Q2 2021 Orchid Island Capital Inc Earnings Call
And Brian.
[music].
Yeah.
[music].
And.
[music].
Great.
[music].
Yes.
[music].
Yeah.
And all that.
[music].
Okay.
Good morning, and welcome to the second quarter 2021 earnings conference call for Orchid Island capital. This call is being recorded today July 32, 5 and 10 and 21.
At this time of 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 are subject to the safe Harbor provision of the private Securities Litigation Reform Act of 1995.
The sooner you start Kohl's shines and 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 at the.
Actual results.
The results to differ materially from those expressed inc.
Such forward looking statements imports.
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 and we'll report on form 10-K the.
The company assumes no obligations to us.
Such forward looking statements to reflect actual results changes in assumptions or changes and other factors affecting forward looking statements.
Now I would like to turn the conference over to the company's Chairman and Chief Executive Officer, who started Robert Cauley. Please go ahead Sir.
The thank you operator and good morning.
And until the second quarter or growth.
Our earnings call I hope everybody had a chance to download the slide deck from our web site and.
And.
As usual I will proceed through the slide deck.
2 of our remarks before we open up the call for questions.
To lay out the agenda for today.
The coal.
And I'll start off with a review of a brief review of our financial highlights.
And then I will go through a review of the developments and the market from the quarter and won't be.
And the hard work and react to the interpreted and these developments and the decisions that were made regarding the portfolio and our hedges and leverage ratio.
I'll start off.
And we're just getting a brief review of how the company and the portfolio are positioned coming into the quarter.
And then also provide some comments on our outlook in terms of how we see things evolving over time and the future.
And then I'll return and go through the financial results and give more detail as well as the portfolio and our hedges and then finally just.
Days of coupled up with some closing comments and are on.
Walk and then turn the call over to questions so with that.
The churn to fly.
For the.
So the results for the second quarter 2021, Okay and had a net loss per share of <unk> 17 cents on net.
The earnings.
<unk> per share was <unk> 24 cents, excluding realized and unrealized gains and losses on our MBS and derivative instruments.
Net interest expense on the interest rate swaps.
And a loss of 41 cents per share from net realized and unrealized losses on our RMB asked at the root of instruments again, including net interest expense.
The interest rate swaps.
Book value per share was $4 from 71 as of June 32021 versus $4.94 at March 31.2021.
And Q2.2021, the company the company declared and subsequently paid.
19 of 5.
And so on and dividends since its initial public offering and the company has declared and $12.11 of dividends per share, including the dividends declared in July of this year.
Okay economic loss of 3 and half cents per share for the quarter or 0.7 cents.
Turning to slide 5 and 6.
And we get the results of orchid versus our peer group, which is the fine on the bottom of the page and the note on each case each page.
And you can see our results on both.
Year to date, and 1.2 and 3 et cetera, and look back from bankruptcy.
And 30 as well as per the calendar years.
Per share this is both on the.
And the case of page 5 using stock price and dividends to compute total rate of return and the case of page 6 we use the book value.
Im going to of a few more comments on these slides and at a later point and the saw on the call.
And so for the moment I'm just going to move.
And in turn to market developments.
Because the orchid entered Q2 and.
As we position the portfolio of towards the later stages of Q1, we had shed a lot of our exposure to lower coupons production coupon from 30 year space predominantly and our TBA positions we had.
<unk> added to our hedge positions.
And we started to deploy capital more towards iOS that Pat.
Allocation of gotten actually inside of 10%.
And since the <unk>.
2 and it was the 18 and it shouldn't actually slightly higher and.
And we're positioned quite defensively entering the quarter.
So now I'll just kind.
Move on through the developments took place in the quarter and how we've responded and how we view these developments.
I think if you see on slide 8 and see the movements and the Treasury curve, obviously, the blue line there on the left or right represents the market as it exists and the $3.31.
And the Blue line the headline as.
Kind of go 30, and then the Green line is that's the.
The last Friday, so obviously the market has rallied.
You can break down to the balance and the market into 3 phases for this year.
The first quarter of 2 early April.
And he was recovering rapidly stimulus.
And administered by the government we saw.
As of June growth and any measure of surge and we saw the emergence of a meaningful inflation worries the market sold off and the curve steepen very rapidly.
In early April and started to change the.
The events of Q1 led the market to adopt the very very defense of extremely defensive short.
<unk> positioning and the rates market. This was evident in the futures open interest markets and so forth.
But also 1 other development that sort of the push things of the kind of counter to one's intuition.
For 1 of the fed was very skeptical and in terms of their views of the deflation and chairman Powell stepped.
The bell over the he thought inflation was in the transitory and he did not think that it would persist.
And also while the economic data was generally very strong there was 1 notable exception, which was job growth and it was definitely lagging expectations.
And we had a number of non farm payroll reports that were below expectations.
And as we've heard yes, there are.
Wednesday from the chairman.
Something that's very important to them and the outlook in terms of gauging, whether or not we may quote unquote substantial further progress.
A few other outside factors that kind of caused this pain trade, if you will or the non drug and if the market seem to rally and the face of ever stronger economic data.
Oh of revenues outside factors, we're simply things like the yen denominated investors. So we're able to deploy capital into the treasury market and the.
The realized very strong returns and we also heard of insurance companies.
Deploying capital from equities into bonds and so all of this kind of.
The led to what 1 might call very counterintuitive development of the rates market and the third phase was really kind of mid June and we had the fed on.
C meeting and a few things emerge from that meeting 1 we saw that there was some disagreement amongst the members of the committee, even though the chairman was very much and charge.
We saw that they had indeed.
Inflation concerns and they were starting to think that maybe inflation might be a little stronger than the first expected and I guess more meaningfully we saw on their dots of at least some members of the committee from the fed would have to hike much sooner than the market had thought previously so all of this seem to kind of all together.
