Q4 2020 Orchid Island Capital Inc Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.
[music].
Good morning, and welcome to the fourth quarter 'twenty 'twenty earnings conference call for Orchid Island capital.
This call is being recorded today February 26 2021.
At this time the company would like to remind the listeners that statements made during todays 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 managements, good faith belief with respect to future events and are subject to risks and uncertainties.
Could cause the 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 Cauley. Please go ahead Sir.
Thank you operator, and good morning, I hope everybody had a chance to download our flip book, which we posted on our website last night.
And as usual I'll be going through the flip book over.
Over the course of the call.
Wanted to start off by saying that orchid had another very strong quarter.
Continued book value recovery from Q1 and strong earnings.
We continue to pay a very attractive dividend that is covered by earnings.
In turn allows our stock to trade at or above book value, which it has for several months now.
This in turn allows us to opportunistically raise capital by either our ATM, where our secondary whenever opportunities in the market present themselves. This of course gives us a chance on enhanced earnings power of the company.
With respect to the slide deck, we do maintain the majority of the slides from quarter to quarter.
Depending on the quarter some are more relevant than others given that we're kind of late into February.
I will be skimming over especially the ones on the market focus slides.
And then also given the significant changes in the market, especially over the last two weeks.
I will spend some time going over steps that we've taken with the portfolio since year end.
With that I'll just go over the slide deck now as usual, we'll start off by giving you the highlights for the quarter on our results as.
As I said, we'll go through the market developments relatively quickly.
I will discuss our financial results and then spend the bulk of the time talking about the portfolio.
Our hedged.
Physicians and changes made to both over the course of both the fourth quarter and year to date.
With that on slide four orchid reported income per share of <unk> 23.
This is net earnings per share of <unk> 30, excluding realized and unrealized gains and losses on our RMB assets and derivative instruments, including net interest expense on interest rate swaps.
We had a loss of <unk> <unk> per share from these realized and unrealized gains on our RMB acid derivative instruments, including again net interest expense on the swaps.
Book value per share was $5.46 at the end of the year, an increase of two or three 7% from the end of the value at the end of the third quarter of $5 44.
Fourth quarter of 2020, the company declared and subsequently paid $19.05 per share on dividends and since our initial public offering the company has declared $11 $78.05 dividends, including dividends declared in the first two months of this year.
Total economic return of $21.05 per share or 4% for the quarter, which is 15, 8% annualized.
Turning to slides five and six this is where we present our results versus our peer group. Our peer group is of course listed at the bottom of each page on the first slide we show the performance calculated on a total return basis using change in the stock price and dividends.
And on the second page using book value because we are doing this before all the results are in for the fourth quarter. Our book value members are not available for all of the peer group. So the second slide it's only through the third quarter, but as you can see again.
Orchid has had very strong performance versus the peer group.
Each case, we're looking back either one through seven year period.
Calendar years, and or if it continues to generate very attractive returns for our shareholders.
Turning now to the market developments, which again not going to spend a lot of time on given how late we are in the first quarter from what's happened so far.
On the left side you can just see the changes on the treasury curve. The Blue line represents the curve at the end of the third quarter. The Red line at the end of the year on the Green line is as of last Friday.
Since last Friday of the market has moved quite a bit.
But just to focus on the fourth quarter for a moment.
Over the course of the quarter rates didn't move higher for instance, the 10 year Treasury moved from just below 70 basis points to over 90.
And.
And this is pretty much driven by recovery.
With respect to the vaccine and not so much COVID-19 cases, because as we all know COVID-19 cases in the fourth quarter, we're starting to rise very dramatically, but we did get the announcement of a vaccine during the quarter and the market started to price in a modest recovery on.
Obviously, that's changed from Q1, but also it's important to note with respect to a mortgage investor that the spread between the primary rates available to borrowers.
On slide current coupon on a mortgage what we call. The primary secondary spread did continue to contract in Q4. So prepayments were still very very fast in the quarter and really show no meaningful sign of slowing on a seasonal basis, what we would typically see.
The second side just shows the same thing with respect to swap the swap curve.
Brief comment on what we've seen this quarter, obviously with the economic data.
Developments with respect to vaccines and the drop in Covid cases, all of these have improved very dramatically in a very short period of time.
Not surprisingly rates on followed suit, especially in the gain on the last two weeks.
