Q4 2023 Orchid Island Capital Inc Earnings Call
Operator: Good morning, and welcome to the fourth quarter 2023 earnings conference call for Orchid Island Capital. This call is being recorded today, February 2nd, 2020.
Good morning, and welcome to the fourth quarter 2023 earnings Conference call for Orchid Island capital. This call is being recorded today February <unk> 2024.
Operator: At this time, the company would like to remind the listeners that statements made during today's conference call relating to matters that are not historical facts are forward-looking statements subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Listeners are cautioned that such forward-looking statements are based on information currently available on management's 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- 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. And now I would like to turn the conference call over to the company's chairman and chief executive officer, Mr. Robert. Please go ahead.
At this time the company would like to remind the listeners that statements made during today's conference call related to matters that are not historical facts are forward looking statements subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Listeners are cautioned that such forward looking statements are based on information currently available on the managements. Good faith belief with respect to future events and are subject to risks and uncertainties 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 Companys. Most recent annual report on Form 10-K.
The company assumes no obligation to update such forward looking statements to reflect actual results changes in assumptions or changes in other factors affecting forward looking statements.
And now I would like to turn the conference call over to the company's Chairman and Chief Executive Officer, Mr. Robert Kelly. Please go ahead Sir.
Robert E. Cauley: Thank you, operator, and good morning. I hope everybody's had a chance to download our slide deck. As usual, I'll be going through the deck over the course of the next 30 minutes or so. Inc., Orchid Island Capital Inc., Orchid Island Capital Ltd., Orchid Island Capital Inc., briefly hint at the market developments, what occurred during the quarter, which obviously shaped our results, and then talk about our portfolio and hedging positions, and then give you an outlook of how we're positioned and how we see things going So with that, I'll turn to slide five. These are the high-level critical metrics for the company for the quarter. Orchid reported a net income of $0.52 per share for the fourth quarter of 2023.
Thank you operator, and good morning, I hope everybody's had a chance to download our slide deck as usual I'll be going through the deck over the course of the next 30 minutes or so.
Can you give me a moment to pull up the deck I will as usual start on slide three just kind of give you an outline of what we'll discuss.
The first thing we'll do is go over our financial results briefing you hit on the market developments what occurred during the quarter, which obviously shaped our results and then talk.
Talk about our portfolio hedging positions and then give you an outlook of how we're positioned and how we see things going forward.
So with that I'll turn to slide five these are the high level critical metrics for the company for the quarter or if it reported net income of 52 cents per share for the fourth quarter of 2023, our book value increased approximately 2% from 892 at the end of the third quarter to $9 10. The total return for the quarter was <unk>.
Robert E. Cauley: Our book value increased approximately 2% from $8.92 at the end of the third quarter to $9.10. The total return for the quarter was 6.05%, and we declared and paid $0.36 in dividends. As you recall, the dividend was reduced late last year from $0.16 to $0.12. Now turning to slide six, kind of the second level metrics, and these reflect, to a large extent, steps taken during the quarter. I won't spend too much time going through the...
6.05% and we declared and paid 36 dividend you recall dividend was reduced late last year.
16 to 12.
Now turning to slide six kind of the second level metrics.
And these are to a large extent reflect the steps taken during the quarter I won't spend too much time going through the.
Robert E. Cauley: Details of what happened in the quarter, as we all know, in October, when rates were selling off very violently, and the outlook for rates going forward was a lot different than it was in the last two months of the quarter. The market pivoted severely, turned around, and rallied in November and December, but nonetheless, during October, with the market selling off the way it was, in order to maintain our leverage and liquidity, we had to reduce the portfolio. So if you look at the top left, you can see that the average balance is down. That's slightly misleading because we did reduce the portfolio by almost 16%, and I'll get into the details of how we did so, but a fairly decent size reduction, and we also brought the leverage down from 8.5% to 1% to 6.7%.
Details of what happened in the quarter, but as we all know in October when rates were selling off very violently in the outlook for rates going forward was a lot different than it was in the last two months of the quarter.
The market pivoted severely turned around and rallied November and December but nonetheless story during October with the market selling off the way it was in order to maintain our leverage and liquidity, we had to reduce the portfolio.
If you look at the top left you can see that the average balances down.
That is slightly misleading because we did reduce the portfolio by almost 16%.
Get into the details of how we did so but.
Fairly decent size reduction and we also brought the leverage down for maintenance have curve too.
One to $6 seven.
Robert E. Cauley: In our liquidity, we took steps to raise our liquidity. And over the course of the balance of the quarter, we did not change a lot with respect to the hedges, and I'll get into that in greater detail in a few moments, but in any event, that is the big picture view of what happened.
Liquidity, we took steps to raise our liquidity.
In the course of the balance of the quarter, we did not change a lot with respect to the hedges and I'll get into that in greater detail in a few moments, but in any event.
Those are the big.
Picture view of what happened to our speeds declined slightly that just reflects seasonal declines.
Robert E. Cauley: Our speeds declined slightly. That just reflects seasonal declines; nothing of note with respect to that. Slide seven just shows our financial statements. We have not yet filed our case, so these are still somewhat preliminary, although we do not anticipate changes. I will leave those to you for your review, and I will then move on to slide eight, which we've been incorporating lately.
Nothing of note with respect to that slide seven just shows our financial statements. We have not yet filed our case. So these are still somewhat preliminary although we do not anticipate changes I will leave those to you for your review and I will then move on to slide eight we've been incorporating the slide of late this kind of shows you are.