And what.
What we would call very hawkish meeting.
And then also and the around that time, we saw the Delta variant, which we're all very much aware of and begin to emerge and that very much caught and the question the growth outlook and I'm not just in the U S and on a global basis and.
So the.
The market since rallied again.
And rallied.
Speak today so.
And clearly we've gone through.
Right of shift from where we were on Q1 and in terms of our view work and island and how we position both at the end of Q1 and today.
We are still positioned defensively.
We're not convinced of inflation is the temporary.
And we think that that's somewhat of an over simplification and the sense that while there are clear elements of the price pressures. We've seen that are transitory lumber prices and the amongst some of the more popular ones with some of the.
Developments on the inflationary side and we are clearly not.
And it gets somewhat just on oversimplified.
Patients, who just dismissive of lot of P and that being said on the doctor very it does pose risks to growth.
But even as.
As much as it's as bad as it's been we do think that eventually.
And we'll see growth recover.
And and start to see the economy can resume the.
The growth trend that we were on up until a few weeks ago and in fact, you could maybe argue that the.
The Delta variant and a sense could prove inflationary in the sense of that.
As more and more people are reluctant to go back to work or for instance, with the federal government to extend the supplemental unemployment insurance and.
And with the extend and exacerbate.
The job shortage and wage growth that we've seen so on that.
As possible with that May have a kind of counter intuitive outcome as well.
But generally speaking as the fed eventually does paper of their quantitative easing.
They will stop pumping reserved.
And that was the system and the sources of downward pressure on rates will start to abate.
And as the result, we remain defensive and we kind of view of the balance of the grid skewed towards the towards higher rates and also it's important to note that we.
We do have and inflation outbreak, especially if it is of significantly and we're certainly not calling for that.
And the does occur.
And the Levered bond investors, we know that can have a very meaningful impact on our portfolio and our book value, whereas the continuation of low rates.
While the can put pressure on our earnings.
And maybe generate faster speeds it doesn't tend to have.
And if and the state of the impact on book value of that a spike higher in rates can generate.
So moving on to the slide deck slide 9 and I really want to say anything much on the picture tells a thousand words, so obviously we've been rallying.
Slide 10, I do want to make a couple of comments here on the 1 notable development. We saw this quarter reflected and the green line at the bottom.
Volume and the pages of the curve has flattened honestly, we've kind of bull flattened or.
And the second quarter and into the third and.
We had as I said earlier of added to our Io position. So obviously this did not.
And there's not a good outcome for them, but that being said we do.
And do view this movement of rates as.
And and opportunity to add to those positions and attractive level that all being said, we have maintained significant allocations to poles and specs in particular and.
And we will see and a few moments those have behaved extremely well in terms of prepayments and thats very important for protecting.
Our net interest margin and of course ultimately our dividend.
Turning to slide 11.
Starting with the top left.
The performance of the various TBA coupons of this quarter, it's really the mirror image of what we saw on the first.
And the first quarter, you saw lower coupon suffer and meaningfully down in price.
And higher coupons were flat to slightly up this quarter, we have slightly pretty much the opposite and all of that being said the slides of the and at the end of the second quarter since quarter and higher coupons of actually done a little bit better.
Big driver of that has been most recent prepayment speeds, we have started to see the emergence of some burnout.
And but I would say that remains a very much of an open question going forward with this rally and rates and compression and primary spreads secondary spreads, which I'll talk about the minute I think the.
Very much remains to be seen just how much burn out we do see and higher coupons and of course that will affect the performance of both the TBA.
And the roles and as well as specs and those coupons and as you can see on the bottom left.
And the roles and the production coupons remained very very strong which is not surprising given the presence of the fed what is surprising is the role of the particularly the 3 coupon, which as we speak is trading.
And the almost as big of drop as we see and the 2% coupon and Thats very much counterintuitive, it's clearly being driven by squeezing of the front month.
The back month Rolls is still positive but much lower.
And then finally on this page has pointed out the fact that spec.
Spec pay ups have recovered.
And sometimes this reflects the combination of factors for instance of the TB underlying TBA.
Drawn the are weaker.
And they see movement, and the payoffs, which kind of capture some of that but generally speaking we have seen the recovery.
And TBA.
Specified pool pay ups this quarter and it remains.
Reasonably.
Healthy in the Q2 not necessarily of meaningful strengthening but.
The safe duration expectations, but still attractive.
Turning to page 12.
This is our proxy for the implied vol and the market.
The 1 point I want to make here is if you look at this picture.
You can see that while ball so despite quite dramatically late in the first quarter and.
And has since come off it does still remain above the level. We saw for the last 9 months of 2020, so volatile modestly elevated although.
We know that.
Maybe.
Likely to persist absent another shock.
Because we have generally been and a very low vol environment for a number of years for the most of it.
The next slide I want to talk about a little more depth. Because this is really germane to both what happened and this quarter, but much more importantly, how.
How we position orchids portfolio and how we.
Not 1 of things evolving over time and why.
And to really focus on the left hand side here. This is the TBA LIBOR OAS and I want to make the few observations you see all of these various lines of corresponded of different coupons. The grey line on the bottom of that represents the <unk> 2 and a half and if you looked at where that line was back in June of 2020.
It was north of 50, LIBOR OIS and as you can see and April and May of this share. It got all the way to negative 20. So obviously that is a very big move other coupons of made similar moves and may not necessarily getting into negative territory, but clearly a big move and of course. This is all driven by quantitative easing.
And the fed buying and combination with the Paydowns north of a $100 billion a month and mortgages.
So, obviously mortgages and gotten very tight knowledge since.
Rebounded, especially when the fed first started to hit the possibly tapering.
And so on a kind of local and they look more appealing than the dividend, but I think.