So what we're really seeing is the normalization process on both the economy and the rates market are moving very rapidly.
On the comments from the fed chair this week it assumes that the fed chair is comparable with these moves they view them as a.
On the market reassessing the economy.
Pricing on a recovery, which is something they very much like to see in addition to <unk>.
Rising inflation expectations, although yesterday was a little bit different yesterday, we saw the front end of the curve move and I.
I think it remains to be seen the level of comfort that fed has with that but that's probably more of a conversation for the first quarter earnings call in today.
The subsequent slides just show the change in the 10 year rate over both the.
Quarter and for swaps and going back.
Two years as you can see the change in the fourth quarter was very modest we ended the quarter just over 90, but we were over 150 yesterday. So obviously the market has continued to sell off in price recovery and very dramatic fashion.
<unk> 10, I think is very telling what we show on the bottom on this slide. This green line is the slope of the fives <unk> curve and this is basically a proxy for the slope of the curve and as you can see going back to 2013, we entered into a very long flattening period, which has changed dramatically over the last couple of years and especially 2020.
In early 2021.
Interestingly yesterday.
<unk> actually reversed and has continued to reverse slightly today. So this $5 30 spread actually got north of that level here of $1 55 actually got into the 160 <unk>, but has since come back about 15 basis points or so just in the last not even two days.
Another telling slide is slide 11, just to go to show you how much things have changed in this quarter as you can see in the fourth quarter mortgage prices were fairly stable higher coupon mortgages did well.
We market really anticipated potential earn out in the case of the higher coupons, we've seen some of that to date on maybe not as much as the market expected and of course lower coupons were supported by fed purchases, which continue on an ongoing.
Just to give you some points of reference that you can see on the top left we show TBA prices over the course on our fourth quarter. If you look at the bottom line. That's the price of our Fannie too and as you can see at the end of the year. It was pushing up against 104 yesterday those bonds traded below par. So obviously, a very significant move.
The Red line on Fannie two fives, they were up $105 price yes.
Yesterday, there were at a 100 to handle and ironically, the topline Fannie fours, which were a high $106 price at the end of the year actually have traded up in price since year end.
Again, reflecting the desire for higher coupon securities.
With respect to the roll market. The story really hasnt changed the levels have changed somewhat higher coupons tend to trade with flat or negative drops in the lower coupons have attractive drops although that's been changing slightly lately.
On the right side of the page, we see spect prices on.
They've been very very strong we'll have more to say about that a little later.
It remains to be seen where these levels or given the moves in the last two weeks next week, we have the auction cycles, and we should be able to get a good picture on where things are.
Last week, especially the last two days, we've had very limited color with respect to spec pricing I think just given the magnitude of the market's moving such a short period of time, there just hasnt been enough trading to flush that out.
The next slide is implied vol, which is obviously very important from mortgage investors as you can see last year in March we had a huge spike.
And then it was very very subdued through the balance of the year yesterday, we were in the mid to high 80%. So we've spiked again not quite as dramatically as last March but again, a very big move in a short period of time.
These next few slides I can go over fairly quickly one.
One thing that's interesting to note here on the page 13 is LIBOR oas's for Tba's as you can see they had tightened somewhat in the fourth quarter and that continued to be the case early in the first quarter of 2021.
So, even though mortgages cheapened quite a bit in the last few days keep in mind that this is after tightening to multi year tights.
Earlier in the quarter. So they were really just coming from a very tight level and so we're really just getting back to what I might call. It fair values. So this is nothing like say for instance, the taper transom tranche on where mortgages got exceptionally cheap we're really just getting back into a more fair based range is I would say.
This range.
On Slide 14. This is again kind of more last year's news as you can see in the fourth quarter risk assets had an extremely strong quarter of course, we all know that stock markets continue to make new highs of we're doing so.
On that is reflected in the volume side, what you see the year to date returns and again risky assets, whether it's high yield or emerging market high yield on the S&P, we're very strong in lower risk assets after having a very strong first quarter.
Actually it's kind of trailed not surprisingly.
Slide 15, I think this is very relevant for us and for today's discussion on the top left hand side you see the Red line, there, which is the mortgage rate available to borrowers.
And the level on the refi index.
As you can see the level of rates to borrowers would continue to drop.
All year, it got down as low as $2 80, and depending on your source could have been below that many cases work.
On the refi index was very high.