Robert E. Cauley: This kind of shows you our net income focus. We're looking at NIM here. We're trying to take into account the effect of our hedges and discount accretion or premium amortization. The idea here is to make this data look a little more like our peers, who also report either core income or earnings available for distribution. As you can see in the top right, these are dollar amounts; the bottom are just presented in percent or per share amounts.
Our net income or.
Net income focus so we're looking at the NIM here, we're trying to take into account the effect of our hedges and discount accretion of premium amortization. The idea here is to make this data looks a little more like our peers, who also report either core income or earnings available for distribution.
And as you can see in the top right. These are dollar amounts of the bottom everything just presented in percent of per share amounts.
Robert E. Cauley: The headline number was relatively flat, but if you look at the interest expense on repo, you can see a decline, and that reflects the decline in the size of the portfolio. But what's noteworthy is that the income number did not change very much. And the reason the income did not change particularly much, a couple of reasons, even though we did reduce the portfolio kind of mid-quarter, and also, the third quarter is somewhat misleading because we added a lot of assets late in the quarter, so we did not have a full quarter's worth of income. But nonetheless, the combination of the two leaves us with a relatively attractive NIM.
The headline number was relatively flat, but if you look at the.
Interest expense on repo you can see a decline and that reflects the decline in the size of the portfolio, but what's noteworthy is that the income number did not change very much.
And the reason the income did not change, particularly much a couple of reasons.
Though we did reduce the portfolio. We did so kind of mid quarter and also the third quarter is somewhat misleading because we added a lot of assets late in the quarter. So we did not have a full quarters worth of income, but nonetheless, the combination of the two leaves us with a relatively attractive NIM as you can see discount Ah.
Robert E. Cauley: As you can see, discount accretion was actually larger. That simply reflects the fact that as we calculated accretion based on the market value at the end of the previous period and with the third quarter sell-off, asset values were down; discounts are larger. So even though prepayment speeds were slightly low, we had larger accretion, and then the effect of the hedges continued to move in our favor. The bottom line is that there was a fairly substantial increase in adjusted net income. However, this is non-GAAP. We're presenting this just for comparison purposes with our peers, and we're trying to, as I said, take into account the effect of hedges and discount accretion, which under our method of accounting, we did not use in the fair value option. So,
Accretion was actually larger that simply reflects the fact that as we calculate accretion based on the market value at the end of the previous period and with the third quarter selloff values of assets were down discounts are larger so even though prepayment speeds were slightly lower we had larger accretion and then the effect of the hedges continued to move in our favor bottomed.
Line is there was a fairly substantial increase in adjusted net income again. This is non-GAAP were presenting this just for comparison purposes to our peers and we're trying to as I said take into account the effective hedges and discount accretion, which under our method of accounting, we do not use and the fair value option. So.
Robert E. Cauley: On a peer-shared basis, you can see income was up fairly substantially, even with a slight reduction in the portfolio. And I just want to say a word or two about the numbers on the bottom. As you can see, we had been paying a 48-cent dividend and earning less, and now that's kind of reversed. And just to go back to where we were in 2023, we were, at the time, willing to accept slightly lower current income because we wanted to own securities that we thought had a much better total rate of return potential, mainly lower coupons, especially if the economy was going to pivot and turn around and we were going to end the So we were willing to make that sacrifice. The events of this last quarter, we had a decision to make in terms of reducing the size of the portfolio. It was easy.
On a per share basis, you can see income was up fairly substantially.
Even with a slight reduction in the portfolio and just wanted to say a word or two about the numbers on the bottom as you can see we have been paying a 48% dividend, earning less now.
Now that's kind of flipped and just to go back to where we were in 2023, we were at the time willing to accept slightly lower current income.
We wanted to own securities that we had we thought we had much better total rate of return potential low mainly lower coupons, especially if the economy was going to pivot and turn around and we were getting and the tightening cycle and potentially go into an easing cycle and so we're willing to make that sacrifice.
Vince in this last quarter.
We had a decision to make in terms of reducing the size of the portfolio. It was easy we can shed basically TBA like 3% coupon securities.
Robert E. Cauley: We could shed basically TBA-like 3% coupon securities that had a negative NIM and actually increase the income of the portfolio and still leave us with a decent overweight to that sector. So to the extent that we do get a move in the other direction rate-wise, we stand to do quite well. So we're very happy with this positioning.
That were had a negative NIM and in fact increased the income of the portfolio and still leave us with a decent overweight to that sector. So to the extent that we do get a move in the other direction rate wise that we stand to do quite well so well.
We're very happy with his positioning we have very comfortable level of income.
Robert E. Cauley: We have a very comfortable level of income, and we still have the potential to do well in the event of a rally, although today's numbers may call into question how soon that's going to happen, but I'll say more about that later. So anyway, moving on, to discuss market developments. The top left is interesting because this shows you the curve over the course of the last few months. As you can see, the red line there is September 30th.
And we still have the potential to do well in the event of a rally although today's numbers make call into question. How soon that's going to happen, but I will say more about that later.
Anyway moving on.
To discuss market developments on the top left is interesting because.
This shows you the interest the curve over the course of the last few months as you can see the Red line there September 30th.
Robert E. Cauley: The green line is the end of the quarter, and the blue line is actually where we were last Friday. If we had done this at the end of the close of business yesterday, that blue line would have been pretty much on top of the green line, and if we did it at the close of business today, it might be right back where it is. The long and short of it is that the market still remains quite volatile, and the outlook continues to change. The data this week obviously was very significant, but we also had developments away from that with respect to regional banks. And we had a Fed meeting, and so we've been very, very choppy, and the volatility that we've been experiencing for a couple of years continues. If you look at the bottom right, you can just see kind of a proxy for the shape of the curve.
The Green line is.
