Q3 2021 Orchid Island Capital Inc Earnings Call

Ladies and gentlemen, todays conference scheduled to begin in two minutes. Please continue to standby. Thank you for your patience again, ladies and gentlemen, todays conference scheduled to begin in two minutes. Please continue to standby. Thank you for your patience.

[music].

Okay.

Good morning, and welcome to the third quarter 2021 earnings conference call for Orchid Island capital. This call is being recorded today October 29, 'twenty 'twenty. One at this time the company would like to remind the listeners that statements made during todays conference call relating to matters that are not store colfax.

Our 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 risk.

And uncertainties that could cause actual performance or results to differ materially from those expressed in such forward looking statements.

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 forwardlooking 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's had a chance to download the slide deck that we put up on our website last night, because I will be as usual fall in the slide deck as I go through the process of the call.

And then at the end of the call of course, we will open up the call for questions.

First of all just kind of give you an outline of how we will.

Proceed it's very much the same as it's been in the Paas will start off with the financial highlights and go through the market developments should give you some background to help you understand our performance and positioning then go through our results in more detail finally will go through the portfolio, Oh hedges and assets.

And I'll give you a greater understanding of our positioning with respect to our financial highlights orchid Island.

<unk> net income per share of <unk> 20.

This was net income of 22 cents, excluding realized and unrealized gains and losses on our MBS assets and derivative instruments, including net interest expense on our interest rate swaps.

Lots of <unk> <unk> per share from net realized and unrealized losses at RBS derivative instruments.

Does include interest rate swaps interest as I mentioned, our book value per share increased six cents from $4 71 to $4 77.

And then the company declared and subsequently paid $19.05 a share in dividends since its public offerings initial public offering that as the company has declared $12.31 and dividends per share, including the one declared in October of this year.

Economic gain of $25.05 per share or 541% for the quarter I just wanted to move.

Moving on to slide three and four.

This is as always we present, our performance versus our peers.

First slide we show our results using the stock price or work at island and our peers through September 30th.

And we're calculating total return using stock price and dividends paid the bottom of the page we show our peer groups. I know you have changed somewhat over time as different entrants have come and gone into our space.

Second page just shows you the same numbers all using fulsome value for purposes of calculating total return. So that's the change in book value plus dividends paid again, it's shown with a one quarter lag simply because we don't have all of the.

Results of our peers for the third quarter, although I will add that based on the early results that we have it looks like or if it has had a very solid quarter. Again. These numbers are presented both on a look back as of the end of the second quarter and then for each of the various calendar periods.

Moving on to the market development. So I just want to pause and just again reiterate why we do this.

Close to just go into our results and giving you a.

A description of our positioning the purpose of going through these market developments as the way. We do is we wanted to give you a deeper understanding of why we had the results that we had her why would position the way we are and how we see things going forward. So that's that's why we spend time on.

On the market development, because when you can just give you a deeper understanding about how orphanage doing so moving on again to slide eight.

This slide is the same slide we use every quarter just shows you a snapshot of the various curves both the nominal or the cash curve on the left and the swap curve on the right.

And then of course for Q1 as well and as you can see on the left hand side or the right.

Rates at least based on this snapshot did not appear to move at all the only movement at all really in this quarter.

It was a flattening of the curve. So if you look for instance at the five year pointing to curve you can see that rates increased in the long and flat, but down. So we had a meaningful flattened out here and we'll talk about this a little bit more detail.

But I wanted to just say something about this well, while even though on a snapshot basis. It looks like nothing really happened. If you look on the next slide, particularly the top left you can see that rates actually for most of the quarter were lower.

So even though we ended the quarter with rates unchanged, our host treasury benchmarks hit their low yield for the year. During this quarter and the result, and the reason is is that we have.

The emergence of the Delta waves of the pandemic and that unfortunately.

Very severe and when it first emerged nobody really knew just how severe it would be in the market reacted as you would expect and in there was just.

Uncertainty with respect to the impact on earnings and I want to draw. A contrast between Q3 and Q4 and then it gets very important one.

When the Delta ways emerged.