If you look on a much longer horizon.
We're still not quite all of that attractive and you would assume that once we're completely out of the quantitative easing and.
The rate hikes, and so forth that eventually those levels will tend to migrate back towards where they were or may or may not get all the way back to those levels.
But you would assume that they would tend to do so and that really drives our thinking with respect to the mortgage market. So I think you can.
The following the statements I think it's very likely much certain ever likely that the.
The following 3 things will occur 1 I think its very unlikely that we will not see.
QE tapering before the end of the year.
And we will certainly given what we heard this week.
And of year at the absolute earliest probably next year early next year and then also there'll be pro rata on mortgage market participants were worried that the fed might start to taper mortgages before treasuries and the.
Pretty clear with chairman Pollo speaking Wednesday.
He is not share that mindset he thinks their impact on the market is pretty big is the same.
So I think it's safe to say that of the pro rata and I think the second point you can make a fairly high degree of confidence is that once it starts.
It would be very gradual.
And theyre not going they're going to telegraph it.
Before it happens and when it happens and theyre not going to do with such a way that it's going to kind of of violent impact on the market. So it's probably going to play out over 6 or 12 months and and the third point is is that assuming and maybe you can't say this fall and point with as much conviction, but assuming the fed follows the previous course of action whereby the first taper QE.
And here and there a period of rising rates and and the third leg of that is quantitative tightening where they stop reinvesting the paydowns on their portfolio and remove reserves from the system.
And if that does in fact play out the and that means that the fed will be buying mortgages at least in the form of reinvesting paydowns probably in.
2023, and maybe beyond.
So all of that kind of pace of fairly benign picture in terms of the impact of tapering on the mortgage market and that being said and this is where we go back to the slide at the top of the page, we are coming off extremely tight levels and while.
It's true that many sectors of the fixed.
And the labor markets are equally tight.
The fact that you've had so.
So much.
Buying pressure and the market not just by the fed but don't forget is the fifth pumps reserves into the system. The banking system. Those funds are invested again and so we've seen the banks be very large buyers of mortgages for some time now.
Didn't come out of base, you're going to take a lot of that pressure downward pressure off of.
And I think this decline and sponsorship will as I said I think we will start to see the levels back off and as a result.
And while we don't think this is gonna be extreme of violent move.
We do in fact, I think it will play out.
And is that fairly benign the overtime.
But it will in fact occur and so we will position so as to of Boyd or minimize our exposure to the coupons, we think of the most vulnerable and those would be <unk>.
<unk> and 15 year and Judy <unk>.
Production coupons and so.
Continue to stick with our over weight, if you will.
The pools are probably higher coupons and and inspect form so that we can protect ourselves from prepayments and protect on yet so I think thats and very important slide.
Slide 14 the.
The top of the page 2 shows returns for the quarter from the U S aggregate bond index and the.
The picture.
And that this paints a very obvious was very much a risk on quarter risk, taking and is obviously and.
And will spirits are very very robust and you can just look at the returns for the quarter here the <unk>.
Hi, risk sectors Mercury market high yield the S&P 500 high yield.
The emerging investment grade investment grade and so.
Of all of them very well and more.
The risk the risk.
Averse asset classes, treasuries and mortgages and each asset backs the amount.
<unk> poorly comparison of those sectors.
Turning to slide 15 on a couple of important points here I think I'm going to start on the top right and what we see.
And so forth the primary secondary spreads and we've talked about this at length for some time, obviously this kind of represents of the difference between rates and the treasury market and rates available to borrowers and we started and a very high level and we knew that there was a lot of them from that the compressed and factory has and it has come down close to 100.
See here he sort of leveled off some.
We also know part of the reason that that couldn't compressed quite as rapidly as the simply the fact that originators didn't have the capacity to handle more and mortgages. So they had to increase the head count will in fact, they have and.
Now with the position, where they're very responsive to move interest rates also recently.
And that was.
Regulatory change the adverse market fee was removed and this basically just represented another fee.
And was paid on the mortgage originations of whats typically passed on to the borrowers. So in effect, it's kind of just the onetime shift down and rates available to borrowers we refer to this as an elbow shift but it.
Is that rates.
And can go lower and in fact, they have and if you look at the left side of the page and the 2 lines here..1 is the refi index. The revenue items the rate mortgage rate that has since quarter and most of this and at the end of the second quarter. It has moved lower.
As you would expect the refi index has responded although.
Not as strongly as you may have expected, it's still in the mid 3000 and it may go higher, but so far we've taken and rates back down closer to where they were at the trough.
Late last year and the refi index is not back to the peak that we saw that same content.
How that plays out on the balance of the year of remains to be seen.
And just me, but it does occur obviously doesn't this will also coincide with what we see in terms of burn out and higher coupons, how much of that we see and obviously, that's a big driver of performance of the TBA versus spec pools. So.
And that remains to be seen and.
And now I'd like to speak about our financials.
The results a little more detail slide slide 17.
As always we presented slide of kind of decomposes, our income statement and.
2.
Which is simply our net interest interest expense.
On net of repo and expenses and and the middle column of our <unk>.
Realized and unrealized.
Gains and losses and as we said at the onset of the call.
And 17 net loss for the quarter.
41 cent loss on on our realized and unrealized gains and losses on our MBS assets and derivative assets inclusive of interest and 24 out of that.
I mentioned that we were positioned.
And defensively coming in and the quarter and we remain so and so there wasn't virtually nothing done to the hedge book.
Over the course of the quarter and since so most of these losses. This 41 sense of loss realized and.
And.
While that.
And who knows exactly what the.
Possible since most of these losses are unrealized the to the extent of the market we're moving.
Some potential.
Both.
Okay and.
And.
And.
And we.
Versus the impact that they had on our results and book value.
Okay.
