Q4 2022 Orchid Island Capital Inc Earnings Call
Good morning, and welcome to the fourth quarter 2022 earnings conference call for Orchid Island capital. This call is being recorded today and be wary twenty-fourth 2023 at this time the company would like to remind the listeners that statements made during todays conference call relating to matters that are not historical facts.
Facts are forward looking statements subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Listeners are cautioned that such forward looking statements are based on information currently available on the managements. Good faith belief with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in such forward looking statements.
Important factors that could cause such differences are described in the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K the.
The company assumes no obligation to update such forward looking statements to reflect actual results changes in assumptions or changes in other factors affecting forward looking statements.
Now I would like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead Sir.
Good morning, and welcome everybody I hope everybody has had a chance to download our slide presentation.
From the website this morning.
I apologize we did issue our press release.
Last night as usual, but the company financial statements were not attached.
That process is taking a little longer than usual this year and so the financials are where we're not attached.
We will be filing our 10-K, probably next week as well.
We would do today.
This is the process is just running a little late and.
Sorry for the delay, but those should be out.
Next week.
But all of the numbers that are in the press release, you can rely on their all.
Accurate unchanged actually unchanged from what we released back in January .
Balloon results, so with that I will kick off with a slide deck.
As usual kind of followed the same outline starting on page three with the outline what we're going to discuss I'll briefly go over the financial highlights talk.
Talk about the market developments and how they shaped our performance.
And also our our results and outlook for the future and then I'll go into our financial results a little more detail and then finally talk about our portfolio characteristics, our hedge positions and how we're positioning and our outlook for the market going forward.
So firstly, the highlights or get out in.
Generated net income per share of <unk> 95 cents.
Earnings per share of negative nine excluding realized and unrealized gains and losses on our RMB absolute derivative instruments, including net interest income on interest rate swaps.
Got a gain of $1.04 per share from net realized and unrealized losses on our RMB asset driven instruments again, including net interest income on interest rate swaps.
Book value per share of $11 93 at December 31, 2022 versus a 11 42 at September 32022 in Q4, the company declared and subsequently paid 48 cents per share in dividends.
Since our initial public offering the company has declared $64 97 per share split adjusted.
Including dividends declared in January and February of this year. The total economic gain at 99 cents per share for the quarter or a six 7% annualized.
And now I will discuss the market development turning to slide six.
Make a couple of comments here first of all I wanted to point out that you'll note that we have included not just 930 and 12 31 numbers, but also in February .
We recognize that we're well into the quarter and then a lot has changed not just.
Really in February but January as well, so it's been a quite volatile quarter, so far and we shut off the treasury cash curve and the swap curve I wanted to make a couple of points here, if you'll notice the cash curve.
It's very flat and the 10 year pointed out.
And really has been since September 30th.
If you look at the swaps curve, while it's still relatively flat, it's less so its downward sloping and that just reflects the fact that swap spreads are negative silver swap spreads and more negative. The further you go up the curve and ramification for that.
Somewhat significant in the sense that if you look at swaps as a hedge instrument 10.
10 year swaps at about $3 60 as of close last night.
It's still attractive hedge level, especially for lower coupon securities, which have a fully extended.
It can be quite easily hedged with longer dated swaps.
And yield even did five CPR for instance, they can still yield.
A decent spread above that level. So I just wanted to point that out that is one of the benefits of an extremely inverted curve and as we speak today given the data that was released earlier encourage even more embedded moving on to page seven.
Just want to not spend a lot of time here, but just point out if you look on the left hand side, you can see that even through early into this quarter our rates and the long it really hasn't moved a lot. They are up slightly today, but most of the movement is again, it's been on the front of it and you saw that in the last slide where the market continues to price it more fed.
Hikes.
It looks like we're gonna be hiking into the middle of this year, possibly and all this this this is driven by the most recent data, but the long end of the curve has not moved anywhere nearly as much.
Turning to page eight.