You said there was you know obviously, it's a very bad development and it caused a lot of uncertainty, but I would think it's safe to say that was a very strong consensus in the market that wants the delta Wade was behind us.

And once the various forms of supplemental unemployment insurance and so forth we're behind us in September as the market and the economy was really poised for strong growth I think there was very strong since I believe in that and it was just a matter of time before once this delta weight in past us that we would resume very strong growth in particularly.

Wage growth and the fed had talked about the transitory nature of inflation and they thought that once the pandemic got behind us and we had the labor shortage go away that inflation would go away as well that was Q3. So now let's fast forward to where we are today.

And as you can see rates were moving up at the end of the third quarter and the reason is is that because people started to realize that maybe this wasn't going to be the cases, we initially thought.

For one well.

Delta wave isn't gone, but its certainly in retreat.

And all of the various supplemental unemployment insurance measures are gone.

Foreclosure moratorium is over but we really haven't seen jobs really increase now we may see more next week, but so far they really haven't come back as quickly as we thought and also just growth in this quarter has steadily in terms of expectations decline at the beginning of the quarter expectations were that the third quarter would have fairly strong growth.

Yesterday morning, we found out it was only 2% and while there might be some rebound into the fourth quarter I think theres a lot more uncertainty with respect to 2022. So that is a very meaningful change I think in the longer term outlook. Our medium term outlook. If you will that's taken place over the course of the quarter and the other thing I'd mentioned is inflation.

The inflation that we're seeing now including the data was released this morning is certainly challenging the transitory in nature.

<unk> is starting to look like it's going to if it is transitory it's going to be transitory for longer. So it's definitely looks like it's going to extend well into Q4 and probably into next year and if you look at listen to earnings calls not by mortgage rates, but by the other companies and for instance, the S&P 500.

All tend to echo the same theme that they expect inflation to be with us for quite a while now in the U S. The U S is a maybe not exactly the same as the rest of the world. Our for instance, our energy intensity, which is a measure of how much energy prices impact our economy has moved down over the decades.

Back in the seventies win.

Rice of oil went up and had a very devastating impact on Connie economies and cost inflation to go higher but now cars youre more efficient we're much more energy inefficient as a country and therefore, the impact of higher energy cost on inflation in the U S are not as severe as they work that may not be quite the case around the world certainly what we've seen from Australia.

Earlier this week.

Canada, England.

K central banks in particular, there are responding quite strongly to very high levels of inflation. So inflation has definitely become the preeminent story AMB saw shortages of supply shortages of goods and labor are also persisting much longer than we expected and so starting to really factor into the growth outlook.

Just for Q4, but into 2022, so that's important not just for our immediate results, but it does matter for us in terms of positioning because we view this uncertainty as a reason to continue to position and where we are defensively in nature and.

Basically waiting.

So the resolution of some of this uncertainty before we for instance, maybe raise the risk profile of the portfolio. So we'll talk a little bit more about that.

So anyway that was what we wanted to draw from that.

Slide Chad if you just look at this slide really just.

<unk> the slope of the curve.

And really what Youre seeing is a convergence between the yield on the five year Treasury and a 35 year Treasury is historically the most sensitive to changes in the direction of rates. So in this case the market is expecting short term rates to go higher and sooner.

And so youll see the five year react typically the long end of the curve is most sensitive to inflation and we certainly see that.

Why it's moving the way it is that's a bit of a quandary audition two I did too rationale that ive seen floated.

One by our economist that we fall at cornerstone macro in the view there is that our express there was that if the fed is going to have tightened more and sooner than maybe the terminal funds rate will end up being lower and Thats explains why longer term rates have come down and the other one that may just simply be the massive international global <unk>.

Little flows that we see.

Specially in the rates market sometime can cause movements in the long end of the curve. It don't really jive with what's going on with the domestic economy.

But these can in fact do often drive rates and so we've seen especially this week meaningful moves day in and day out on the long end of the curve that don't necessarily appear to be being driven solely by domestic events in any event. Whatever reason, we're seeing a flattening of the curve and again for a levered bond investors such as ourselves that gives us.

