very strong growth. consumer seems to be in decent shape. And as I mentioned, you know, the government's running large deficits, plus you have the benefits of AI and the CapEx build out, all that tied into the one big beautiful bill and the very favorable tax components of that. So I think the market and the economy go either way. But the important thing is, as Hunter alluded to, is that the way the portfolio is constructed with the high coupon bias, with hedges that are a little further out the curve, And the call-protected nature of the securities we own, I think that we can do well in either. So, for instance, if we do stay in a low-rate environment and speed stay high, we have very adequate call protection. And to the extent that the opposite occurs and the economy restrengthens and we start going into a higher-rate environment, we have most of our hedges further off the curve, and we have higher coupon securities that would do – wealth in the sense they would have enhanced carry in that environment. So I guess one final comment is that we do expect now, especially after the day of today, that the Fed will likely cut a few times. And over the course of the next few months, we're probably going to potentially adjust our hedges to try to lock in some of that lower funding and maybe add a little upgrade protection because we think if the fact the Fed does ease a few times that and all likelihood that move after that's a hike. So with all that said, we will now turn the call over to questions.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment while we compile our Q&A roster. Our first question is going to come from the line of Jason Weaver with Jones Trading. Your line is open. Please go ahead.

Hi, guys. Good morning. Congrats on the results in this quarter and the growth. I guess first, given the relatively consistent leverage and even greater liquidity now, as well as sort of the positive note that you mentioned, the prepared remarks, especially lower vol, is there anything particular on the horizon macro-wise that you'd be looking for to change overall risk positioning, notably like maybe leaning more into leverage?

Well, as I kind of said at the end, I don't know. We could with leverage. I mean, like I said, there's two paths I see the market following. One is where we kind of stay where we are. The Fed continues to cut. Rates stay low. In that environment, we're going to benefit, obviously, from the first few rate cuts because the percentage of our funding that is hedged is on the low side. I think in the event that we do see that, as I mentioned, I think we'll probably look to lock that in. And if we do so, we probably would be comfortable taking the leverage up some. To the extent the market and the economy rebounds and we see a strengthening, which I think is very possible, frankly, I would say I would take the under on the number of rate cuts between now and the end of next year. Then I would say we would not be taking leverage up. We would be looking to kind of protect ourselves. One, lock in funding and then look to protect ourselves on the asset side from extension and rate sell-off impact on mortgage prices.

Yeah. Got it, thanks, that's helpful. And then second, referencing the remarks on the high-coupon spec pools you purchased just as of late, do you have any view on pay-ups upside potential here, especially if we see more refi momentum growing?

We've really seen pay-ups ratchet higher in the beginning part of this quarter. This most recent cycle, the GSEs, we saw pay-ups increase sharply. A lot of that is attributable to the fact that there were people who were long TBAs as kind of strategy when the role markets were more healthy. And that carry from those roles was just completely evaporated. And so you've seen people who might have had heavier concentrations in TBAs really be forced to dive in and just start buying everything they could find to supplement that income. We fortunately didn't have that problem. And most of the spec pools we bought was really kind of the first half of the quarter.

So yeah, that's just to reiterate that point. I mentioned we had the spike tighter in mortgages like in early September. And I forgive you if you mentioned this, I'd miss it. But of the capital we raised in the quarter, 70% of that was deployed before then. So we benefited from that. And then also I just, you know, We talked about this at the end of the second quarter. At that time, the weighted average price of the portfolio was basically par. It was like 99.98. And most of what we added, all of what we added were to higher coupons. But that being said, the average price of this portfolio now is a little over 101, 101 and 7. And our average pay up is 33 ticks. So while we've been adding call protection, we're not paying up for the highest quality. Frankly, we don't think that it's been warranted. not get too into the weeds of what we own, but we've gotten, as you saw in our realized prepayment speeds, very good performance out of those securities without having to pay extremely exorbitant payouts. I don't know that we're ever going to get back to where we were in 2021, just by comparison. Back then, our higher coupon, New York, whatever coupon they were, the payouts were multiple, four and five points. I don't know that we're going to see that anytime soon, but We've done quite well without having to go anywhere near those kind of levels.

Thanks for that. I appreciate the time, guys.

Thank you, and one moment for our next question. Our next question will come from the line of Eric Hagan with BTIG. Your line is open. Please go ahead.

Hey, thanks. Good morning, guys. Eric, hi, Eric. Hey, good morning. I think you guys have kind of talked a little bit around it, but you know, are there scenarios where dollar roll specialness would return to the market in a more meaningful way? How do you, how do you feel like specialness would affect like trading volume and kind of market dynamics over overall, um, going forward?

Sorry about that. Um, I don't know that, I mean, we saw that really in spades back in the early days of QE when the Fed was buying everything. I don't think we're going to see QE. In fact, it's been made pretty clear by the Fed that when they reinvest paydowns with respect to mortgages, they're only going to be buying treasuries and probably bills. So I don't know. I don't really see the specialness of the rule market coming back in a big way. You know, we've historically not been big players in that regard, as you probably know. So, I don't see it as a core. One, I don't think it's likely to happen, and two, it's never been a core element of our strategy.