Very important slide for US is mortgage investors. This shows the one of many measures that we use to gauge mortgage attractiveness or others or like what are basically just showing you the spread of a current coupon mortgage to a 10 year treasury. There's many other metrics you could use you could use a spread to the fives tens flagged or you could use a spread the swap.
<unk> and I think the conclusion that you would draw would be the same if any of them and I just want to point out a few things on the bottom we show a very long term look back. This goes all the way back to the beginning of 2010 and that's very important for gaining some perspective on where we are today, which of course is at the far right.
And then on the top you see the same chart only with a much shorter look back just going back to the end of 2021 and as you can see in 2022 mortgages that quite cheap in fact, if you look at the top there you're seeing which the point that coincides with a late September early October we got to about 190 basis.
Points spread.
That is quite wide in fact, if you look at where we were using the bottom chart in March of 2020, we only got to about 160, so we were quite a bit wider than that.
That was when the market was being open to a large extent being driven by the fed and forced to accept the fact that the fed was going to take much more aggressively in the rates were going to go higher and mortgages sold off of course that was also accompanied by movements in volatility, which also drove mortgage spreads wider and so you saw quite a wide move.
And then we started the tightened but that has since reversed and that's mostly been the case in February and we were at about 160 basis points yesterday, and maybe a few basis points wider than that so.
Looking at the Blower chart, you see a prolonged period, where spreads were fairly stable at seven or eight year period, where those spreads were in the high Seventy's and Theres no compelling reason that says we're going to have to go back to those levels.
But it's I think reasonable to assume it's not likely we're going to stay at these extreme levels in all of this leads us in most of our peers to conclude that mortgages are attractive and they offered very attractive total rate of return.
Prospects, assuming at least a return to somewhere close to that range. So it's quite a big move if we were to go from 160 or higher towards high Seventy's Eighty's range or even close to that so mortgages look attractive to us are moving on slide nine is just showed you a chart that we've used more in the past less.
And today, it's just showing you the spread between the five and 30 year points on the curve and as you saw on the slide a few before that part of the curve as well slightly inverted not meaningfully so all the inversion really occurs in the very front end. So for instance.
The spread between the two and the 10 year or fed funds in the tenure, that's the meaningful and version it's likely to stay where it is if not even get higher as we move forward until the end of the tightening cycle.
Slide 10. This is a kind of a picture that moves it snail's pace. This is just showing you holdings by large commercial banks and the fat and with <unk> in place and reserves being withdrawn from the system. Both of these lines are declining at a slower pace. We've seen this before back in 19, when arguably reserve start to tighten it caused some.
Problems in the markets.
The market is aware that this might happen again, if the fed did put in place a standing repo facility in the event that it did occur.
I don't think it's an issue for the immediate future, but something worth watching and that's kind of why we have this slide in here Slide 11 is very important. This is when we're looking specifically at the mortgage market and if you look at the top left what we present here as we normalize the prices for several coupons, Fannie threes fours fives and sixes.
So we're giving you a wide range of coupons and as you can see early in the fourth quarter, especially as we moved into late October mortgages and rates performed quite poorly.
And mortgages in particular did quite poorly, but then it started to turn around and we closed the quarter on a big upswing. That's why we had to book value performance, we had and as you can see in early January they did very well and I want to point out and stress here that if you look at the coupon performance.
<unk> coupon versus higher coupon in the period of the quarter or any of these periods. When we were rallying.
It very well and there's several reasons.
Reasons for this obviously they have longer duration, but also what we've seen over the course of the late fourth quarter into early first quarter. This year as money managers in the light coming back into the market most of whom were probably underweight the sector and adding to their positions to get neutral or at least close to neutral we don't have.
Any data for February so I can't really say, where we think money managers are relative to the bogies, but we do know I just read today that bond funds have seen eight consecutive weeks of inflows. So even to the extent that they're neutral. The fact that they would try to stay so with bond inflows is beneficial to the sector and that's good news for us because we've been on.
The other side of that equation for quite a while last year. So the fact that money is coming into the space is bodes well, particularly for these low coupons in particular anybody that runs our portfolio against the index because the index is very heavily skewed towards lower coupons. Obviously they were the ones that were produced for most of the last 10.