Around 4000, and actually got as high as 4500 earlier this year.
Never quite as high as we've seen in the past, but still very strong steady level of refinancing we of course know how strong the housing market is over the course of just the last few weeks, though this red line is the reverse course and is probably over 3% today last week or this week actually the refi index dropped a little over 10 percentage below four.
And I would assume if these rates hold that will continue to drop.
On a important note.
One of the large production coupons is that two 5% 30 year mortgage and we are kind of just past the point, where they weren't no longer 50 basis points in the money depending of course on the gross whack, but so now that coupon is probably not so refinance ago.
And that's a meaningful development for the coupon stack on.
On the right hand side, you see the primary secondary spread.
As you can see by year end. It was around 150 that continued to compress into the first quarter day.
Depending on the items you look at to calculate that we use the Freddie Mac survey rate versus the implied yield on our current coupon mortgage on that.
Much closer to 1% earlier this quarter and now started to move up with rates pretty much basis point from basis point.
Bottom side. So it's just the refinance ability of the mortgage universe, obviously that could continue to change, especially given that we've had a lot of one and a half two with two 5% mortgages originated in 2020 and early 'twenty one.
10 year rates move meaningfully above $1 50, a lot of that.
A portion of the mortgage universe will no longer be re financeable.
Now with respect to our financial results on Slide 17, the left hand side, we just basically decompose the numbers, which we talked about at the top of the slide deck.
Where we break out our earnings absent mark to market gains and losses on this just provides a detail on the right hand side, we show the returns by sector in terms of how we allocate capital and given what happened in the first or the fourth quarter mortgages in spite of the rates moving slightly higher continued to tighten throughout the quarter.
And the pass through portfolio did quite well.
Given how high speeds, where on the compression of the primary secondary spreads and interest only securities. So I actually had a negative return for the quarter that is not the case in the first quarter. This year as you would expect.
Those numbers are reversed.
Moving quite well.
Just a few more historical slides before we get into the media presentation on slide 18, we show our dividend history and NIM as we reported just kind of focusing on the last four quarters as you can see the blue line here at the top of the page.
It represents the yield on our average assets and of course, it's been declining the Red line is our funding costs, which has also been declining net of that is the green line, which shows on our NIM has actually expanded modestly over this fourth quarter period and it seems to have trough. If you looked at the dividend you see more or less mirrors that.
The dividend got as low as $5 five since briefly earlier in 2020 and has since recovered.
<unk> to be see what we'll see for the balance of 2021.
But to the extent you have rates remaining higher and the curve steeper as long as funding stays low which I think is a reasonable back from the balance of the year. It should be a very attractive earnings environment for for agency rates for the balance of 2021.
On Slide 19 is just our earnings per share.
<unk> just shows you the allocation to capital I will just mentioned briefly on the left hand side you can see the allocation to passengers has been very high.
Trending higher for several years now we are just starting to reverse that ever so slightly and add some more io exposure and that I think just reflects the changing nature of the investment environment. We're in.
With respect to the right side, you can see that the portfolio of blue somewhat as I mentioned, we've been able to opportunistically add capital either through the ATM in the case of the fourth quarter or through a secondary earlier this quarter and the company continues to grow slightly.
And now really just turning to the what we've done in the portfolio.
First of all with respect to the fourth quarter as I mentioned, we had two primary developments drove decision, making on the one hand, you had rates moving slightly higher and you could see with the introduction of a vaccine that was likely to continue but you also saw a compression of the primary secondary spread which was keeping.
Refinancing activity quite high and what we did if you look on slide 22 in the portfolio look somewhat different than what we saw at the end of the third quarter and basically what we were doing is were going down in coupon out of higher coupon very high quality specs into lower coupon lower quality.
Thanks.
Basically the reason being that over the course of the quarter really into the first quarter of this year. What we saw is at the.
Pay up premiums for.
All specs were raising rising rapidly, but also the highest quality were very very high.
Given that rates were backing up and Theres a lot of duration and those those premiums.
We were trying to reduce the portfolio's exposure to those but we're also also able to do so by going into lower coupons keep prepayments level is very very low and we spoke at the top of the call about our the earnings power of the portfolio.
It's been very strong for quite some time now and we were able to keep it so by doing these trades.
So we were kind of reducing our exposure to very high pay up premiums TB spec pools. We also added some TBA dollar rolls.