And again Thats just the potential.
Making any predictions with respect to the right side of the slide and just show the returns of our.
Allocation of capital between pass throughs and structured securities.
Modestly negative return and the passion portfolio of has lagged our hedges.
Sure.
And we did have a positive mark to market.
On the pass throughs, but the 2 reflect premium amortization and a mark to market. So it did decrease it and then of course with the book will flatten or and the rates market headwinds and we generate a return of negative 15%.
But we do as we said.
Yes.
And do that is just.
For those assets.
Turning now to slide 18.
All of this kind of captures the economics of the portfolio of net pointed out the greenlaw.
<unk>.
And just identify what we have the Blue line is the average yield on our assets the rate.
I'll start of economic funding costs, which means it's incorporating our hedges, even though we don't use of hedge accounting per se. We do reflect any of these numbers and then the net of the 2 of the Green line.
And there are some obvious conclusions we can draw from this 1 of the Green line as you can see has been quite stable and.
And that kind of translates into what you see and the dividend, but also of the Blue line. While it has been declining by the sharply. It also is starting to stabilize.
And then finally of the Red line on any given where we sit.
Market wise and the outlook for the fed, especially the leadership of the fed I think it's reasonable to expect that our funding costs will remain low probably certainly through the end of this year and and quite possibly through the balance and most of the balance of next year. So the sum of all of these streams that makes us.
Optimistically constructive.
<unk> on the dividend.
<unk> appears to imply that.
We should be able to maintain this level of.
For the at least the next 6 to 12 months of annuity beyond.
Slide 19, just shows the same thing slightly differently and this is and earnings per share were we disaggregate the.
Mark to market gains and losses from.
Our proxy for core of and those exactly the savings where do you see from our peers.
And then finally slide 20.
And in terms of the results and as I said earlier I wanted to defer the discussion of volume.
<unk> versus our peers and <unk>.
And don't.
On the go through this first and what you see and this chart and these 2 graphs.
On the channel presentation before the top of them just shows you are in.
And annual dividend yield and the top half of the page using the book value at the beginning of the period as the denominator and and the bottom of indices the beginning.
<unk> stock price and in both cases, the Blue line represents or give the yield and the bottom of the peer group and I apologize and department of page, we don't define the peer group, but if you go back to page 5 and 6 it's the same exact same peer group. So that's the we're preparing.
And I think what you wanted to distinguish received it and the Oregon.
And it's clearly paid a higher dividend versus the peer group basically all the way back to 2014.
And that's reflective of the strategy and we tend to have a high dividend yield we tend to have a higher leverage ratio and.
And we tend to put a lot of emphasis on higher yielding assets, which are many cases spec.
Spec pools high quality spec pools.
And as a result, we can generate with those yield growth speeds and high income.
So thats.
As you might expect and it's a very high yielding portfolio and Thats reflected in each chart from that being said.
And it's the case with any of the financial markets.
And slightly higher risk portfolio, you're going to tend to have higher volatility as well and that's reflected for instance, and the first quarter of this year. The fourth quarter of 2016, we have had episodes, where our book value volatility our performance has lagged that of our peers.
And.
Collected and those results back on page 5 and 6 on that being said we do.
And then just have such a quarter and the first quarter.
Frequently we don't have those episodes too often they tend to occur not even within the quarter often within a matter of weeks, but otherwise the higher yield of the portfolio tends to make up for and off in most cases the lead.
And outperformance versus the peers and as a result, that's why we continue to pursue the strategy. So.
While the results as of Q1 or Q2 on.
And as good as they were proud of that quarter again, and I think it just reflects the proximity of the Q1 and I think at barring another shock to the market and the near term of.
The yield of the portfolio will close that gap and ultimately hopefully lead to outperformance on underperformance.
And that's that for that moving on to slide 21.
We've talked in the past.
The reposition of the portfolio here and the numbers on the left hand side, you can see that the.
Of the higher patient of restructured portfolio at the end of the first quarter was the 9.5%.
Now, 18% at the end of Q2 and in fact, even higher now as we speak.
And then again on the right side, we can show you the actual numbers that we invested and the various sub.
Sub portfolios and in the <unk>.
Alex of the changes and those terms of asset purchases and sales and so forth.
And now with add on going to move on and talk a little bit of us the characteristics of the portfolio as we sit here today on slide 23.
And as usual, we'll go through the composition of the assets and the hedges on the bottom of the page and on the structure.
Sales of victory and the middle.
Weighted average coupon is actually not changed very much and the pass through portfolio to 97.
And it was $2.95 at the end of the first quarter. So all of it didn't change much.
Price is slightly higher just because of the rally.
But I will make the few observations.
And so some small some large.
First with the small as you can see the lower duration of assets 20 year and 15 year assets essentially unchanged from last quarter. The changes just reflect the run off and and some of the highest coupons.
For the half and pretty much unchanged and our third.
<unk> and <unk>.
Since quarter end, and we have made a change of that bucket, but the more notable.
<unk> and it really meaningful.
Our exposure to the 2 and a half from the 3% coupon of 1.
1 we reduced our exposure to 2 and a half coupon from 1 point north of $1.1 billion to under.
700 million and.
And we've also increased our exposure to the.
30 year threes that was about 185 billion out of 272 format. So that that growth. There reflects 2 things 1 of the allocation out of the lower coupon and as I just mentioned, but also we were able to.
Grow the portfolio through our ATM.
Many of our peers this quarter and most of that growth is reflected in that coupon of 1 on.
The point I'll make with respect of the pass throughs, our exposure to the 30 year 4 coupon is reduced by about $140 million and that really was the case, where we sold pools.
The restructuring desk and took back on idle so that was actually part of the allocation of capital from passengers to iOS and the portions of the middle of the page you see our positions and structured aisles and that reflects trades such as the 1 I. Just described but also just the acquisition of new iOS and with respect to the hedges.