10 years in contrast to say Fannie fixes are six in house, which Werent even produced until recently.
For quite a long time, so to the extent Theres index.
Money managers coming into the market they are going to be active in those sectors and those securities have performed well and we would anticipate they would perform well.
If and when the fed were to pivot and the market will start going the other direction.
In contrast, if you look on the bottom left you see rolls are other than the Fannie six this rolls are all very low they do not offer much in the way of drop income with the exception of fixes its been a fairly technical market and fixes so that role can get very special or less.
So very quickly the generic generally speaking neuro market has not been attractive of late the top right. Just shows specified pools. These are just representative as you can imagine as we rallied in January specs had a decent run, especially with roles being soft, but now we've had another backup in February .
Suspected roll those might soften again, but it remains to be seen we don't have meaningful data points, yet we will get that in early March.
The overall market or the specified pool market given that the market is at such an extreme discount.
Even in a good day, there's not a lot of performance to be had there. So it's more of a.
Generic or a low low pay up pools are more desirable.
Turning to slide 12, we show a picture of volatility. This is just one one measure three months by 10 year normalized at all and as you can see it's been high and very elevated and it remains elevated again, we're showing data through February 17th which is last Friday.
Even elevated more as we speak.
One point I would make is that mortgage performance in spread levels have been fairly highly correlated with fall as they always are but it seems even more so over the last 12 or 14 months. So.
Ball levels are very important and something we always keep an eye on.
Because they do impact mortgage performance always have and always will.
Just moving on slide 13. This is the left side, we show OAS levels.
As you can see they've been fairly stable.
Different investors put more stock or less than the OAS levels. The problem with all we have six years. A skeptic is that you realize that these are the products of models and given where we are right wise and the fact that we have.
Almost the entire mortgage universe at a discount those are we've never seen an environment like this before and models are built off of empirical data. So.
The challenge I would argue.
The models to be as accurate as they might be otherwise theres been frequent changes to a lot of that model, especially on the street yield book and the like.
But that being said there are a number of investors use to trade off of OAS levels. So you can't ignore them.
But they would tell you that mortgages are reasonably attractive not great.
We'll have a little more to say on the relative attractiveness in a moment.
Moving on just some.
Return data just so we can kind of gains in perspective and not.
Lose fact inside of the fact that while we are exclusively MBS investors, we operate in a world of investors who operate across all sectors.
We have three tables here the top one shows for the Q4 returns and as you can see it was very much a risk on is we'd like to say type of quarter. The best returns were generated by the S&P emerging market high yield domestic high yield et cetera, but lower risk sectors, such as agency mortgages had positive.
Turns but lagged the more risky sectors, which is kind of what you would expect.
What you don't expect as what we saw for the full year of 2022 on the bottom.
This is very much in sharp contrast to historical norms. If you see the numbers here from the far right. The S&P was down 18%.
Treasuries were down 12, five mortgages almost 12 very unusual to see all of these sectors have such highly correlated returns in all negative.
That was one of the most remarkable aspects of 2022 is a positive correlation between bonds.
And most risky assets, it's very typically not the case, it's the opposite more often than not so very unusual year and it just reflected the fact that we had unprecedented things going on we had.
Believable removal of accommodation by the fed in the form of their tightening.
And then also we had seen such incredible monitor fiscal policy from the government, which was stopped last year. So it was basically that we withdraw those tremendous amounts of a combination and that's what led to these types of returns.
Slide 15, we just show that quarter to date through February 17th.
I think much to say here other than well they are all positive which is good but it will be interesting to see how this table looks as we move through the year, we approached the end of the year.
Could look a lot different.
Slide.
17. This is more of a saying, we're just showing you spread levels across the fixed income markets across the world.
Ratings spectrum, and I'm, not really going to say much about this you can look at this at your leisure we do show.
Levels at the end of 2021 2022 current apparent is as of February 9th and then we show year to date changes and then one thing we do have here as this one column there. The right side is 2022 highs and of course those levels were all very very high in 2022, and you can see in the forests British right column.