Causing pause that is when you can see how this ultimately.

Shakes out moving on to slide 11 in respect to the mortgage market as I mentioned I want to remind you that we were defensively positioned coming into this quarter defensively positioned at the end of the quarter and will be for us for now if you look at the performance of the mortgage market on the top left we basically just show you the performance of the various <unk>.

Year coupons, what we do here as we normalize their prices as of June 30th at Mark Each at 100, and just show you the change in their prices over the course of the quarter and as you can see mortgages did well towards the end of the quarter our rates started to move higher and it became clear that the fed was about to taper their asset purchases specifically at <unk>.

Second on September its open market Committee meeting when the chairman made it quite clear that.

A tapering of their asset purchases was on the near term horizon and you can see Fannie two two and a half.

<unk> fell off in price and that probably reflects a combination of those two factors with respect to roles.

The top two lines, the red and the Blue Orange is show you the strength of the role of those two coupons, but that is still very much involved in those roles are quite strong in contrast, higher coupons are soft Fannie.

Fannie four roles, but negative the Fannie three rollout a few spikes has generally been negative the key change there is that green line, which is Fannie threes.

The perception knowledge that as rates back up.

Perhaps a 3% coupon will enter the production window and therefore enter the.

The fed purchase calendar.

Calendar and so forth as a result, you're seeing a move up in that role.

That is in turn affected the spec market on the top right.

I apologize discharged cramped. It shows you five years of data, but as you can see on the right hand side I'll pay ups got quite high through the course of 2020, and then collapsed during the first quarter and then recovered during the third quarter when rates were lower and then finally have fallen off at the end and that reflects both rates being higher in <unk>.

<unk> role, especially in some of the higher coupons and particular three's being a little stronger and as a result, we did see some softness in those payoffs towards the end of the last quarter.

Moving on slide 12, just a snapshot of vol.

Looks relatively benign here in the course of the third quarter, but in the court.

So the fourth quarter it has definitely picked up.

A lot more uncertainty in the market and especially with respect to central banks.

Timing of rate hikes, and so forth. So we see volume pick up.

Finally on slide 13. These are just OAS levels.

If you notice on the left you can see the production coupons choosing to in house are still quite rich.

And for US that just means that it's not the right time for us to start to meaningfully up to increase our allocation there.

We're especially with the prospects of not only just tapering, but potentially the pace of tapering could change to the extent the fed had to alter their plans with respect to rate hikes. So that the combination of those two.

Is it enough to kind of stay away for now I'll just make one comment if you look at some of these lines here you can see there is a sharp drop all of a sudden that just because of the model that we use which is yield book updated their model and it caused a lot of these OAS levels to trial.

And thats after that slides or just a more bigger picture comments on the market as a whole on slide 14, just wanted to draw any conclusions from this the top chart. Just shows you. The quarterly returns on the left hand side you see most of the fixed income markets mortgages treasuries and so forth and you can see the return.

For the quarter were very very modest basically zero or very much unchanged. If you look at the right hand side.

Riskier assets has did better but the one that really stands out is the tips market and you can see the tips market had a very strong quarter and basically what this flex is people demanding more protection for inflation, so theyre buying chips or building up their prices yields on nominal treasuries only increased <unk>.

Honestly, so as a result real yields declined quite a bit in the.

The breakeven is difference between the two increases so a very strong quarter with respect to the year. If you look at the bottom you can see most of these sectors of the fixed income markets are slightly negative, it's clearly being riskier assets that have done well and I guess the takeaway from that is at least for the first 10 months of the year our risk.

Has done much better than haven assets low risk assets.

Moving onto the refinancing activity, which of course is very important for us.

Top left we show the refi index versus the average mortgage rate and what you've seen here and what youre seeing in Q4, so far as the convergence of those two lines. The refi index has remained subdued and mortgage rates are creeping higher.

Item charges shows you the percentage of the universe, that's in the money versus the aggregate refi index and.

They both are trending down finally, I'll just say the primary secondary spread seems to have kind of reached a floor I don't know that there's much room for that to improve.