Notable.
Changed if you look at our TBA shorts and was $400 million at the end of this quarter that number was $1.3 billion at the end of the first so we took off TBA hedges and we added to our shorts and 5 year treasuries and tenure ultra's, otherwise pretty much the same.
And since.
This quarter and we have done some trades.
We sold and we bought a new 2 and a half with the intention of selling some of our existing assets that are just ramping up the curve and prepaying faster the net effect on net on our allocation of that coupon will not change.
But we have added.
And again.
Notable.
Growing and kind of investing with somewhat of a lag trying to pick off points trying to maximize our entry points, we have added to the 3% exposure.
And again some items we can.
Added.
And 1 other thing as Blake mentioned, we could sell from 3 and a half and took back on iOS.
And I mentioned.
With respect of the hedges that have been no changes.
On slide 24.
As you can see our allocation of the very high quality specs has come down but the specs generally is not.
We just tried to change the mix and these.
And they are obviously very important for us because we don't use the TV.
TBA dollar roll market. So we have to generate our income through our pass through clause and Thats really critical that we maintain our speeds and realized speeds as low as possible.
And then if you turn to slide 25, and you will see on this slide and the next 1.
We've been successful what we show here on slide 25.
The 4 graphs and charts of the first top left as of June and May and April and then quarter by quarter going back several.
Quarters, and I want to point out that our greatest exposure and 30 year spaces of the 3% coupon and if you look in both.
June and May and April you can.
And see our performance versus the cohort has been very good our pass through portfolio of prepaid of 10.9 CPR in the third quarter.
And obviously very good result was $9.9 and the first quarter when rates were much higher so.
The strategy is working on and that's what's critical to our ability to generate.
Income and and pay the dividend.
The next page just same kind of story and different pictures I will apologize this does and at the end of the second quarter. Obviously since then.
Orange or yellow whenever called net line, which represents the 10 year yield has declined back into the 100 twenty's.
Importantly, the Green line, which is our prepayment speeds, which again.
Depicted on this picture is basically just defined at the.
During the fall and mathematical calculation and we need to divide the total dollar amount of prepays by the principal balance of mortgages.
And so it's kind.
Kind of normalizes for size.
You can see and things.
And the range, we continue to be and the range as we enter this quarter and it's even below where we were and in.
Back in 19, so even with rates of touching all time lows and 2020 and.
And rallied back towards those.
Those levels this year.
Prepayments of being well maintained.
Moving on to slide 27, and we show our leverage ratio as you can see it's down reflects carbo combination of 2 things 1 on <unk>.
Allocations to iOS, but then also.
The somewhat defensive posturing and.
As we have raised capital kind of taking on.
Our time somewhat deploying it so that we can make sure that we take the.
Our what we view of an optimal entry points.
And.
And so it's probably somewhat lagging.
It may migrate up slightly from there, but it's not going back to the.
Slide 9 range that we saw and prior years.
Slide 20 age of shows our hedge positions as I said.
Very little essentially nothing has changed with respect to those.
Since quarter end.
And with that Matt.
My mother, along with the prepared remarks and.
And we can open up the call to questions operator.
And sorry Monday to ask a question Youre 1 of the first firewall on on your telephone.
To your question from the balance.
The fund by while we compile the Q&A roster.
Your first question comes.
Hi, Jason.
From Jones trading.
Hey, good morning, and thank Bob Thanks, as always for the commentary and perspective, so I appreciate that.
So the.
And I love the increase and the Io exposure, maybe you could talk a little bit about what the Levered Roe and it looks like.
Firms of the Io strategy versus just the core agency strategy.
It is.
Well the items, which would go on.
And that kind of in year, 2 first of all of a lot of the items that we've added on.
Our defensive in nature, So theyre currently co.
The.
And twice by assets and the money of prepaying faster so those tend to be some negative yielding assets.
The idea of being net and the backup in rates those cash flows will extend and those will become positive the earning assets.
With respect to the pass through portfolio.
I would say the comparables.
With the.
Slide it was but the.
The NIM is very comparable to where it's been and.
And so the combination of the 2 of site compression and the overall Roe available.
But the.
Very much predicated on how rates and the market of all over time, Inc.
Sort.
Stay here would probably stay near those levels and if you would expect and then with upside in the event of right.
Right back up and then I'll open.
And that of the Hunter if he wants to share anything.
Sure.
With respect to the iOS specifically.
I think we've been targeting.
Really 2 types of asset classes.
1 is call protected securities with good underlying.
Cool convexity.
We have been.
Sort of mostly focused on the 3.3 and a half of the occasional and 4%.
Primarily backed by loan balance of collateral some of which is paying a little bit faster but.
And where we're putting those on those faster speeds and perhaps.
The next with expectations of Bill.
And he built them and.
Our effective yields or option adjusted yields.
On that.
Those types of assets are generally kind of and the 2.5% of 3.5%.
Model.
The projected range.
On the front Kerry might be a little bit lower than that just because.
Just because there is some earn out.
Being baked into the model. So anytime you have a yield over of cash for a lifetime of cash flows or the remaining life of the bonds cash flows to the extent.
Stent that speeds are going to slow down and in the later on the gears the tends to be kind of back loaded but I.
I think that the the ROE based on where we are.
Putting on repo and some of these and aware of about 50 to 65 basis point sort of.
Area and so if we said.
And just as kind of of generic target we were.
Able to achieve the 3% yield on these items.
And.
55 basis points, we're getting them and that sort of low double digits.
Return on.
On capital after thinking.
Taking into effect of the haircuts, which are a little.
Per se.
Predominantly I think the majority of our portfolios on it with 20% haircut. So youre looking at maybe a maximum of the 5% leverage and.