Most AD cloud asset classes have moved in but not nearly that much theres certainly still all above where they were at the end of 2021. So generally speaking most sectors of the fixed income market are trading at levels much wider than they ended 2021.
The next slide slide 17.
Not much to say here the top left shows you the refi index versus the mortgage rate and as you can imagine with mortgage rates are extremely high levels. The refi index is at multi decade low the percentage of the universe, It's re financeable as extremely low very low single digits.
But one thing that is worth pointing out if you look at this top right. We have the primary secondary spread.
And this is really relevant for originators and what we can expect from them.
You can see the current level is more or less in the middle of the range its been and going back a few years.
But one thing we do know and we've seen in the past even going back to the days before the financial crisis.
When mortgage originators or in a <unk>.
Low market they can accept tighter spreads in order to keep business volumes adder at sustainable levels and so for that reason.
We may see a slight tightening in this spread rates long end rates would go up a little bit higher just so they can maintain levels, which means that we may see refinancing activity our purchase activity stay a little more robust than it would have otherwise, but that all being said.
Leave no doubt that refinancing activity is still very low and even purchase activity is at very low levels.
Now we can talk about our financial results.
On slide 19.
Yeah.
And this is a chart, which we present every quarter and I wanted to spend some time as I did last quarter and talk about the left hand side as you can see.
For the current quarter, our core income proxy its negative its nine cents negative obviously with a 48 cents dividend you wonder how we can cover that.
And just as I said the last time, you have to understand that in the right column. There. When we have these realized and unrealized gains because of our accounting treatment. Some of the things that would normally be components of core income instead captured in those numbers. So for instance.
Unrealized gains on MBS <unk>.
Includes accretion of discount.
Our entire portfolio trades at a discount to par.
And any accretion through Paydowns is captured in that number so that number for the quarter was $6 $75 million. So that's about 18, three four cents that would otherwise have been captured in the <unk> number and we also have hedges now for the quarter, our interest rate futures and swaps.
Had a negative mark to markets, but that's just because they went from very very far in the money to slightly less so, but nonetheless needless to say they were all in the money for the quarter and so we were receiving more than we were paying out for instance on our swaps.
And that number was about $11 1 million for the fourth quarter, which is about 31 one.
So when you add those two numbers to the negative nine you get about $39, five which I realize is slightly less than the <unk> 48 dividend.
And I'm going to address that but I'm going to do so in a few moments when I get into discussion on the details of the portfolio. So for now, let's just hold that thought.
But we won't be coming back to that momentarily.
Next I want to talk about slide 20.
And this thing is again this is historical data that we've presented but I want to point something out very important.
If you look at the top chart and see a solid red line that represents our.
Economic interest cost, which was 226 basis points for the fourth quarter now granted that's at a higher level than it's been recently, but if you look back at where those numbers were in 2019 for instance, even into early 2020, they were at higher levels. So our economic interest.
<unk> expense was higher than that it is now even though the benchmark indices are more than 200 basis points higher today than they were then.
And this speaks to the amount of hedges that we have in place.
And the legacy hedges, which we've closed but for tax purposes still a relevant because the way tax accounting works for instance, if you enter into a 10 year swap and a year later you close that position whatever the open equity is in that position that the date that you close it is applied.
Over the remainder of that 10 year swap period. So in this case it would be nine more years.
So for instance, if that swap are close with positive equity.
It would represent a reduction in your interest expense over the remaining nine years.
And we have a lot of legacy swaps. In addition to our current swaps that are going to be available to us for tax purposes, and therefore dividend calculation purposes for many years to come and I'll give you. The details of those numbers in a moment, but there is a lot of benefit being derived from those hedges.
Just moving through the slide deck I'm not going to say much about 'twenty. One this is just historical information.
But I want to spend some time on page 22. This shows our leverage ratio on the left hand side keep in mind. This is GAAP leverage. So this is showing our total liabilities.
By our shareholders' equity, we do back out unsettled security purchases, but those are generally not material.