I think that the originators of basically extract at all the efficiency. They can out of the process and that spreads seem stable now.

Now I will go into our financial results just go through those in a little more detail on slide 17, as we always do we show our results decompose between just the returns to the portfolio less our expenses and in the Middle column, we show our realized and unrealized gains.

Couple of comments you can see that we had some unrealized losses of a little over $11 million on the mortgage portfolio that really just reflects a very modest movement in rates coupled with some softness in spec pay ups, we still do as we have since the first quarter have a large allocation to spec pools and no real exposure.

Russia to TBA rolls so.

Pay ups were soft at the end of the quarter Thats reflected there.

Hedges just reflect a modest increase in rates. So the net net of that is a slight decrease since the two that we mentioned earlier.

And then as far as returns for the quarter as you can see the pass through portfolio had a very strong quarter.

Empty it very very well.

Collecting combination of and up in coupon bias in very low realized speeds and I would also note that we'll say a little bit more about this in a minute, but our allocation to structured assets, particularly iOS did very well this quarter.

We are using those for a number of reasons, but one of the benefits. Obviously is that they generate positive returns positive carry so it's nice to be able to get positive carry out of our hedges.

Finally, our last couple more slides here before we get into real nuts and bolts of the portfolio. Our NIM is reflected on page 18, I just wanted to point out it's remained stable.

Yield on our assets has declined I'll ever since really the onset of the pandemic finally seem to stabilize and bounce a little bit this quarter, our funding cost, which reflects the effect of our hedges continues to inch down. The net effect is we've had a very stable NIM and we had a slight uptick for the quarter.

The near term I think it looks well for the balance of the year I would say why in a moment here.

Just moving forward.

Slide 19, really don't even say anything about this this is just historical information frankly slide 20 as well.

It just shows you kind of.

Basically the picture of how we run the portfolio versus our peers.

Now, let's get into a little more of the details of the portfolio. If you look on slide 21.

This is our capital allocation.

What I want to point out is as you know obviously, we had a.

There's a fair amount of capital raising this quarter as a result, all using our ATM.

As a result, the portfolio increased by approximately 22%.

That did increase we also increased our allocation to iOS.

It went from <unk>.

Increased by approximately 3% in percentage terms, but in dollar terms it increased by almost 50%, 48% or so.

So we've continued to add iOS as a hedge instrument as we mentioned we see the fed tapering on horizon, some non zero probability that it could be a little faster than it might be the market expects as a result, you would expect mortgages would be a little soft and we think IL. One are a good hedge for up rates, but also maybe a little less.

Sensitive to mortgage basis, widening and Thats why we saw increased interest that allocation.

The right hand side just shows you the roll forward of the various sub portfolios.

And now I'll turn it over to the portfolio on slide 23.

You can see that.

While we don't have last quarter's slide deck I won't point out that the.

As we've grown the portfolio and increase the size. It's generally stayed the same in terms of this laid out in terms of coupons and allocations.

The 3% coupon remains our largest concentration.

For instance, the weighted average coupon on our 30 year portfolio is $2 96. It was $2 97 at the end of the second quarter. So essentially unchanged. The wall of the portfolio is actually lower than it was at the end of the second quarter. So.

Even though we've had the passage of three months time.

Portfolio was actually lower wallet and that just reflects the fact that we've added a low wala assets to the portfolio and we have slightly uptick the allocation to specs.

One thing I do want to point out is if you look at that 30 year line, we have nearly 4 billion in market value exposure.

Those assets prepaid for the quarter at seven six CPR.

That's lower than turnover.

Very very good outcome of the yield that you derive from that type of asset with that type of dollar price is somewhere in the neighborhood of 2% and funding costs.

Hedge funding costs at around 50 basis points, that's a very nice NIM I did mentioned that we increased the allocation to iOS, we have more line items here.

Talk about our hedges in a moment and then after the call hundreds of Teva.

In the Q&A, we can give you some more detail on how we selected the various iOS. We have slide 24, just shows you the slight uptick in the allocation of the specs.

We historically have own specs in lieu of Ppas.