The end of the quarter and the Blue line is actually where we were last Friday. If we had done this at the end of close of business yesterday that Blue line would've been pretty much on top of that Green line than we did at the close of business today, it might be right back where it is so.
The long long and short of it is is that the market still remains quite volatile.
Outlook continues to change the data. This week, obviously was very significant but we also have developments away from that with respect to regional banks.
And we had a fed meeting and so we've been very very choppy and the volatility that we've been experiencing for couple of years continues if you look at the bottom right. You can just see that kind of a proxy for the shape of the curve and.
Robert E. Cauley: And I just point to the bottom right. You can kind of see that late in the year, we had a fairly significant move from where we were at the end of October, and then it just kind of reversed, and now we're going the other way. So even the shape of the curve continues to gyrate as data comes in and factors outside the market continue to impact the shape of the curve and rates, and so forth. Turning now to slide 11, the top line is one of our favorites; it kind of just shows you a proxy for the attractiveness of the mortgage sector, the basis, if you will. As you can see, we've been at very wide levels. If you look at the right side of that chart, you can see that in November and December we tightened up quite a bit. I just want to make two points about this.
And I just point to the bottom right you can kind of see late in the year, we had a fairly significant move from where we had been at the end of October.
And then it just kind of reversed and now we're going the other way so even the shape of the curve continues to gyrate.
As data comes in and out factors outside the market continued to impact the shape of the curve and rates and so forth.
Turning now to slide 11.
The top line is one of our favorites are kind of just shows you the proxy for the attractiveness of the mortgage sector that basis. If you will as you can see we've been at very wide levels. If you look at the right side of that chart. You can see is November and December we tightened quite a bit just wanted to make two points on this on one is that quarter to date.
Robert E. Cauley: On one hand, quarter to date, we've kind of traded sideways; we really haven't tightened much or widened much. But that being said, we're still at very attractive levels, and so the mortgage basis is still attractive, and we are still very anxious to be able to put money to work in this environment because we are very excited about the retention opportunities that are out there. With respect to just the metrics on how mortgages performed on the bottom of the page, you know, we, as I said in the past, we normalized prices just to give you a feel for how they changed over the course of the last quarter, obviously, a very strong performance into the end of the quarter, and to a large extent, has been maintained into the first quarter of 2024. Roles on the bottom right, these are all conventional roles, these are
Kind of traded sideways, we really haven't tightened much or widen much but that being said, we're still at very attractive levels and so the mortgage space is still as attractive.
Still very anxious to be able to put money to work in this environment because we are very.
Excited about the routine opportunities are out there with respect to just the metrics on how mortgages performed on the bottom of the page. We are as I said in the past we normalized prices just to give you a feel for how they changed over the course of the last quarter, obviously, a very strong performance into the end of the quarter into a large extent has been.
And into the first quarter of 2024 roles on the bottom right. These are all conventional roles. He has a very very weak.
Robert E. Cauley: There are certain roles that are attractive, there are GINI roles, GINI May securities. We typically don't trade in that space, but the roles in that space are attractive, and they really would present a slightly different picture than what you see here. Moving on, just some more market color, volatility on the top. This is kind of a more recent look back; it's only going back one year.
There are certain roles that are attractive there Ginnie rules Ginnie Mae Securities, we typically don't traffic in that space, but the rolls in that space are attractive and they really presented slightly different picture than what you see here.
Moving on just some more market color volatility on the top this is kind of a more recent look back upon going back one years.
Robert E. Cauley: Three points I want to make here. One, at the time this was presented last Friday, we were kind of at local lows with respect to the last year. We have certainly bounced back this week. But every day this week has been choppy with respect to either incoming data, the Fed meeting, or the regional banking news. So it's definitely bounced off that.
Three points I want to make here one at the time of this was presented as of last Friday, we were kind of at the local laws with respect to the last year. We have certainly bounce. This week every day. This week has been choppy with respect to either incoming data the fed meeting or the regional banking news.
Oh, it's definitely bounced off of that and if you look at the bottom chart, which is a much longer look back period, you can see that while still is fairly highly relatively.
Robert E. Cauley: And if you look at the bottom chart, which is a much longer look back there, you can see that Vol is still fairly high, relatively high levels on a historical basis, and even more so this week versus what's depicted here. A few more slides and then we'll get into the portfolio. On top of slide 13, you see the red line, you can see that mortgage rates kind of rallied into the end of the year, but still extremely high levels, still around 7%, probably if anything going up from there. One thing that is worth noting, if you look at the top right, primary and secondary spreads are still, on an historical basis, fairly elevated. And the takeaway from that is that in the event of a more welcoming market, mortgage originators, if they were to tighten those spreads, could definitely enhance refinanceability. Right now, that doesn't look like it's gonna become an issue, but the potential for that to happen in the future is definitely there. So now, I'm just moving through the deck. Slide 15 just gives me a chance to go into a little more detail of what we did during the quarter. Obviously, I mentioned just the high-level.
Relatively high levels on a historical basis and even more so this week.
Versus what's depicted here.
A few more slides and then we'll get into the portfolio.
Top of Slide 13, you see the Red line, you can see that the mortgage rates kind of rallied into the end of the year, but still at extremely high levels still around 7%.
Probably if anything going up from there one thing that is worth noting if you look at the top right primary secondary spreads are still on a historical basis fairly elevated AR and the takeaway from that is it.
In the event of a more welcoming market.
Mortgage originators, if they were to tighten those spreads in.
Could definitely enhance refinance ability right now that doesn't look like it's going to become an issue, but the potential for that to happen in the future is definitely there. So now just moving through the deck.
Slide 15, just gives me a chance to go into a little more detail what we did during the quarter. Obviously as mentioned just high level, we only had a very severe turnaround in the market from October into November and December.