And maybe 2.5% NIM of bumps funding there, but I think more importantly, the benefit for us is that we're able to.
Decrease our reliance on rate hedges, and that's particularly important bobst and on a fair amount of time talking about how we always need to guard against.
And our staff hiring rates because of that could be very devastating to us, but you know 1 of the things that we're also focused on is the.
Fact that if we get something.
The high Crazy.
On the unexpected that causes us to rally or for rates to stay low that.
No.
Items tend to our mortgage rates in general tend to sort of.
Bottom out into a widening of it so.
It's very simple mechanics.
To the extent.
The mortgages widen and then that means that the rates. The borrowers are only and are not going down as quickly as say the risk free rates of treasuries or swaps or whatever and so while we may experience. Some short term pain owning iOS and the basis widening move ultimately the cash flow streams are better because.
Something of fewer borrowers are able to refinance or at least they're not refinancing.
At the same sort of clip that we would have modeled.
And into a lower rate environment. So that's the.
From the removal of those costs.
Costly constantly rate hedges and the ability.
The <unk> preserve our cash flow stream into a rally as you know.
Something that were.
We really like here.
Brian and too.
Maybe about 100, and how do we foot what you just said with the disclosure of that plus 50 still leads to a $45 million and loss to book value.
It seems like that there might be some discrepancy between my cup of perfectly parallel shift up and some sort of although.
And you know sleeping on the curve.
Yes.
From a long time of long time of that.
And we've been true empirically trading.
Much.
Much much shorter than those rate shocks would imply and.
So we like to look at those and certainly pay attention to them, but but really for the last couple of years, we have been.
<unk> much more flat than those of those break shocks of employer.
Mhm.
Yeah, and I would say that the.
Just going back to the dollar amount of of the losses.
You had a.
A very modest positive number on pass throughs, but then you have and we can.
Capture the premium amortization and that market.
We also had a very.
And negative number on the Io book.
So the net of the portfolio was net negative and then.
The biggest position and the hedge book.
And the swap book and also our swaption.
And we had a very meaningful erosion of nodes over the course of the quarter.
The big and so.
The bulk of the loss was in the hedge book, but.
Unfortunately, the does not offset by gains and the pass through Slash Io book and in fact, the lost on exacerbated it so and.
Again it was all if he had of summarizes the 1 phrase it was just the meaningful underpin.
Performance of mortgages versus their hedges.
And that's it and the way we.
We got hit both ways the assets were down and price as I said.
Mainly because of the iOS.
Obviously, the hedges rallying.
And all.
And across the curve our exposure, we don't have as much exposure.
<unk> of the along and of the curve, but the <unk>.
Any of the currently of plenty and.
And it was felt there so.
I kind of it just seems to me like that number and maybe overstating the projected.
Net loss per ads.
Leave it at that and then the I think maybe the most important question and I'll jump out of here with my peers keep.
Exposure.
And we talk about Levered ROE is sort of high single digit low double digit kind of range versus the 70 per cent pound on book value.
What's the what's the reason for keeping the dividend of at that level versus just changing into a level that is consistent with.
Of the Rovs.
Well I mean, I will say this I mean, the dividend the 6.5 cents, it's certainly not because we earned 6 and half cents every quarter or every month.
And we do have episodes, where we earn above and below that and we're trying to do and we set the dividend is try to pick kind of the center of mass if you will.
Go on where we think we're going to earn going over longer periods of time and.
And there are episodes, where you're above the line and there are periods, where you are below the line up and.
And unless we feel that that's a permanent.
The shift.
And then we're not going to change the dividend and given our outlook and what I said and what are your bronco.
And how we view the Io positions.
We expect that we'll be at that number on average going forward.
And if something were to change.
She and meaningful deterioration of the economy of the outlook and it looks like we're going to state and this low rate environment and obviously the allocation.
Oils.
Not be warranted the.
Composition of the hedge book would not be warranted and the allocation of the patches would go back up so that would be second transition and that direction.
But if you go back to where we were and 19 and 20 and and when we entered even.
Even in.
And the early the first quarter, when we had a very high allocation of the pass throughs.
And last year over the last year and of half of the year or generate very attractive on ROE does that period. Just when you go through these periods of transition like we did and the first quarter and even this quarter.
And sometimes you get these outcomes, but we don't think thats going.
And to off of long term outlook, and so I guess and barring a change and such outlook. We will continue on this path even if it means we're slightly under earning for a few months.
Okay I appreciate the at the time and as always you guys do a.
Great job on and giving us color. So thank you for that share.
Okay.
Your next question comes from Tim <unk>.
On the line from 7 guidance.
Yes.
Good morning guidance Acme, Inc.
Anchor of sentiment you guys did great Paul and you get a lot of information on where you are and where the market is and.
And any of the recovered from that thank you very much.
Can you refresh me.
He was asked me and like you came into this quarter and there's a book value.
The walls.
Into the second quarter was $4.94.
The into into.
The ended the second quarter.
471.
Alright, and we have and update.
As to where you want and when do you expect the DRAM right about now.
And maybe I would probably help.
Yes, we were up slightly from that number.
Alright and.
Okay.
And.
Based on John you're breaking up a little of that.
And Paul.
Is that have.
And you updated let's see your yes, you're at CER and.
And the release of about a week ago, or so trade due to and been very active and going into quarter and with your ATM as well as into this new quarter is it still of active or will it be as soon as this call is done.
We were the <unk>, yes, we're probably likely to do so yes.
And so.
And how much accretively, how much of the book value of maintenance, so far this quarter and of course aware of.
The accurately it looks like rates and moved in and.
Moving the wrong direction, how much of the slow start.
Our guidance this quarter, so far and be laid at the feet of the accretive offerings, you've been able and make so far this quarter.
And Q3.
Yes.