And.

The higher quality assets, we've added generally new York stories or lower loan balance did uptick slightly this quarter.

And then finally on slide 25. This is really critical for US just shows you. It's 3% cohort. If you looked at each month presented here September August and July or the quarters looking back you can see that our allocation to that sector has done very very well relative to the cohort as a whole next combination.

Those low realized speeds.

And the higher coupons on the asset would generate the net interest margin that we are able to do and that really is what drives our economic performance and dividend.

Slide 26 again, it's just more historical information that just shows you that.

Speeds, which are the green line remained very subdued.

There are much lower than they were even in 2019, so even though we've been in a much lower rate environment speeds been well.

<unk> maintained in front in the near term our outlook is favorable with rates slightly higher than the seasonal I would expect speeds to if anything be slightly lower for the next few months.

The next slide just gives you our leverage it.

It does look like our leverage drops.

That's somewhat misleading technically as of 930, our leverage ratio was seven two.

As I mentioned, we've been raising capital through the ATM. It was somewhat backloaded in September we took in a few big chunks of cash towards the end of the quarter and deploy those in the auction monthly auction cycles in very early October. So we added another turn of leverage since then.

Since Reg settle for 30 year mortgages in October our leverage ratio has been around $8. Two so it is still flat that being said as I mentioned, we are generally defensively positioned and giving the uncertainties surrounding the outlook, we anticipate continuing to do so so that leverage ratio will probably stay somewhere in the low.

So to maybe mid eights.

And then finally, our last slide is on the hedges.

We have had some changes since quarter end table depicts simply that look back between June 30 to 930.

But since the quarter end, we have added some TBA shorts.

We've added some long and short in the future space needs.

10 year Ultras, and then with respect to our swaption.

We did basically.

The restructure some of those increases in size rose raised the strikes on those and the maturity dates were extended.

A lot of that just by taking some profits in building those positions. So.

The hedge book continues to grow as the portfolio does as well just one general note, though I would say that we are relying much more on iOS and swaption.

And to a lesser extent futures to hedge versus swaps.

Swaps, obviously will have a direct impact on our funding cost in terms of paying fixed receiving 40 until the fed starts to hide but so the hedge allocations did mostly in and swaption to iOS and to a lesser extent futures versus swaps.

And thats about it with that I will open up the call to questions. Operator, we can take any questions you might have.

Thank you Sir.

A reminder to ask a question you will need to press star one on your <unk>.

My question press the pound key please stand already compiled the keybanc.

The first question is from Jason Stewart from Jones trading your line is open.

Hey, good morning, Thanks for taking the questions.

Jason I wanted to start with the funding costs and your outlook for the fourth quarter, you know Theres a couple of markers on the horizon and we typically see a little bit of pressure going into year end whats your expectation for <unk>.

Just you know overnight repo not not considering not considering swaps, but have we seen the bottom here do you expect any pressure or do you see this as a pretty smooth sailing through the end of the year.

I'll, just say a brief word and I'll turn it over to Hunter.

We always when we approached quarter and year end always anticipate that pressure. So we always tend to try to start layering in some fundings over quarter end.

So that's no different in this quarter and give it to 100 talk about levels.

Yes, we continue to see a.

Hi on that demand for collateral so.

We get we get tapped on the shoulder every.

Few days or so with the counterparty is looking for.

<unk>.

More assets.

From us that they can reach they can put on our repo books.

I haven't seen a lot of pressure I will say that just.

Anecdotally when there are two or three months from the turn.

Counterparties tend to try to.

Baked in a little bit of that uncertainty, it's no more than a basis point or two right. Now. So you know if we're rolling something at 12 basis points for one month, we could probably do it over a year and for 13 or 14. So.

Not seeing a lot of pressure and still seeing a lot of demand for for assets to refi.

Got it that's great. Thank you for that color.

And then in terms of operating leverage.

I know that there is a calculation for the management fee.

What's your expectation as you continue to grow the equity base in the portfolio for the rest of the operating line items I mean should we continue to.

Should investors expect to see operating leverage or are you expanding the platform at all how should we think about that going forward.