That number was seven eight at the end of the year, which is on the low end of our range, but keep in mind. This is GAAP leverage ratio.
And many of our peers, who use TBA.
Typically they're long TBA, so their economic leverage ratio as we referred to it is typically higher than our reported gap in our case, we're short TBA as we're not long and so our economic leverage ratio was actually six three at the end of 2022, so it's very low relative to.
Our historical norms and its about $6 four today.
Our leverage ratio.
In view of our typical range, which as you know maybe six to nine were at the low end of our range. So we have quite a bit of dry powder.
That we can deploy when and if the market and the fed pivoted to the market turns around and we start to see prospects for a meaningful rally in rates, especially on the front end and the potential for mortgages to tightened back towards historical norms, we have dry powder it could be as simple as Bob.
Back are short so for instance, if the market starts to rally.
Mortgage is start to tighten we have a lot of TBA shorts that we could unwind it would allow us to benefit and realize this this leverage ratio you can see here versus the true economic when we have today, so it would be beneficial to us.
Page 23, I'm not going to say much about this our allocation on the left two passengers as higher simply because iOS with rates as high as they are basically tapped out I mean, they can't go up in price any more speeds cant get any lower in fact, what we saw for the latter half of 2022 as you know very mediocre.
Performance from the part of iOS, because there were really a lot of investor selling them trying to take profit so.
Price appreciation was limited and we don't see any benefit there's nothing there's more downside than owning items today than upside. So we've been moving into a much more heavily concentrated exposure to pass throughs.
Now slide 25, we can talk about our positioning here and kind of how our position and why if you look at this page I'll just highlight a few things.
If you'll notice that for instance, I'm going to start with our coupon.
Our weighted average coupon at the end of the year was 347%. It was about three three at the end of the third quarter and it's about 355 today. So from the end of the third quarter to today. It's gone from three three to 355 is not up much we still have a very heavy lower coupon bias.
Yes.
And that might be in contrast to our peers, who have gone to a much larger extent up in coupon in an effort to generate current income and to cover current funding costs. We have not done so as much as they have in fact much much less on one thing I will point out here. If you look at our position on 30 years pretty much third.
Year, three three and a half four and four and a half most of those positions did not change over the course of the fourth quarter other than Paydowns, but we did add about $400 million to our position and fives.
And since the end of the year, we have added to our exposure in fours by about $150 million and we added about a $160 million to $5. So we have brought the coupon up as I mentioned to $3 55, but it still has a much lower coupon bias.
And then I would also.
You mentioned that the total portfolio was up about 400 million with respect to our hedges on the bottom of the page we had TBA shorts of $675 million. That's the number I was referencing when I said, our economic leverage ratio was lower than our GAAP. We've added to that since year end, it's now about 875.
So we have a lot of dry powder in the form of TBA shorts that can be unwound.
The event that the market turns and so now.
Just kind of giving some more color on why we're positioned the way we are.
And with this lower coupon bias to things that really mitigate the the negatives. If you will ramifications of owning these lower coupons I mentioned, the fact that we had a lot of hedges. Both 50 hedges in other words hedges that were closed and existing hedges that can be used to offset increased funding costs and <unk>.
Numbers just are these hedges really started to come into the money in the second half of 2022 and like I did today and like I did in the last quarter. I showed you the numbers that we received in the form of an offset to our interest expense.
Boeing forward those numbers are even higher so they are higher than they were in the future than they were in 2022 and what we did is to kind of do some analysis around as we looked at all of our closed hedge positions and we calculated are tabulated the contribution to interest expense in the future and then we took the second step.
Taking all of our hedges that were in place at the end of 2022 and assuming they had been closed that day and then determine what benefit we would derive from those over the remainder of the hedge periods and underlying them and then just had delayed them across time and I can give you some numbers for instance in 2002.
'twenty three we have about 58 $5 million available to offset interest expense in the current year.
In 2024 that number goes to $72 million.
In 2025 at $77 2 million and it stays relatively high through the balance of the decade. The total is about $417 million over the remaining lives of those hedges. So that's a big mitigate in our minds.