Capture some income that way and then we also started to.
Our hedges slightly we added some shorts TBA shorts in the 3% coupon.
So that was.
<unk> did very well for us in the quarter.
Ill come back to what we did in the first quarter in a moment in the meantime, I just wanted to talk through the balance of the slides slide.
Slide 23 shows even on this one slide was very topical last year. It shows our allocation in the case of the Red Lodge, a very high quality specs and as you can see it started to come down over the course of the year on its continued to do so into 2021.
As we do that what I just mentioned with respect to the change in coupons, but also with the increase in rates.
So expect that the refi index, which starts to come off.
That being said on slide 24, as you can see.
These are on Prepays over the balance over the fourth quarter in the last four quarters versus the cohorts.
The portfolio has had a focus more on high quality specs versus ppas.
Purity selection was obviously very important.
Critical for us to maintain the earnings part of the portfolio.
We're very happy to say that we've done quite well over the course of the year.
Allowed us to continue to earn the dividend very attractive dividends. So you can see here the <unk>.
Prepays for each of the months of the fourth quarter were well below cohorts speeds and in looking on the bottom right. You can see have been so for some time.
But thats the way that we achieve that now is just changing.
Slide 25 to show you a level of 10 year versus our Prepays. This little Green line that we show on the chart. This is basically a very simple calculation. We used defied the dollar amount of pre pays by the unpaid principal balance of the portfolio and as you can see over the course of 2020, when we had rates at the lowest levels ever.
We were able to keep our refis quite low through our security selection in fact, it was even lower than the 19 late.
Late 2019 on <unk>.
Leverage ratio for the quarter.
<unk> was relatively flat.
Rob in the high eights, and finally with respect to our hedges.
We continue to add hedges over the course of the fourth quarter on into the first quarter less so with respect to swaps.
More with <unk>.
Instruments would have a higher option component. So you can see on the top right hand side of the page you see the payer spreads, which we've added.
And we continue to.
<unk> focus on our hedging strategies in that area and also we did get.
To this in a moment, we did make some changes to the swap book.
Balance of the hedging.
On the small positions in euro dollars five year futures in TBA.
So now I'd like to spend a few moments to talk about this quarter given.
Given the moving rates Im sure Thats very topical on everyone's mind, given the magnitude of the move so obviously, a lot's changed especially in the last two weeks.
So what we've done with.
With respect to the asset side of the portfolio is basically all of our very low coupon securities. We no longer have any 30 year exposure to any coupon less than two and a half.
We've changed the maturity profile, we have reduced our exposure to 30 years by about $250 million increased our exposure to 20 years by $300 million in 15 years by $250 million.
No longer have any TBA longs in fact, we've increased the shorts.
Now, our shorts, and 3% coupon or over 500 million and we've actually added some shorts and 30 or two and a half.
Over the course of the month the leverage ratio is down slightly to about eight 5%. We view this as kind of a transitory step just to kind of wait out the <unk>.
Correction in the rates market and actually as it were.
As a consequence of the TBA shorts, which we've added inclusive of those our economic leverage ratio was down to $6 six although I have to point out that the bulk of the TBA shorts, and a 3% coupon and the drop there is actually a negative so there is cost.
Shorting those is actually the opposite it's actually a modest positive there is a push on cost on a short term two 5% coupon.
But given the fact that.
That might be an increased cost and a drag on the portfolio with speeds slowing than probably expected to slowly further.
Net of those two will be negligible and then finally, we have done some trading with respect to.
Adding to the Io book, we sold some of our fixed rate Cmos, where fronts sequential <unk> and we're able to add take back on universe I offer that it's a very short cash flow. So we think we have minimal exposure to fed hiking.
We get to retain the most attractive component of that security, which is the Io component.
We probably expect to do quite well as rates move higher.
With respect to hedges. We've also made some changes are swaps, we did two things with the swap book.
Restructure those now we have a weighted average strike of five 3% versus one four and.
And we extended the maturity from four on average to five.
We also mentioned we have a lot of exposure to option based instruments and we restructure those two higher strikes so that they offer us better protection and event of.
Rates, continuing to increase and less downside exposure, if we rally back.
And then finally, we've had a few other trades with some won't spend too much time detail wise, but these are what we call conditional flattened trades.