I would say that.

With respect.

Back to the platform I can't really say that we have any plans for that.

Otherwise.

No I mean, we should continue to benefit from scale, but you only have two variable costs. The biggest one by far is the management fee and the second one is just on our repo funding cost which is much much smaller.

But we can't.

We continue to benefit from it as we grow and we're at a point now where the management fee is at 1% fixed basically from now on so every dollar of capital we raise our weighted average management fee should come down.

And.

Most of the rest of the cost structure is fixed so it gets diluted so we should see continue to see a dilution.

Cost structure as we grow.

Most all the capital we raised in this period was done at that lowest marginal management fee rate.

We don't really anticipate our fixed costs increasing materially so.

Those two things will contribute to operating leverage going forward.

Great. Thanks for that and then.

Last one from me and I'll jump out I didn't hear a book value update I heard the update on the on the hedges and it looks like based on my math, you're closing out some nice profits do you have a book value update for us quarter to date in <unk>.

We don't have a hard number but I would say, it's down somewhat that would reflect.

The increase in rates and spec softness.

The softness that Bob referred to on slide 11 in specified pools, resulting from.

Yeah.

His comments.

He was discussing the <unk>, specifically, which we have a lot of exposure to we've continued to see weakness in specified pool pay ups.

For the first few weeks of the new quarter, so a little bit of a give back there.

Attributable to this crazy roll market with Fannie threes, but.

So.

It's tough to comment on book value of this early in the new quarter, because things can change so quickly, but we're down.

Down very marginally.

Very important to see how we do next week.

Get into November and we have the auction cycles.

Because we really haven't seen as much trading activity in the second half of October we had for the last really year.

Got into a cycle, where you have a typical auction cycle at the beginning of the month and then you get a mid cycle listen occasionally even get some Fannie cash window list in the last week of the year, we didn't or moth rather we did not get that so there is some uncertainty on the level of pay up so the market will be very keenly dialed into next.

I know I think the cash window is gonna be Tuesday next week. So we'll see where those levels are and that will give us an update I would say based on what we've seen to date, though book is down I don't have an exact number but I'm guessing it would be probably one or 2%, but I can't give you anything more specific than that.

That's perfect. Thanks for the color I appreciate that thank you.

Your next question is from Christopher Nolan from Ladenburg Thalmann. Your line is open hey, guys.

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

Yes, that's definitely looks like it's going to continue to be the case.

It's easy to explain what's going on in the front end of the curve of London. The curve is much more of a challenge.

I tried to give my best guess at what's going on over there now or in my comments.

This week in particular.

Every day it just seen intra day, we get big moves.

You walk in and New York has been opened yet.

London hours, the market's flatter and then it turns around and goes the other way and then Europe closes and we go back the other way.

Very challenging week.

But going forward I think that inflation continue assuming it's going to continue to persist.

Stretch the bounds of.

Transition area. If you will that's going to keep the front end of the curve soft what goes on in the long end is who knows but it's hard to imagine that curve not disappointing, but stay pretty flat by the way I didn't mentioned it in my prepared remarks, but the spread between <unk> and <unk> at one point was north of 150 basis points, it's less than <unk>.

75, as we speak so it's dropped by half.

Very short period of time, so it's likely to continue to do that and there seems to be some contagion.

Between whats going on amongst other central banks, and what's going on with the fed it's great that we have a meeting next week. So we can get some clarity in that regard but.

This week that the central Bank in Canada stopped QE and Theyre going to raise rates.

Australia was amazing they have yield curve control there.

They just stopped participating apparently they are ending that program.

They've done nothing to stop the run up in yields I was just checking yesterday the yield on the Australia, two year, which was slightly negative in mid September is approaching 50.

And move meaningfully again today I understand and then the same thing.

Okay.

It's moving rapidly and it seems to be influencing the market expectations here, which again all of these forces are just going to drive the curve flatter.

And then.

Should we expect to increase capital allocation for iOS in the fourth quarter.

We had soft targeted 25%.

At 21 and change I would say, we're probably going to continue to move in that direction.