And it's why we are not comfortable trying to chase current income in the form of premium mortgages today, we feel we have a lot of this hedge.
Hedge benefit that we can utilize in the second reason is that as we do always we look at these investment opportunities from a total rate of return perspective, so not solely focused on current income and we make the lower coupon securities, which are very easy to hedge because they are fully extended we have long.
10 of our hedges in place and we've seen already in the fourth quarter and early in this quarter in a rally they do very well and we explained why we think they would continue to do so the fact that mortgages are wide and the fact that money managers tend to run against indices, which are heavy heavily weighted towards these coupons. We think they offer very good total rate of <unk>.
Return opportunities and that's why we wanted to favor. These on the other hand, we view current coupon mortgages is quite unattractive, while they might offer current high current income or they would probably exhibit extremely poor convexity in a rally theyre going to perform poorly because there.
Shortened because they are the mortgages are going to be the most readily refinance. These are newly originated loans. They are fresh documents they would be the lowest hanging fruit and prepay fast in the event of a selloff there extend as a result with that horrible convexity theyre very challenging to hedge and the cost.
A hedging would be high so again when I talk about there are parents current carry you.
Have to realize that when you go to hedge that.
Really each end of the cost and we don't have a similar cost with respect to the coupons that we own and therefore, we think they have even better total rate of return perspective prospects, coupled with our legacy hedge.
Interest benefit and.
And we are very comfortable maintaining the positioning that we have in place and will probably continue to do so.
Going forward.
One final point on the positioning and this isn't a somewhat related vein with respect to capital raising we we're very constructive on that in early January into early February still.
Still somewhat or maybe a little less so we will probably recognize that.
Carry in this environment is a little less than legacy assets, but that being said as I mentioned, if you can buy.
Discount mortgages that are fully extended and hedge them with for instance, 10 year swaps or a forward starting swap you can still locked in pretty attractive spreads and in conjunction with the total rate of return potential of those securities you still get returns in the double digits. So there they are attractive and capital raising.
Is certainly something we would consider and with the most recent cheapening, we've seen the last two or three weeks.
They they even look more compelling so there's definitely benefits to new capital being deployed today.
Just moving on slide 26. This is just shows our speeds on the bottom right you can see that our speeds relative to the cohorts as we move through 2022 kind of converged. So they're more in line with the cohort that being said speeds in the cohorts are all much slower and will probably stay that way for some time.
There's no question that speeds generally speaking are very low and likely to stay that way.
Going through the balance of the stack Slide 28, we show our funding costs in the Blue line versus the Red line, which is just that our aggregate cost of funds and you really can't quite see it that we also have one month's sofa there they are pretty much on top of each other the red and the Gray line, but the Blue line you can see that gap is large and growing.
And as we've moved into 2023 is to continue to expand and that again leads to the benefits of both our legacy and current hedges, which are very much in the money.
And so that's pretty much it.
One last slide on the hedging positions. The top left are our futures they are mostly unchanged through.
Through the end of the year and into early this year, we did roll them. One trade. We did do was unwind some of our futures and replace them with a forward starting swap.
With respect to our swap agreements other than the one we just added those were unchanged over the course of the quarter and in the bottom right, we show, our swaption and rate derivatives.
That's where we do most of our dynamic hedging as the markets move so the physicians there do change more rapidly than the rest.
But those are ways, we can be kind of nimble and take advantage of opportunities as they present themselves in the market to kind of enhance our overall hedge effectiveness and then finally I just wanted to conclude with kind of our outlook and how we view the world.
Obviously with what's happened of late with the data turning around and going in the opposite direction, which it had been we're seeing inflation start to Reaccelerate. We're seeing wage are nonfarm payrolls are very robust so.
Not sure when the tightening cycle is going to end it tied hard to have a lot of conviction.
But one thing you can have conviction is the fact that assuming that the fed is going to do as they say and continue to tighten or eventually this cycle will end and there will be a pivot we're not sure when but we are very much looking forward to that because we think we're very much very well positioned to take advantage of that in many ways.