At the time in October when it looks like the rates were going to be sustained will be about 5%.
Robert E. Cauley: We had a very severe turnaround in the market from October into November and December. At the time in October, when it looked like rates were going to be sustainably above 5%, the Fed was going to keep rates relatively high through the balance of 2024, and then that violently reversed in November and December. In our view, the market got quite far ahead of itself, and we took steps to address that.
The fed was going to keep rates relatively high through the balance of 2024, and then that violently reversed in November and December and in our view the market got quite far ahead of itself and we took steps to address that but nonetheless, just to go through some details on the left side, we mentioned that we did reduce our allocation to 30 year, 3%.
Coupon by 38%, we did add some higher coupons.
Robert E. Cauley: Nonetheless, just to go through some details, on the left side, we mentioned that we did reduce our allocation to the 30% or 3% coupon by 38%. We did add some higher coupons. In doing so, in conjunction with what we've done in prior quarters, we continue to raise the weighted average coupon.
Doing so in conjunction with what we've done in prior quarters, we continue to raise the weighted average coupon it's up to $4 three three in the realized yield is up to $4 71 also note and I'll get into this more in a moment. If you look at the bottom left at this point, we make here our economic net interest spread increased quite a bit and the reason that that has.
Robert E. Cauley: It's up to 4.33%, and the realized yield is up to 471%. Also of note, and I'll get into this more in a moment, if you look at the bottom left, this point we make here, our economic net interest spread increased quite a bit. The reason that that happened is that we reduced the portfolio during the quarter in October precisely, but we did not reduce the hedges nearly as much, so we got to a position where we're more fully hedged.
And just because we reduced the portfolio during the quarter and October precisely, but we did not reduce the hedges nearly as much and so that we got to a position where we're more fully hedged, but we also did it in such a way that these are swaps, which are really our most effective funding hedged became a higher percentage of.
The composition of our hedges and as a result, we had a meaningful pick up that in conjunction with the higher coupons on the portfolio.
Wider economic net interest margin.
That kind of explains why the prior slide when you saw that 54 cents versus <unk> 36, and 38, so that's kind of where we sit going forward.
Robert E. Cauley: We also did it in such a way that our swaps, which are really our most effective funding hedge, Inc., Orchid Island Capital Inc., Orchid Island Capital Inc., And that kind of explains why on the prior slide when you saw that 54 cents versus, you know, 36 and 38 cents. So that's kind of where we sit going forward. Slide 16 just kind of shows what we've been doing in the portfolio in pictures.
Slide 16, just kind of shows you what we've been doing in the portfolio and pictures and as you can see we've been kind of adding to the higher coupons and reducing our exposure to threes, all the while keeping a fairly decent overweight, which means that in the event of a rally we have the chance to do quite well.
And that's the same time, maintaining very good hedge coverage in various solid levels of income.
Robert E. Cauley: And as you can see, we've been kind of adding to the higher coupons and reducing our exposure to threes, all the while keeping a fairly decent overweight, which means that in the event of a rally, we have a chance to do quite well. And at the same time, maintaining very good hedge coverage and very solid levels of. On slide 17, this is where we talk about our funding in general. As I just mentioned, if you look on the right side, that blue line, the reason that that ticked down is because, as I said, the hedge portion of our, or the swap portion of our hedges, has become larger because we reduced all of the hedges, but the swaps lasted. So the swaps remain a larger percentage of the total.
On Slide 17, this is where we talk about our funding in general as I. Just mentioned if you look on the right side. The Blue line. The reason that that ticked down is because as I said the hedge a portion of our or the swap portion of our hedges has become larger because we reduced all of the hedges, but the swaps less and so the swaps.
Being a larger percentage of the total those are very effective hedges from a funding perspective, and our average pay fixed rate is quite low as a result of that in conjunction with the higher coupons. Our net economic interest income is higher and our funding costs are lower.
Just a few points on the left side and our funding levels, obviously relatively stable with the fed pretty much done hopefully.
And then with respect to the average days of maturity relatively stable.
Robert E. Cauley: Those are very effective hedges from a funding perspective, and our average paid fixed rate is quite low. As a result of that, in conjunction with the higher coupons, our net economic interest income is higher, and our funding costs are lower. Just a few points on the left side, you know; our funding level's obviously relatively stable with the Fed pretty much done, hopefully, and then with respect to the average days and maturity, relatively stable.
The big change there is the economic cost of funding which has improved.
Slide 18 goes into the details of the hedging positions and I just wanted to again reiterate those points that we're now more fully hedged.
Reason being we thought that the market had got ahead of itself into the end of the year.
Looking back we feel pretty comfortable with that decision. That's proved to be very fortuitous. The portfolio is pretty much rate neutral and in fact, most of the book value increased during the quarter was more a function of mortgage basis tightening there.
Robert E. Cauley: The big change there is the economic cost of funding, which has improved. Slide 18 goes into the details of the hedging positions. And I just wanted to, again, reiterate those points that we're now more fully hedged, reason being we thought that the market had got ahead of itself into the end of the year. Looking back, we feel pretty comfortable with that decision. It's proved to be very fortuitous.
And then just be a naked long and we left this ourselves in a very good position, where our income is quite attractive and we have upside going forward.
We're quite comfortable with that.
Just some details on slide 19 on one thing we did do late in December we added some sulfur futures trying to lock in where at the time extremely aggressive.