Great.

And then I guess on page 23, you have a and the.

The portfolio characteristics.

Your asset sensitivity.

Are you going to are you planning to position this a little bit more where you have a little bit neutral.

Sensitivity towards <unk>.

50 bps rise in rates.

Yes short answer to that is yes, and I would say that.

One thing is we've been raising capital it's been coming in quickly this particularly this last quarter or.

So sometimes we add assets, we tried to do so uniformly but get a little ahead or behind on one or the other.

So we will continue to add items as I mentioned since quarter end, we have increased the hedges.

As I mentioned, we added to our treasury shorts ultras.

We added the TBA shorts, we added some iOS and we repositioned some of our swaption. So the profile of book differently today than it did at quarter end.

But yes. The short answer your question is yes, great.

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

Yes.

Again to ask a question. Please press star one on your telephone again Thats Star one on your telephone.

Next question is from Mikael <unk> from JMP Securities. Your line is open.

Hi, Good morning, gentlemen, thanks for taking my question a few of my questions have already been answered, but just wanted to get your thoughts on what Youre seeing.

For agency MBS spread widening or tightening going forward.

And how you're thinking about positioning the portfolio.

Assuming.

Satirist Parabens kind of.

We kind of putter along the way we are now although we've obviously seen quite a lot of volatility last week as you mentioned.

But assuming.

You expect a flatter yield curve going forward.

And also maybe a more volatile scenario, where where do you have.

Massive not massive but heightened perhaps <unk>.

Spread widening.

Thanks.

I'll take that I would say that.

Well I'll turn it over 100% one thing is keep in mind is that we certainly see the good days and bad days for mortgages.

We pretty much have a pretty good feel for that so that I would tell you you know kind of what we expect but.

The thing you have to keep in mind is that.

Everything else is very rich also.

And to the extent there are many many multi sector asset managers out there, which there are.

They are relative value trader. So mortgages is by nature can never typically get too rich or too cheap for law. So that's just kind of an overriding principle. So yes mortgages are rich so it was everything else.

<unk> on the horizon and the market knows that.

But we also have bank demand, which.

Tends to be and represent an additional floor. If you will in addition to the fed simply because.

As they fed pumps reserves into the system they find their way to banks and banks have to invest these reserves.

Just kind of the opposite of where we were in 19, when they were depleting reserves and we couldnt get repo because the feds were up against the banks were all up against their liquidity ratios and so forth now is the exact opposite they have too much cash so they are buyers.

So, yes, I mean I would say.

<unk> key next week, if they give us something thats different than what the market expects youre going to see a knee jerk widening.

And then what happens you know it just represents a buying opportunity. So that's kind of the way I look at Honeywell.

I totally agree with that I think that every buying opportunity has been.

Well received over the last year, or so and I guess.

Obviously, we're sort of in a state of free fall right after that.

Pandemic outbreak, but.

Stepped in shored up the market and since then in any marginal widening.

Met with bi.

And on the market.

The yield front as well every we definitely see yield based buyers step in and every time rates increased marginally and those are.

Sort of on Unlevered money.

Stepping in and then Levered money stepping everyone when things.

Widen out on a spread basis.

As to your question I think if we continue to sort of gyrate around in this range.

I don't think things will change meaningfully I think we'll continue to see.

Slow.

Emergence of burn out in the portfolio and then I think if we do have some sort of an inflation scare something that.

For Us I think thats, what we are most concerned about is a breakout to higher rates.

Caused by something like inflation that seems to be sort of on the back burner right now are less of a concern with the market but.

Something that we always have to keep our eye on.

The nature of the way, we're positioned in premium MBS specified pools and.

And that type of situation I think the portfolio does relatively well for.

For the next 25 or 30 basis points, we could see.

Spreads tight on our assets just due to the fact that refi incentive is disappearing.

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We increased that exposure.

Through the use of Io is as well and we've been really focused on <unk>.

Positioning and cost speed mortgage assets that are.

Going to really have a dramatically reduced incentive to refi.