We can get through this environment as I've mentioned for the reasons, we just discussed and we like the upside when and if that happens we have won.
Central for NIM expansion, if to the extent that the fed eases. We also have all of our substantial hedge positions, which are going to support our NIM, which would do so even more in defense of a fed tightening or easing, but we also have book value expansion potential.
Current coupon mortgages are wide, we don't know how much they can tighten they may or may not get back to historical norms, but they are very wide relative to those and also volcan normalize, which again would be helpful in bringing spreads in balls very elevated.
Other thing is the second point would be our exposure team fully index extended low coupon mortgages, which we think can do very well in a rally.
And the fact that we have a low economic economic leverage ratio, which we could easily increase by two or two and a half turns to take advantage of that and we don't have any exposure to high coupon premiums, which we think would be formed very badly when and if the fed pivot. So for all those reasons. We think we have the potential for.
Very good book value performance and NIM expansion and then one final minor point I would just say that to the extent, we do have a downturn in the economy, you would expect agency mortgages to perform on a relative basis quite well just because we have no credit exposure and you could see some credit widening in other sector. So for all those reasons we are.
Cautiously optimistic on the market as I said, we don't really know when the market is going to turn when the fed's going to pivot.
But the more they tightened the more they have to constrain economic activity just kind of increases the chances that it will ultimately turnover and there'll be successful and when they do we stand to benefit from that environment. So that's kind of and operator with that we can open the call up to questions.
At this time, if you'd like to ask a question simply press star one on your telephone keypad. Our first question will come from the line of Jason Stewart with Jones trading. Please go ahead.
Alright, Thanks for taking the question and I appreciate all the comments on the portfolio, especially on the coupon stack do you have a thought on where natural turnover is in the market today.
Yes.
I would say single digits.
One thing that I'll say about that is that you know in the past when someone asked me that question you would look to whatever discount security there was and there typically would only be one maybe two and say okay. What is the you know two or three year old Fanny or Freddie acts and prepaying and Thats my proxy for turnover will now.
The entire universe is a discount and we have a seasoning.
But it seems that everything is tending towards mid to even low single digits.
Some of the high or low loan balance pools that are seasoned as discounts can prepay around 10 eight to 10.
But that's the range I would say you know call. It three to 10, depending on security, but very low.
Yeah, Okay, and then when you take that into you know, they're going down the coupon stack and related to capital allocation, you know whats more attractive the dividend stock buybacks how should.
We think about that equation in your in your mind.
Well, we did do some share buybacks in the fourth quarter about two and a half million shares weighted average price was like 930. So.
One word.
90%, that's kind of our threshold our book when we get below that we start thinking about buybacks I think when we did those were closer to 80.
So 90 to one hundreds the gray area, if we're in the high nineties.
And the investment opportunities are very good we may even issue shares obviously, if we're above book and the investment opportunities are decently will issue shares.
And then when we get below 9% then we start thinking of buying back shares, but we think the lower coupons, even if five CPR for life, which you may not realize for the next six months, but for life.
Yields on those are still 100 over Britain's a 10 year swap or more depending on which coupon you buy you know a three or three and a half or four so those are not bad returns with decent potential for price related to performance. So you can get total returns in the double digits.
It may just not be all in the form of current carrier, but you may realize that carry down the road just wont be frontloaded.
Right.
And with tremendous upside to the extent that rates move much.
Much easier to hedge into a sell off and you know to the extent that we rally and spreads tightened even further which we would expect you know a lot of that spread duration is going to play out through a longer cash flow.
And we would we would stay in the suite.
Potential benefit there as well.
Got it I appreciate it guys. Thank you.
Thanks, Jason.
Our next question will come from the line of Macau Golf Berman with JMP Securities. Please go ahead.
Good morning.
Gentlemen are doing well.
Those extensive comments pretty much covered all the questions that I had in the.
The question of buybacks versus share issuance was just covered as well I just have a <unk>.
Question about if you could provide a current book value estimate that's that's it for me.
Oh, yes, I meant to mention that all.