Robert E. Cauley: The portfolio is pretty much rate neutral. In fact, most of the value increase during the quarter was more a function of mortgage basis tightening than just being naked long. And we left ourselves in a very good position where our income is quite attractive, and we have upside going forward, so we're quite comfortable with that. Just some details on slide 19, one thing we did late in December, we added some SOFR futures trying to lock in at what were, at the time, extremely aggressive market pricing for Fed easing, and so that should bode us well going forward. And then since quarter end, with respect to the TBA hedges, we have moved those around slightly. The belly coupons of the mortgage stack have become quite rich generally in January, and so we moved some of those hedges into the 4.5% coupons. Some small positions in threes; the balance is in what we call the belly coupon. So it'd be four and a half, fives, and five.
Market pricing for fed easing and so that should bode us well going forward and then since quarter end with respect to the TBA hedges, we have moved those around slightly.
Belly coupons of the mortgage stacked have become quite.
Quite rich generally in January and so we moved some of those hedges into the four 5% coupons. So.
Some small position in threes the balance are in what we call the belly coupons there'll be 4555 and a half.
<unk> done very well and so we view them as having more room to fall and then finally, just like I've mentioned with respect to the swaps we did not reduce as very much in the fixed rate is actually even better now than it was at the end of last quarter and that's also contributed to the improvement in the economic cost of funds and the economic net interest margin.
Slide 20, just shows you some shocks with respect to the various coupons we tend to look at these on a relative totally frequent basis gives us a feel for how these different coupons were doing different scenarios and helps us in our decision making process with respect to how we construct the portfolio.
Robert E. Cauley: They've done very well, and so we view them as having more room to fall. And then, just like I mentioned with respect to the swaps, we did not reduce those very much, and the fixed rate is actually even better now than it was at the end of the last quarter. And that's also contributed to the improvement in the economic cost of funds in the economy. Slide 20 just shows you some shocks with respect to the various coupons. We tend to look at these on a relatively frequent basis. It gives us a feel for how these different coupons would do in different scenarios and helps us in our decision-making process with respect to how we construct a portfolio. As you can see, as you would expect, the lower coupons do the best in a rally or a bull steepener and the worst at a bear flat or a sell-off, but this is just kind of a nice little piece of information that we use. This is not really relevant for the purposes of the balance of the discussion, so I'll just move on.
As you can see it is we would expect a lower coupons to do the best in a rally or a full steepen earn the worse at a bare flatten or a sell off.
This is just kind of nice to know information that we use but.
This is not really relevant for the purposes of the bounds of the discussion so I'll just move on.
Slide 21 again just.
Mentioned that we think we have a portfolio at a fairly rate neutral position our hedge level is quite high and this is reflected in the bottom right. You can see the numbers those are changes in the value of our equity with a plus or minus 50 basis point rate shock and as you can see it's relatively benign reaction to those moves.
And we put that in place more or less in December because we thought we had more room to move higher in rates and further down and it turns out for the most part that's been the case, although it has been choppy.
Robert E. Cauley: Slide 21, again, I just mentioned that we think we have a portfolio at a fairly rate neutral position. Our hedge level is quite high, and it's reflected in the bottom right. You can see the numbers. Those are changes in the value of our equity with a plus or minus 50 basis point rate shock. And as you can see, it's a relatively benign reaction to those moves.
Slide 20 to discuss to our prepayment speeds by coupon. We're just trying to give you the more granular data with respect to the portfolio versus just reporting a portfolio wide level I'll leave that for you to review.
I won't go through that in detail.
And then moving.
It's kind of a ramp if you will on slide 23.
Robert E. Cauley: And again, we put that in place more or less in December because we thought we had more room to move higher in rates than further down. And it turns out, for the most part, that's been the case, although it's been choppy. Slide 22 just goes to our prepayment speeds by coupon. We're just trying to give you more granular data with respect to the portfolio versus just reporting at a, you know, portfolio-wide level. I'll leave that for you to review, and we'll go through it in detail. And then moving down, kind of a wrap-up, if you will, on slide 23.
To make three points.
Obviously the <unk>.
Probably a very pivotal quarter.
Fourth quarter with the change in direction from October into November and December.
We thought the market got ahead of itself in retrospect, it looks like that may have been the case.
But the positioning of the portfolio from current income perspective.
Quite attractive we think that we have potential upside in the event. The fed does he's not sure when and if thats going to occur now given the events of the last few hours, but that being said inflation still does appear to be moderating and as long as we don't have a reacceleration in inflation.
Robert E. Cauley: Just want to make three points. It was probably a very pivotal quarter in the fourth quarter with the change in direction from October into November and December. We thought the market got ahead of itself. In retrospect, it looks like that may have been the case.
It's probably likely that the fed will slowly remove the tightening bias.
If they were to do so that gives us opportunity for our net interest margin to expand even further to the extent we did have a recession.
Robert E. Cauley: But the positioning of the portfolio from a current income perspective is quite attractive. We think that we have potential upside in the event the Fed does ease, although not sure when and if that's going to occur now, given the events of the last few hours.
Obviously, we could do even better because you know as you know.
Given the positioning of the portfolio, we will do very well in equal steepening, but even if we stayed put say is we are we're in a very good position from an income perspective, we think the.
Robert E. Cauley: But that being said, inflation still does appear to be moderating, and as long as we don't have a re-acceleration in inflation, it's probably likely that the Fed will slowly remove the tightening bias. And if they were to do so, that would give us an opportunity for our net interest margin to expand even further. To the extent we did have a recession, obviously, we could do even better because, given the positioning of the portfolio, we would do very well in a bull steepening. But even if we stay put, stay as we are, we're in a very good position from an income perspective. We think the very severe book value pressure that we felt for the last two years is probably over.
Very severe book value pressure that we felt for the last two years is probably over.
And.