I would have to well we were only up slightly.
I don't believe technology of any dialogue.
And we had.
The equity issuance this quarter as modest so I don't think of it I don't have that number I apologize, but I do not think it's significant just because we haven't issued any shares now.
Did.
Some of the sales that occurred at the end of the second quarter settled and the first so they're not reflected on the June 30 balance.
Sheet.
But the share issuance and this quarter, obviously is much much less than the Q2 and by the way.
Equity issuance through the ATM and Q2.
True.
Wouldn't say with so much back loaded we announced and new ATM on June 22nd.
But we have sold quite a few shares under the previous program in Q2 up until that date.
So yeah, we didn't and we just.
The programs out of a certain size. It ended and we started the new 1 on June 22nd but at that point, we had already so far from share. So we were selling shares accretively to book throughout.
Most of the Q2 and.
Much lesser amount early in Q3, and we would assume after this call depending on market conditions and the price of the performance of the stock that we may sell and the future but.
I wouldn't say that it was back loaded.
I would attribute it to the the.
Most of the.
As of this quarter.
In the portfolio of us being from.
Specifically the.
Fannie 3 specified pools.
Pay ups for those of really.
Done very well, especially into.
At the end of book.
The first 3 weeks of July they really ratchet.
The game versus where they were at the end of <unk>.
At the end of June and have outperformed and general mortgages of outperformed over the last week or 2 but she and.
We're seeing a lot of tightening and the last week or so and even in the TBA markets, but specified pools for the first few weeks of the.
Of the quarter did quite well.
Hey, guys. Thank you and trying to correct.
And you say, thank you for the correction.
Completely disregarded the earlier ATM and.
And when you have read the cube.
You'll be able to give a little bit better.
And that adds to the.
The tightest and resonates on the collateral and the Io and inverse Io and dimensions.
Oh.
Excuse me of that now.
Yes, it's not in the queue.
And so we can do it now, but if not in the queue. Thank you.
Thank you.
Hello, everyone.
Karen on chip.
And what the General Wacky, Inc, and what kind of seasonal characteristics.
I'm sure you and I'm sure, you and grant need and iOS and the deal a little bit more of an average collection of security selection and general and pass throughs.
And so there's really sort of a barbell approach.
And.
Uh huh.
So we have some higher coupon and predominantly really predominantly force with.
And with gross wax and say the $4.30 to 4.
The 50 range, there's a handful of 4 perhaps and there.
That are really more generic in nature. These are pools that have.
And.
Very very large negative durations and very high positive convexity.
And then the and the other side of the barbell.
It's really.
The collateral types that we've been adding.
Over the last.
Really it sort of in the second quarter, and then continued through the third.
Third which are.
Loan balance predominantly loan balance higher loan balance say $1.50, 175, K Max threes.
The 350 to $3.75, gross wax off of that.
Paying a little bit on the faster side, the price and the continued to face on the faster.
But and then some really pristine collateral that these items are the ones that we made off of specs that we used to own so 85 K Max force.
New York slow pay and New York, 3 and of hats on but those were and kind of the twenties wawa.
Good gross wax.
Faster so less than 40.
And I'm, sorry, less and probably 50 basis points of spread above their coupons. So for the 3 fives call it and the 300 ninety's and for the floors and the.
445 sort of area and so the idea is pairing positively convex past fading fast.
And so <unk>.
And with slower paying items that have a much flatter S curve and also have good convexity characteristics and the underlying pools.
Have the combined gross WAC I think that will actually be and I do.
Do have the permit.
Good day.
And for 'twenty, 1 and.
And for all of the 'twenty 1.
And because of the continent relative.
Items of 419 and versus the 440 foot they're much smaller.
The inverse iOS.
Book is relatively small.
It's a little bit of of carry play we've we've.
Page 2 of them.
Kind of.
Some higher risk structures, there with that I think there's only like $5 million worth of them and the on the books, but they are like low strike inverse iOS off of costs the collaterals. So.
And it's sort of of the same concept.
They have.
Out of the high sensitivity to interest rates and are going to do.
Well.
Most of the majority of that decision was put on the 1 trade and it was basically sort of stating the fed and the short term so by a relatively short cash flow that was very dependent upon.
Money market rates staying low.
And over LIBOR, staying low and.
So the cash flow is working its way on pretty quickly and go on our way. So far so it's been on the books for a lot of them.
Alright, thank you carry on bags.
The momentum of level of disclosure there and once again.
And you guys do so much information of this call and thanks for that.
The.
Very.
Your next question comes from Christopher Nolan from Ladenburg Thalmann, and your line is now open.
Hey, guys.
And it was raised from the ATM and the quarter.
Which quarter the.
The second quarter.
Don't have it and finally.
And I want to say 100.
On the 5 million, but.
And on average price of 540.
Give me a second and I could get that number.
But it's almost 125 and at the average dollar price of product.
Okay and is that net of growth.
Net net.
And a follow up on the previous question in terms of the using the ATM going forward.
Given the given your comments in terms of your keeping the leverage ratio and it seemed to be not that much changed.
But given the outlook it sounds like it's a somewhat of an attractive environment for you.
If the capital plan to continue to grow.
Equity aggressively through the ATM.
All of it.
If conditions warrant so to speak here price of the stock versus book value and the investment opportunities are there.
Will the cause.
As long as it's accretive to book value and doing so and the.
And hopefully, it's maintaining earnings and its not the charting earnings day.
And the number of short term gain long term loss. So we don't want to do that.
And as I said, the leverage ratio, maybe down and it probably will go back up slightly.
And there's somewhat of a lag as you raise capital.
And deploy the proceeds and you don't earn the income on the assets right away.
So.
And despite of the Io allocation, which is part of the reason why the leverage ratio is lower.
We're not out of the nearing kind of the target range for that.