Using the mark to market on the portfolio and hedges, we were up above 10% at the end of January .
So obviously, we had a good run in January and we had a lot of local low coupon.
Coupon exposure, but with the sell off since then we've given up at least half of that my most recent estimate again, just using mark to market of the portfolio. That's not purely GAAP number we were about 4% year to date. So we gave back a little over half of that.
We'll see what the future holds but so far were up on the quarter.
Alright, Thanks, a lot good luck going forward.
Thank you.
Thanks. Your next question will come from the line of Christopher Nolan with Ladenburg Thalmann. Please go ahead.
Can you give a little details to the logic behind the increased TBA short position. Please.
Yeah, what we did there was as I mentioned in January in there like the very earliest days of February lower coupons had a really good run.
<unk> performed very well and we just it was kind of a way to lock in some gains if you will.
Hunter you want to add to that but that was sort of the.
No I think that's a tool that will for a lever I guess that we will use to the extent that we think.
Certain coupon TBA in general has had.
<unk> had a outsized Ron will we will.
Put some duration related hedges on in the form of TBA shorts and.
And in lieu of other rate hedges, so it's really more of a basis trade.
And with our high.
Closure to Fannie Threes, you know, it's just something but I don't expect to be there forever, but mortgage like we said mortgage.
Mortgage did great in the fourth quarter. Even you know continued that continued into the first quarter and so we like that a little bit more to our basis hedge and.
To the extent that we see things get wider which we have you know we may reallocate to rates.
Okay, and I guess my follow up question turns on the dividend I know it was.
A decrease this quarter.
And given that the market has been I mean, the interest rate market has been so topsy turvy everything else.
Given that and given your comments in terms of all the taxable carry forwards you have.
What's your thinking of the sustainability of the current dividend.
Yeah.
We see it as sustainable as I mentioned, we were a little short in the fourth quarter, but that's just purely on an income basis.
The portfolio's total return was much higher than the dividend because we had the price appreciation that we had.
I also mentioned that the hedges really starting to kick in in the second half of 2022, they really do so this year. So we've got that significant tailwind so to speak at our backs.
And even with these lower coupons.
While they not cover the dividend in and out of themselves in conjunction with the.
The benefits of the hedge legacy hedge.
Asset.
And the fact that they have such great total rate of return potential.
Even if there's a modest shortcoming shortfall in the near term, which I'm not sure that would be we still view those as much more desirable I think it's a hunter mentioned, it's very challenging to try to.
In my mind be myopic and tried it does go up in coupon and capture more interest income because that's fleeting. It's really not what you think it is because those assets are extremely hard and therefore costly to hedge.
With a core total rate of return prospects.
Okay.
Just to chime in on that I think this is just a and.
An environment, that's more complicated than just.
Looking at economic income or our NIM, there's a lot of there's a lot of income that is not quantified.
Under that more simplistic.
Way of looking at things for.
For example in the deep discounts.
In our portfolio all of the pay downs to the extent that they are.
12 to.
2014 points accretive to.
Two two.
<unk> to us and fair value terms.
That's really to me.
When I think about these assets, that's an income component, but it shows up in a fair value adjustment. So it's really hard to disaggregate those changes in market value a lot of that.
Book value appreciation that we saw in January and in year to date and in December you know comes from the fact that there's a there's both there's a there's a positive ROA component in our hedges theres, a pull to par and our deep discounts that we own so looking at things through the traditional wins just.
Yeah.
NIM or economic income is a little bit challenging in this environment.
Thanks for the color Carter.
Thanks, Chris.
And then Brian any questions. Please press star one.
We have no further questions at this time I will turn the conference back over to management for any closing remarks.
Thanks, operator, and thank everybody for your time.
The extent of this.
Questions come up please feel free to call us in the office or to the extent that you unable to listen to the call live and want to call US afterwards after listen to a replay of the number and the office is 770 22311400.
Willing enable to take your questions and otherwise have a good day and have a good weekend. Thank you.
That concludes today's meeting. Thank you all for joining you may now disconnect.
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