We're very comfortable with how we are situated going forward just one final point before I turn it over to questions on slide 25. This is just some anecdotal information we preside provide every quarter, you'll get that Blue line represents bank holdings of mortgages and that is a welcome development. We have seen of late and that is that banks have start.
To come back into the mortgage market a little bit they can play a very significant role. The fed obviously is continuing to wind down their portfolio and banks had been doing the same.
But that has changed a little bit of late.
Notwithstanding the events of this week with respect to any regional banks, but prior to that we had started to see banks re emerge and that would be a very welcome development for the sector because they can play a very strong role in supporting the mortgage market and.
Robert E. Cauley: And we're very comfortable with how we are situated going forward. Just one final point before I turn it over to questions on slide 25. This is just some anecdotal information we provide every quarter.
I always welcome that so with that operator, I will turn the call over to questions.
Robert E. Cauley: If you look at that blue line, that represents bank holdings of mortgages. And that is a welcome development we have seen of late, because banks have started to come back into the mortgage market a little bit. They can play a very significant role.
Thank you and at this time, if you would like to ask a question simply press star followed by the number one on your telephone keypad. If he would like to Vitale. Your question you can press star one again.
If you do have a question at this time simply press star followed by the number one on your telephone keypad.
Operator: The Fed obviously is continuing to wind down its portfolio, and banks have been doing the same. But that has changed a little bit of late, notwithstanding the events of this week with respect to some regional banks. But prior to that, we had started to see banks reemerge, and that would be a very welcome development for the sector because they can play a very strong role in supporting the mortgage market. I would always welcome that. So with that, operator, I will turn the call over to questions. Thank you. And at this time, if you would like to ask a question, simply press star followed by the number one on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
Thank you. Your first question comes from the line of Macau men from citizens James M. P.
Your line is open.
Hi, Good morning, guys just.
Just a couple of questions here could you give an update on what your economic leverage stands currently and.
Sort of piggybacking on that assuming.
We don't get any rate cuts till the second half of the year and we cannot see.
This sort of level of.
Operator: If you would like to withdraw your question, you can press star 1. Again, if you do have a question at this time, simply press star followed by the number one on your telephone, and we'll pause for just a moment to compile the Q&A. Thank you. Your first question comes from the line of Mikhail Goberman from Citizen JMP Group or Linus. Hi, good morning, guys.
Primary secondary spread.
Ads.
What is your appetite for that leverage kind of going forward I know, obviously leverage went down means.
Meaningfully.
In the fourth quarter.
And also if you could a book value update.
As we stand now thanks.
Sure I'll do a quick ones and I'll turn it over 100, the Leverages if anything slightly lower probably just pay downs for the month not being reinvested.
Mikhail Goberman: Just a couple questions here. Could you give an update on what your economic leverage stands currently and sort of piggybacking on that assuming we don't get any rate cuts until the second half of the year, and we kind of... Hey, at this sort of level of primary and secondary bread. What is your appetite for that kind of leverage going forward? I know obviously leverage went down meaningfully in the fourth quarter. And also, if you could, a book value update as we stand now. Thanks. Sure, I'll do the quick ones, and then I'll turn it over to Hunter.
Our book value was more or less unchanged as of yesterday.
Up or down a few pennies from where it was at year end.
And.
With respect to primary secondary spreads.
As a tougher when the call I'm not sure how that's going to evolve today kind of threw a monkey wrench into the outlook because I think.
Where we were at the close of business yesterday, probably still thinking the fed would ease at some point, maybe not March but.
As long as inflation kept trending down that.
Even if nothing other than to keep real rates from getting too high that they would slowly ease, but if we do.
Robert E. Cauley: The leverage is, if anything, slightly lower, probably just pay-downs for the month, not being reinvested. Our book value is more or less unchanged as of yesterday, up or down a few pennies from where it was at year end. And with respect to primary, secondary, and spreads, that's a tougher one to call.
See an acceleration from here versus wage growth and then there is the risk that you would have a wage price spiral that could start to change things.
So our view is to probably take leverage back up a little bit.
Robert E. Cauley: I'm not sure how that's going to evolve today, kind of throwing a monkey wrench into the outlook, because I think where we were to close the business yesterday, probably still thinking the Fed would ease at some point, maybe not March, but as long as inflation kept trending down, that even if nothing other than to keep real rates from getting too high, they would slowly ease. But if we do. We see an acceleration from here in, for instance, wage growth, and then there's the risk that you would have a wage price spiral that could start to change. So, our view was to probably take and leverage back up a little bit, but I think now we may have to just... Wait a minute, just to see kind of how things shake out here from here.
But I think now we may have to just.
Wait a minute just to see kind of how things shake out here from here.
Yes, I think we will look to leg in.
A little bit and the leverage try to do so that's sort of a measured pace as we as we see how the data develops we we came into.
The tightening in the fourth quarter that occurred from kind of the the wides in it.
At the beginning of the quarter into the third.
Pretty defensive and so we took the economic leverage down we sold a few bonds that sort of the.
At the.
So the height of the.
Peak of the of the of the widening that occurred in the second half of the year.
Robert E. Cauley: Yeah, I think we'll look to lean in a little bit on the leverage, try to do so at sort of a measured pace as we, as we see how the data develops. We came into the tightening in the fourth quarter that occurred from kind of the wise and at the beginning of the quarter into the third, pretty defensive, and so we took the economic leverage down. We sold a few bonds at sort of the ORCHID ISLAND CAPITAL INC. peak of the widening that occurred in the second half of the year, which was unfortunate, but we've been looking for opportunities to increase basis, you know, our basis at www. OrchidIslandCapital.com. Yesterday and today, mortgages are definitely cheaper, and so we've had our eye on a few things. We can leg it in.