These are trades that are kind of more forward looking in anticipation of a normalization of the rates market and eventually the market pricing in a fed hikes. This is a trade that will protect the portfolio from me.
Meaningful flattening of the curve and which of course would put.
Downward pressure on our NIM and upward pressure on our funding costs. So we've put those trades on at attractive levels.
Course, we monitor all of our hedges just to make sure that they are.
<unk> or the levels that we have them on are most effective levels to protect the portfolio. So.
Basically with asked about it kind of gone through everything with respect to the portfolio booked in 2014, our 20 quarter four and also quarter to date and I think with that operator, we can open up the call to questions.
At this time, ladies and gentlemen, if you would like to ask a question. Please press star followed by the number one on your telephone keypad.
Pause for just a moment to compile the Q&A roster.
Our first question comes from Jason Stewart from Jones trading your line is open.
Hi, Thanks, good morning.
And thank you for the thank you for the update for the <unk> activity I was wondering it sounds on.
Great in terms of the way the rates have been incredibly volatile and sort of settling out here can you put a pin in it and sort of estimate what book value per share is.
After doing all that it's.
It's quite challenging we serve.
We are going to be down slightly.
I would say yesterday accounted for at least half of the move quarter to date.
Probably isn't moving we have a rough estimate Jason but we don't have is a lot of exposure to spec levels.
There was very little activity yesterday, and the day before and nothing that you can really benchmark off of for instance, we saw some 50 wallet dwarf 545 trade very seasoned higher coupons.
Next week, we will probably see all the origination list will get some levels on.
On specs.
We're also seeing some recovery today in the market.
Very choppy as I said for the last two weeks meaningfully so yesterday.
Guests that the on.
All of the move on our book value.
Quarter to date over half of it occurred yesterday so.
Definitely going to be down a few percent.
But I would be hesitant to put too fine a pencil to that level and also probably going to be changing in a few days anyway.
Alright, and the quarter's not over correct.
When we think about the Io positions, how big it's been trending down for quite some time for good reason.
How big do you think it could be and do you really think it's a.
A true hedge against basis widening.
We put some thoughts around that would be helpful.
Yes, the basis aspect of it is a little bit challenging because you know.
Mortgage derivatives tend to widen.
With just regular passengers with TBA zone.
I think what we find though is just as it relates to.
On the refinance ability of the underlying instrument that does present, an opportunity when you have a large widening in say like <unk> and you have.
Primary rates increase there will ultimately be.
No.
Kind of a.
For dollar if you will impact in the derivatives, because they are sort of sensitive to prepayments. So.
But on a on a mark to market basis.
Going through a period of widening basis day.
It will definitely.
<unk> experienced the same sort of problems and on a levered fashion that Morgan as well, but the fundamentals are vastly improved when something like that happens.
My answer to the.
Question in terms of how much more would we add I think it's very opportunity dependent.
Bob alluded to the fact that we added an inverse io off upfront sequential that we've been holding on the portfolio for a couple of years.
That collateral was off of New York Force and had been behaving rather well.
We felt like the floater market.
Cut enough of a bandwidth this sell off and the demand ticking up for those that we could sell one.
With a really low cap and maintain a short cash flow and that really dovetail well with our <unk>.
Our macro view that we know.
We will see.
Bear steepen or.
And and.
And.
The long end could get quite volatile, but we believe that the fed is going to remain anchored.
At or near zero for the next couple of years and so if that plays out.
While that cash flow does have exposure to higher.
Rates on the front end.
We like that trade something that we I think we would do more of if we found the right opportunity.
It's really not.
Basis hedge.
Chime in a bit.
The basis blows on.
It's really important to understand that.
At the end of 2020 and into the early parts of the first quarter mortgage and getting really really tight TB.
TBA OIS is depending on your model most people use benchmark benchmark off of yield book.
Minus 20 minus 25.
Very very tight levels and so while we've come off a lot coming off a very tight levels. So mortgages are not multiyear cheaps by any stretch of imagination, there fair Earth.
A more fair wearing proper grammar.
But at the end of the day, if you're trying to hedge that basis rates are not going to be.
100% effective the only thing you can really do a short TBA or maybe <unk>.
Put options on Ppas.
And when you are a REIT.
On limited ability to do that I mean, you can't hedge 100% of your mortgage exposure you've kind of have no reason to be in a business at least for any length of time. So.
Youre going to be net long in.