On the next call it 25% to 50 basis points. So that's why a lot of times, you'll see our profile skewed a little bit where it'll be negative to the up 50, I think thats because it appears we've observed within those assets with types of assets that we typically hold do well in that scenario.

That's also why we've tried to not play chicken with the fed being in production coupon TBA as well a little bit unique in that regard we have.

Trying to resist the allure of drop market and Fannie twos in two and a half.

Just on a relative value basis.

Horribly negative OAS.

Our concern is that.

Those are going to be the first.

First assets to widen into a into a taper.

As my thoughts.

Just one other thought I might add is that in terms of the.

And evolve and something that the market doesn't see coming in.

If you look at the market pricing.

And compare that to what Paul said at the September fed meeting when he basically imply that tapering will be done mid summer and if you look at the eurodollars marker of the fed funds futures contracts you see that the.

Initial tightening right after that and then obviously that's very much in contrast to the last cycle. When there was a long pause from when QE ended to the first hike. So the market is very much.

At odds with a repeat of what happened the last time.

Who knows how it plays out but lets say for instance that.

<unk> continues to get worse whatever.

The fed concludes that they have to.

Bring forward their tightening.

You would presume that they don't want to be tightening.

Raising the fed funds rate at the same time they are buying assets. So they would then accelerate the tapering and that event because that's not what the market is currently expecting in spite of the fact with fed funds market is telling you.

And that would that you would see the production coupons soften quickly.

And for investors they might just say, okay, we're going to sell these lower coupons. They may leave the space or they go up in coupon and Thats kind of how we're positioned.

Put that to happen. So I don't think theres, a chance that they're going to.

Taper or extended taper out unless the economy, that's something that is not currently on.

Visible so I think the risk is that they are forced to accelerate the tapering in which case you would see the production coupons probably soften up.

And that would benefit us.

That type of environment, we are.

In a fairly enviable position to the extent that our leverage ratio is lower than it typically is.

Not as low as some out there that are waiting for this sort of.

<unk> opportunity moment, but we definitely have another turn or so of leverage that we could.

Quickly add.

And a buying opportunity type of moment, but perhaps more importantly, we have been pretty successful lately in raising capital and.

Would definitely use that lever so to speak is as a way to add cheaper assets.

We saw that type of scenario play out.

Got it. Thank you gentlemen, that's very very helpful.

Good deal.

Your next question is from Kevin Jones Investor Your line is open.

Hello.

Hello, Kevin.

Yes, hi.

I don't have a question I just called in to listen.

Oh, well glad thank you for doing that.

Yeah.

Well.

From my view.

I'm at a loss.

Alright, well. Thanks recall, we did have a great weekend.

Keep doing what you're doing.

Alright.

Thank you.

Alright, thank you.

Again to ask a question. Please press star one on your telephone again Thats Star one on your telephone.

But do you have a follow up question from Christopher Nolan from Ladenburg Thalmann. Your line is open.

<unk> answered my TBA question, but I've got you guys.

What's the management perspective on doing additional equity raises.

All the TBA.

The ATM.

Sure.

Is something we want to continue to use.

We've done secondaries, probably obviously as you know we don't do a lot of those we have done them.

There are benefits to the ATM the cost of capital is cheaper.

The money is kind of slowly over time. So it makes it easy to invest you have to do it all at once.

If the stock.

Our basic mantra is when the stock is trading above what we consider raising capital when it's trading below we consider buying it back and then we always factor in market investment opportunities at the time in both cases. So today the investment opportunities are okay. They are not spectacular.

And the stock had been trading at a premium to book So it was accretive.

So in that instance, if that were to continue we would probably be still inclined to continue to use the program.

Got it thank you.

Again to ask a question. Please press star one on your telephone again Thats Star one on your telephone.

There are no audio questions at this time I will turn the call back to Mr. Combs.

Thank you operator, and thank you everybody I appreciate you taking the time to join us.

So we enjoy your questions to the extent you have additional questions that weren't answered or you have to listen to the replay.

And when it call. Please feel free to do the office number is 770 22311400 always be glad to take your questions. Otherwise we look forward to talking to you next time. Thank you.

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

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