So at some point that will level off.
And then and I think from there. It really is just the question of how the market looks at the time and where we want to deploy the capital.
Right now it's.
The 3% coupon and to a lesser extent through 2 and a half and 3 and a house and the ministry coupons or the vast majority of the portfolio.
And then iOS.
And as Hunter alluded to the Io strategies and those kind of from the bar Belled in terms of 2 different strategies.
Simplifying, but thats kind of where it is.
And then the other thing that might affect.
Net income and earnings would be.
Substituting Iot them from a rate hedges.
Because of those.
<unk> and the potential to be obviously positive field versus paying something so on the far outlook on rates.
Materializes over time, and we're pretty confident that it will but it's been a rough year to date.
But if it does.
That will bode well for.
Our us book value and earnings.
And that would be in fact, again happens and that would be very attractive time to be raising capital.
Because we would be raising capital into a raising of the current environment, given our portfolio, which would be higher coupon and iOS. So if we see.
<unk>.
And whatever drives it but if we see rates moving up over the balance of the year and the next year.
That's good for us in terms of our positioning and also good for our earnings outlook. So yeah, we would love to be able to raise capital into that scenario.
And on the top of the iOS I mean, given your comments.
And where you expect at least from the next 12 months or so.
Short term rates remain somewhat low and the yield curve steepened.
Given that are you planning to keep your Io allocation capital allocation and at current levels.
Yeah.
And Thats the idea right.
We see that steepening of occurring.
All of which would be good for that those positions.
And you never know, how it's going to play out and when we saw on the first quarter. It can play out very quickly and very moderately.
And so we don't know that we kind of view of where we think we're going ahead, but we don't know the necessarily holiday.
All of that plays out.
At some point, we thought we were kind of seeing the full extent of the sell off and yeah. You want to start getting rid of some of those because you would've been monetizing those gains.
And maybe going into the pass throughs.
Yeah on the nuts.
I don't I think you never say never and I heard Bob This morning.
Some of the deferred should start raising rates early next year and I also heard Paul on Wednesday, and I don't see the embracing rates anytime soon.
So as a result needs of the curve since and think of on the front end and ask the steep and so.
And you never know, but I think thats the way it is going to play out I think it's going to take a while before they start raising.
Great Okay. Thanks.
Yes.
Your next question comes from Macau, Robert from JMP Securities. Your line is now open.
Hi, Good morning, guys. Thanks for taking the question.
Sure.
And your prepared remarks that you've seen some element of prepayment burn out so far and the third quarter. I was wondering if you could briefly just sort of expand on that a little bit and and also on the on the question of Prepays.
How do you think they will.
Respond to the removal of the some adverse market a refined charge.
Thanks.
I'll say, a few words and I will turn on the Hunter.
While interest and the speeds that were reported and then most of the what.
And what we're seeing is an acceleration and speed and the lower coupons production coupons like 2.5 and.
And the reaction to the movements in rates has been much more muted and.
Higher coupons.
And the factor and some other factors and a day count things like that which vary from month to month, but not so much the loss reported of the 1 before that you did see some slowing and higher coupons and and somewhat of a continuation of that the smarts and so like I mentioned on the call you've seen some profit.
Very good.
The performance of higher coupons late June and into July.
Whether that's sustained or not remains to be seen but it seems that the focus for now of the.
The originators is back to the production coupons, because obviously there the much easier refi.
Execute right the docs of fresh every and expression of the low hanging fruit, so thats, where youre seeing on <unk>.
Those as they ramp up.
Both the get in 2020.
And when primary secondary spreads were high and sales were high.
Lot of the 1 and half tunes and too.
And 1 of apps that were originated.
Had very high gross net WAC spreads and typically 100, so all of the tools were 3% coupons to the borrower all of the 2 and 543 and 5% coupons to the borrower and now available rates are and the high too. So those people are the.
Target.
And when we saw the first quarter and rates spoke the spike higher than those borrowers we are and and the money. So the originators turned their focus to more seasoned higher coupon bonds or high Saito of bonds and we saw those speeds accelerate but now it's kind of reverse and so that's what we're seeing.
If we stay here of this level of rates for a long period of time and eventually they will.
Refi all of the teams and 2 and asset and then those turned their attention to the higher coupon borrowers again and I'll turn it over to Hunter.
And his thoughts.
Yes, I think that.
We've been investing in with a little bit of a piece of it.
Of a <unk>.
Baseline.
The philosophy that rates arent going to get materially below call. It.
2 of these to the borrower and so.
1 of the trades and we've been putting on and have done so and and.
Quite large size of our elbow shift strategies with low gross whack so call it collateral from.
From Citi.
And where the properties lie on the state of New York that are say $333.40, gross WAC elbow shippers is taking.
The real.
So of the incentive to refi and away from those borrowers at $2.75 to 85 call. It.
Refile.
The opportunities and also we have gone.
Fairly deep into <unk>.
Agency and.
Investor pools, there was some of our release.
Earlier in the year the agencies, we're going to strictly limit the number of.
Investor pools that could come through.
And it tends to be some low income borrowers and those tools as well I think thats going to.
Maybe kind of a month or two's worth of negative impact of and all of the.
Borrowers that really qualify for that for that new program on that or at least receptive to.
2 of refinancing.
As a result of it.
That'll work its way through the system pretty quickly I think.
Through our pool, it's pretty quickly so.
We continue to be pretty.
Pretty bearish and hence the allocation to the I think.
Similarly, I guess, the 2 to 3.3% to 3% bucket. So.
We have been.
Very.
Very picky about the gross lax and the pools that we've acquired and the 3% bucket and we'll continue to do so of trying to keep it somewhere under 3.5%, which really in conjunction with whatever specified characteristics.
Layering on to the collateral.
It makes it.
At least at this point.