You bet and fit when it tightens and you suffer a little of a nationwide.
Yep, Okay. Thanks for taking those questions I'll jump back in the queue. Thank you sure.
Thanks.
Our next question comes from Macau Bergerman with GMP Securities. Your line is open.
Hi, good morning, Thanks for taking the question definitely appreciate it.
The comments on book value and portfolio positioning in the first quarter as well.
Just a question on how you guys are thinking about leverage going forward.
It looks like it's going to be a pretty volatile while in the year.
In mortgages and rates.
And also how you guys are thinking about the dividend going forward. Thanks, a lot George.
Well I guess the way through.
Scented it to the board and I really deeply believes that we weren't very well levels of rates all time lows and we started to sell off and as we got north of 1% and approached $1 20 on the mortgage market starting to get skittish on my view was that 125 or $1 30 was that point, where the two 5% coupon no longer.
Refinance on board.
Mortgage investors, we're going to really become concerned with extension of the mortgage universe, but I also thought if we went from just from $1 25 to 150 on tens that that would be a very painful episode for mortgages, but once you get above that level are meaningfully above that level I didn't really think you can go much higher in rates.
For instance rates across the pond EBIT pond are still relatively low compared to ours and so there's that kind of are there is also the potential impact on the equity markets and financial conditions and the likelihood that the fed would tolerate that would step in and maybe extend of the.
Land with their purchases that kind of thing so I really thought there was a at least a soft cap on rates and so if we could get to that level north of 150, where refinancing activity was meaningfully subdued.
But the fed had high if you had a very attractive investment opportunity and so we've kind of got there much quicker than we thought.
But now that we're here if we stay here, it's not that bad of a place to be yes mortgages are wider.
Gave up a little bit of both to get here.
But the earnings outlook are very very <unk>.
Tractive and so maybe we stay volatile like this for the balance of the year in which case, we'll just have to face that deal with it but if rates stabilize on a higher range.
Call. It 140 to 160, whatever it happens to be.
Not a bad place to be and I don't think that puts downward pressure on the dividend.
Granted we've had to change the hedges somewhat.
We even talked about leverage down a little bit, but we view that as temporary and we're just trying to protect.
Protect ourselves through this move.
But unless we stay on an extremely volatile market for the balance of year I would expect we'd be able to remove those and so that gets us back to an environment, where it's again. It's on the curve is steeper funding still cheap prepays are lower and the big challenge of 2020 was avoiding excessively high refinancing activity so everything.
We talked about at every earnings calls of all the steps, we're taking to keep refinancing down and we show you. All these slides on the earnings call deck about how our portfolio prepaid versus the cohorts and so forth, but now that's less of a concern.
We have a steeper curve and slower speeds, so I don't see anything negative.
Sure.
Great. Thanks, a lot that's very helpful.
Alright.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Christopher Nolan with Ladenburg Thalmann. Your line is now open.
Any idea in terms of those were pre pay stand year to date.
Oh, Yes, we had two very good months, we'll get another one next week, but.
We did.
We can get you those numbers, but.
They were in our most recent press release in February when we put out our February dividend, we had that January prepays, which were on.
Yeah.
I'm on the net.
Net.
The Prepays released in January.
Were $16 seven for the pass throughs of <unk> 44 for the structured.
Combined totals.
I think that I think it was 20 I think on that in Q4 they were.
That was.
Yeah, Chris I don't have in front of me to our February press release had the January level.
February which was released.
It is not released yet.
I expect to be in line. So it's been a good slower than Q4.
And then I guess, how much of your capital you're allocating to iOS.
Well right now.
Now, it's probably just about marginally over 10% it had gotten well under $10.
Well this inverse we took back and just kind of said that may be an attractive.
Asset for us to pursue our other iOS I mean, it's we.
We typically looked at <unk> as much as hedges versus income and so we wanted iOS that had a lot of extension potential in other words, something that was paying fast now but in the event of a selloff would extended slowdown.
And so.
There were plenty of those available before.
Terrible carry instruments.
And they've done well quarter to date very much so.
Well look maybe opportunistically add those I think the allocation to pass throughs, well north of 90 is probably no longer warranted.
But as Hunter said, it's really opportunity driven.
Opportunities present themselves we will.
Let's take a step.
Really what's been driving I will say this is that kind.
Kind of mentioned.