Which was unfortunate, but we've been looking for opportunities to.
Increased basis.
Our basis.
Exposure, a little bit tick off some of the TBA shorts as well as just potentially adding some of the.
Some some pools to the mix. So I think that will be measured about that opportunities like yesterday or today mortgages are definitely cheaper and so we've had our eye on a few things and we can we could lay again.
That's slowly I guess as well.
I think in general I think we are.
Neutral ish on the basis in general.
Robert E. Cauley: In general, I think we're neutral-ish on the basis that opportunities present themselves to incrementally add in. We've been more focused on sort of break edges than anything else year to date. So through the end of December and really since the December Fed meeting, the market got way ahead of itself in terms of pricing in some eases at a very quick pace through 2024. We took some steps to sort of lock that in, if you will, through funding hedges and have been waiting for a better opportunity to explicitly add on the asset side. So that's how we'll continue to look at things. Gotcha.
Yeah, obviously opportunities present themselves to to incrementally add and we've been more focused on sort of break hedges than anything else.
Year to date, so through the end of December and really since the December fed meeting.
You know the market well.
We felt like way ahead of itself in terms of pricing in some some some eases.
Very quick pace through 2024, we took some steps to sort of lock that in if you will.
Through funding hedges and have been waiting for a better opportunity to explore explicitly out on the asset side. So so that's.
Mikhail Goberman: Obviously, we're going to get a portfolio update in a week or so, but I guess we can expect you guys to keep adding the same sort of coupons at the margin that you've been adding the last couple months. Yeah, I think the other, like we said, the belly coupons have been kind of the most favorite locations because they're kind of right below par. They're fairly far away.
We will continue to look at things I think.
Yes, obviously, we're going to get a.
Portfolio update.
In a week or so.
I guess, we can expect you guys to keep adding the same sort of coupons are at the margin that you've been adding last couple of months.
Yes, I think the like you said the belly coupons have been kind of the.
Most favorite locations, because they're kind of right below par.
They're fairly far away, we're fairly far away from rates from them extending significantly, but they are not affected by prepayments too much. So they've been very popular destinations, but they're pretty rich pretty full.
Robert E. Cauley: We're fairly far away from rates from them increasing significantly, but they're not affected by prepayments too much. So they've been very popular destinations, but they're pretty rich and pretty full. So it's kind of hard to add there.
It's kind of hard to add there we said we added shorts there.
Robert E. Cauley: Like I said, we added shorts there. So we would probably look to add maybe, well, I would have said at the close of business yesterday with the rally, some higher coupons simply because of the magnitude of the rally. And they've gotten so cheap today that I'd have to kind of reassess based on how things shake out the balance of the day, basically away from probably on the other side of that stack. So the higher coupons we will be looking to add. Because that barbell's been working for us lately.
So we would probably look to add maybe I would've said this close of business yesterday with the rally some higher coupon simply because of the magnitude of the rally and they've gotten cheap today of that I'd have to kind of reassess based on how things shake up the balance of the day, but.
So basically away from probably on the other side of that of the stack. So the higher coupons will be looking to add.
Because that bar Bell has been working for us lately.
Robert E. Cauley: Yeah. As you know, we came in... last year we had big buys towards lower coupons, some of the legacy portfolio items, you know, into some of the more pronounced widening points throughout 2023. We were really shedding things that had been acquired in a much lower rate environment but that were more or less TBA-ish. So we don't really feel like, from a relative value perspective, we were really giving up too much there. If we want to put them, you know, we sold a number of threes. If we want to reestablish some of those, we can do that pretty easily in the TBA form. The pools that we sold over the course of last year were not really meaningfully adding to the income.
As you know we came in.
Two last year, we had.
Big bias towards lower coupons, and some of the legacy portfolio items.
Into some of the more.
Pronounced widening points throughout 2023.
We were really shedding things that had been acquired.
And a much slower rate environment, but that were more or less T be ash. So we don't really feel like from a relative value perspective, we were really giving up too much. There. If we wanted to put we sold a number of threes. If we want to reestablish some of those we can do that pretty easily in TBA form the pools that we sold over the course of <unk>.
Last year, we're not really meaningfully adding to income they were more of a.
Robert E. Cauley: They were more of a trade that we put on in the event that we saw a tightening in the basis. We felt like those basis expressions are best made in lower coupon space, but it started getting a little bit noisy because money managers were sort of in and out of the index. So we'll continue to kind of monitor how the index performs, whether money managers are generally sort of underweight or overweight. I think that's going to be the theme for this year with respect to those lower coupons. You know, it's going to be kind of student body left, student body right as money managers come in and out of that space. And so to get away from that and also stay away from our peer group, I think it's been really heavily focused on belly coupons. They've sort of been driving performance there lately, but they look a little on the tight side.
Of a trade that we put on in the event that we saw we saw a tightening in.
And the basis, we felt like those basis expressions are best made in lower coupon space, but it started getting a little bit noisy because money managers are sort of in and out of the of the index.
So we'll continue to kind of monitor how the index performance, whether the money managers are generally sort of underweight or overweight I think that's going to be the theme for this year with respect to those lower coupons.
It's going to be kind of a student body left student body right as money managers come in and out of that space.
And so to get away from that and to also stay away from.
Our peer group I think it's been really heavily focused on the belly coupons and they've sort of been driving performance. There lately. They look a little on the tight side. So we've opted to continue to hold some of those lower coupons, which are right now relatively wide. In addition to some higher coupons.
Mikhail Goberman: So we've opted to continue to hold some of those lower coupons, which are right now relatively wide in addition to some higher coupons. And like Bob said, take that sort of barbelled approach as opposed to chasing after the really lower risk from a premium perspective, belly coupon type trades that are in and around PAR. Great. That's really great color, guys.