No, it's looking as long as they're, you know, especially in the upper coupon, that's really being driven by fear of prepayments, and the speeds that are being delivered into these, that are the worst to deliver rules that are being delivered into DBAs are pretty bad here. So, I mean, I don't expect them to continue to be so for the next couple of months. I think it's going to stay depressed, at least in that space, until we pop out of this. It'll either pop out of this rate environment that we're in now, so trend back towards the top or middle of the recent rate range, or until rates move meaningfully lower. But I think we're kind of at a spot here where you're not going to see too much in the role space.

Okay, yeah, that's interesting. Can you talk through some of the, you know, what the supply and availability for longer-dated repo looks like right now? I mean, do you see that as, like, an effective hedge for the Fed not cutting as much as what's currently anticipated?

We'd like to be doing so. We've looked into it a lot. Unfortunately, the spreads are just too wide. We've done some, and we will continue to do so. But as Hunter mentioned, you know, we were historically in the mid-teens. We're approaching the higher teens. But you're getting above that when you start going out in terms. So we have done some just to try to lock in as much as we can. And we do it opportunistically. So, for instance, you know, if we were to see, let's say, the government reopens and you get some heinous, you know, nonfarm payroll number in the market, you know, prices in seven or eight cuts, that's when we try to do those things. So I would opportunistically.

Yeah, it's been more effective to do in future space for us. And we do so from time to time. I think I alluded to the fact that we have a pretty good chunk of the portfolio that is unhedged right now, so we can certainly have room to move in and do some shorter-dated short futures in the first year or two of the first couple years of the curve or some kind of a swap or something like that with a relatively low duration. we joke around that the repo lenders are always, you know, very quick to price in hikes and very reluctant to price in cuts. So, um, that's been kind of the experience that's kept us from, and you just think about it, you know, the dynamics of what usually happens when the Fed gets involved in, you know, has to cut five or six times. It's usually coincides with a, with a credit market rolling over or a weakening economy. And, um, You know, those are not particularly comfortable environments for repo lenders.

Got you, guys. Thank you so much.

Thank you. And one moment for our next question. Our next question will come from the line of Mikhail Goberman with Citizens JMP. Your line is open. Please go ahead.

Hey, good morning, guys. Hope everybody's doing well. You guys talk about call protection. About what percentage would you say of your portfolio is covered with call protection if rates were to go down, say, 50 basis points in a sharp manner?

Almost 100% of the portfolio has some form of call protection. We have little pockets of what we call lower pay-up stories, like LTV, that sort of thing. We're still constructive on those in spite of the fact that they're relatively low in terms of pay up, but we have a housing market that's under pressure and it's difficult for borrowers with high LTVs to turn around and refi at every opportunity. They will ultimately be able to do so, but it's not very cost effective for them. It's not the lowest hanging fruit, I guess. the more generic stuff is. So, yeah, almost all of it is. We have some stuff that we keep around just in case we have a dramatic spread, whitening some really low pay-ups pools that we use, you know, if we ever have a situation where we need to quickly reduce leverage by just delivering something in the TBA, but the rest of the portfolio's got some form.

And most of it's been working out really well for us. And as far as the rally... As I mentioned, our weighted average price at the end of the quarter was a little over 101. I think the average coupon is still high fives. So it's premium, it's in the money, but it's not so extreme. So another 50 basis points rally gets you, you know, obviously like a north of the six, which is like a 102 or 103 price. So they're going to be faster, but with the call protection we have, I don't think the premium amortization is going to be so detrimental. In fact, I think our premium amortization for this quarter was very, very modest. So it was an uptick, obviously, from there. But it's nothing like, for instance, what we saw in the immediate aftermath of COVID when those numbers were very, very large.

As we bounced around kind of this rate range, where we have bought the more expensive, I guess, or the higher quality stories has been kind of in that first discount space. And the rationale there is just they're relatively cheap at that point in time. So, like, when rates were a little bit higher, fives were, you know, 98, 99 handle. We bought a lot of New York fives in the very beginning part of the quarter when rates were a little bit higher. And so those will do very well if we continue to rally.

That's helpful. Thank you very much. And if I can ask one about the – flesh out your comments a bit about the hedge portfolio. If swap spreads were to widen back out, how much benefit do you guys see to the portfolio?

You said widen out. They've been widening, right? I know it's unusual. If they continue. If they continue to widen. Yes, continue to benefit from that. I don't know if we have a dollar amount on it, but if you look at...

It's around 2 million DVO1, so you can think of it at those terms, yeah.

So, like, for instance, like, the long end is, like, at negative 50, so let's say you went to 40, obviously, you know, something like that. I don't know how much further you can go, though, because you could argue that the market's really priced in, the end of QT and the Fed stepping in to reinvest paydowns in the treasuries. I think in order for that to happen, you'd almost have to take QE. Meaningful, not just reinvesting paydowns, but what Hunter said. So $2 million BVO1, so if you get like another 10 bits, what is that? It's something like 15 cents or something like that, or 12 cents a book.

Fair enough. And if I could just squeeze in any update on current book value, month to date.

It is up a hair. Basically, you know, we don't audit that number every day because we get a dollar an amount every day. It's up very, very modestly from quarter end.

Gotcha. Thanks so much, guys, as always. Take care. Yep.

Thank you. And I would now like to hand the conference back over to Robert Colley for any further remarks.

Thank you, operator. Thank you, everybody, for taking the time. As always, to the extent anybody has any questions that come up after the call or you don't get a chance to listen to the call live and you wish to reach out to us, we are always available. The number here is 772-231-1400. Otherwise, we look forward to speaking to you at the end of the fourth quarter. And have a great weekend. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.