Part of the reason that we got away from high coupon high pay up premiums in Q4 and this continued into Q1 is.
Is the demand basically it's from the Street you got a lot of these CMO desks payoff for this collateral because they can carve it up and create harvest price bonds with banks. The bank demand is the mortgage space. It's been very very strong Q4 and Q1 dip.
Positive is on very high.
And.
<unk> growth has been modest so they've been big buyers of mortgages and they tend to buy or on par. So the street can buy attractive collateral that looks great on a OAS model and create a parse price strip down bond and then levers left to get set off to the rest of us.
But it makes it very challenging to compete against that when Youre on your participating in these origination cycles on our auctions because they're a very aggressive bid and thats really what drove us away from those securities and that's in our minds. It's like you know this is a chance to sell these pay ups at very high levels.
Rates are going higher and these payoffs are going to be in parallel if rates shoot higher interest.
Short period of time, which is in fact, what happened all of a sudden.
Low loan balance Fannie three or three and a half.
Skinner's.
Pay up premiums going to drop so we were selling those and adding lower quality specs in lower coupons, and we realized very low speeds off of those so thats CMO bid, we'll see if it stays there now that we've moved higher in rates, but that was a big driver of.
Our spec levels up until the most recent few weeks.
And then.
Two more questions and I appreciate the detail.
In your comments you.
Indicate that you are shedding the lower coupon.
Uh-huh positions, particularly for those with really long terms 30 years and so forth.
What are you focusing more on now if you can just because I missed that.
Oh I'm, sorry, we went up doubted maturity 20 years 15 years.
And we actually just we didnt actually sell.
Two and a half, but we did add two and a half TBA shorts.
We view that as kind of a temporary trey just to kind of get us through this.
Turbulent period.
No.
Two and a half will probably continue to own those going forward. We may not have those shorts in place, but otherwise, it's just been a shorter maturity mortgages.
And we may add some higher coupons are probably going to start seeing more than produced probably going to start seeing some threes get produced in the next few months. So we will revisit those.
Levels to what the level of volume drive our decision, making a lot.
Final question in terms of actually going forward and the environment has changed a lot.
And.
From my position it looks like it's pressuring book value, but your earnings outlook looks good whereas the balance for you in terms of sacrificing book values to protect earnings and so forth.
Vice versa.
It's.
Fortunately when you get a move like this it's so sudden you can get very cautious and add to your hedges, which are going to put downward pressure on earnings to protect book.
And if this episodes over quickly then.
Minimal impact on earnings I mean, our thought process is we're willing to sacrifice a little bit of earnings in the short run to protect book.
If it's a long long grind higher in rates, then we'll have to fine tune our analysis to find the appropriate balance.
This played out quite quickly and we expect this to play out over the first two or three quarters and in fact, it played out in three weeks so.
That like I said earlier on the last call if we get to a level of rates, especially if it's north of 150 and appear to be standing into our range.
Then we can get.
Off some of the hedges.
Not not.
Irresponsibly, so but.
Being able to attract generate pretty nice returns in that environment.
But like I said I think there is a soft cap on rates I don't see the 10 year flowing through 2% anytime soon I don't think the fed is going to be willing to.
On the equity market is going to tolerate that and which in cases force that fed sand.
Got it Okay, Chris just maybe just to follow up on the on.
On the speed question, the current mix of the portfolio.
One month's speed as of most recent French which was earlier this month was $13 seven.
And three months speed is 11, two for the specified pools, which are of course, the most sensitive. So one other point to add there is there is a.
Correlation between the dropped down lower in coupon from.
At the end of the year into into the new year here.
Because the premiums on those assets are.
Substantially lower so.
We have sort of two.
Two factors going on on wireless speeds are a little bit slower, but two is the.
The negative impact of those speeds is a little bit smaller as well because of the premium on the assets isn't quite as high.
Okay guys. Thanks for the details.
Alright.
Again, if you would like to ask a question. Please press star followed by the number one on your telephone keypad.
And there are no color. Thank you at this time I will turn the call back over for closing comments.
Thank you operator, and thank you everyone as always if you have additional questions. Please feel free to call us in the office is 770 22311 400.
We're not on the office, which is often the case. These days, we can be reached by shell, but I will leave that to our office manager too and that up and otherwise we look forward to speaking with you next quarter and thank you for your time today.
This concludes today's conference call you may now disconnect.
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