Like Bob said take that sort of bar belled approach as.
As opposed to chasing after that.
The really lower risk from a premium perspective belly coupon type trades that are in and around par.
Great that's really great color guys. Thank you.
Christopher Nolan: Thank you. And as always, best of luck going forward. Thanks, Matthew. Your next question comes from the line of Christopher Nolan from Lindenburg, Bauman. Your line is open. Hey Chris. C'mon, good. How are you?
Best of luck going forward.
Thanks Mikael.
Your next question comes from the line of Christopher Nolan from Lindenberg Thalmann. Your line is open.
Hey, Chris.
Good how are you.
Robert E. Cauley: Bob? Bob, the comments that you made on your cost of funding were interesting. Should we imply from this that you have a negative spread? www. OrchidIsland.com. On a hedge basis, they are, yeah.
Bob.
Bob.
Let's say you made on your cost of funding were interesting should we imply from this that you are negative spreads.
Alright thing of the past going forward.
On a hedge basis. They are yeah, we are.
Robert E. Cauley: We're pretty fully hedged and a lot, like I mentioned, I said a couple of times, you know, with all the swaps we have in place, in particular, that on an absolute gap basis, yeah, it looks negative because we don't use hedge accounting and we don't advertise premiums and discounts. So on the face of the income statement, it will still appear negative. But as we disclose, particularly in the deck, when you take into account the effect of the hedges, it is far from negative, and it's actually, you know, north of 200 basis points. The only thing that could change that, I mean, really isn't anything, I mean if we were to say it's like growing the portfolio substantially and had to add new hedges, even at that, you can still get attractive funding. I was just looking at the screens yesterday with the rally; 10-year swap spreads were around $350. So if you were to, for instance, add, you know, any coupon north of three.
Pretty fully hedged in.
Like I mentioned and I said, a couple of times with all of the swaps we have in place in particular that are.
On an absolute GAAP basis, yet it looks negative because we don't use hedge accounting.
And we don't amortize premium and discount so on the face of the income statement. It will still appeared negative, but as we disclose as particularly in the deck. When you take into account the effect of the hedges.
It is far from negative and its actually north of 200 basis points. So.
The only thing that could change that I mean, there really isn't anything I mean, if we were to say start growing the portfolio substantially and had to add new hedges.
Even though that you still can get attractive funding.
Just looking at the screens yesterday with the rally 10 year swap spreads were around $3 50.
So if you were to for instance, you know add.
Any coupon.
North of three three.
Robert E. Cauley: Three and a half you can get positive spread so, It's not really hard to maintain that NIM, expanding it might be hard, but I would say yeah, I think you're right. You know we're pretty good shapers. We've got locked in funding hedges that should keep our spread at a fairly attractive level going forward. Yeah, I mean, you know, like I said, if we did get any eases, you know, it's pretty much all, you know, upside from there, right? Because... Orchid Island Capital Inc. Great Final question. The comments he made about the banks... Given that we're facing, in your experience, what has been, Mortgage Back. You're one of the best.
Three and a half you can get positive spreads so.
It's not really hard to maintain that NIM expand it might be hard, but I would say, yeah, I think youre right.
We're in pretty good shape, there we've got locked in funding hedges that should keep our spread in a fairly attractive level going forward.
Okay. So that's positive for further for the dividend in terms of incremental decreases right.
Yeah, and then like I said, if we did get it eases.
Pretty much all upside from there right because.
Are you just taking absolute repo interest expense down.
And both.
So the bottom line.
Great final question.
The comments you've made on the banks were interesting.
Robert E. Cauley: Oh, I would. Well, I don't know if I have any specific answers in mind. I mean, typically... The credit, you know, the lack of credit exposure in the sector. ORC.
Given that we're facing could be potential carnage in commercial real estate, depending on who you talk to.
In your experience what has been the.
Performance of mortgage backs when you when the banks are going through a commercial real estate correction.
I would.
Robert E. Cauley: So I'm going to go through a couple of different categories. The first category is asset management. So asset management tends to bode well for the sector in those types of environments. When you have a credit event, whether it's commercial real estate or corporates, high yield, investment grade, the asset sector, especially from the perspective of a multi-sector asset manager, usually does well. In fact, Hunter and I were just at a conference last week, and there were numerous investors, different types, and one of the panels they had were people who managed either endowments or pension funds.
Well I don't know if I have any specific instance in mind I mean typically.
The credit.
The lack of credit exposure in this sector.
Tends to bode well for this sector and those types of environments. When you have a credit event, whether it's commercial real estate or corporates high yield investment grade.
The asset sector, especially from the perspective of a multi sector asset manager usually does well in fact, we were on and I would just at a conference last week.
There were numerous investors different types and one of the panels, they had where people who managed either dominance or pension funds.
Robert E. Cauley: And they were quite bullish on mortgages. Asset managers are fairly overweight on mortgages. This group, we're still finding quite attractive.
They were quite bullish on mortgages asset managers are fairly overweight mortgages.
This group, we're still found him quite attractive and as.
Robert E. Cauley: And any type of credit evolution, a negative one, just makes them look all the more appealing because they are attractive from a historical perspective, and they have no credit risk. So I would think that would bode well for us. The negative with the banks, though, is that a large number of banks acquired a lot of mortgages, especially lower-coupon mortgages. And as you found out last year, to the extent they were very far underwater, and they were forced to sell them, there's a source of potential selling pressure. That's why lower coupons had a rough day the last two days, just because of this New York Community Bank issue.
Any type of credit credit evolution.
Negative one just makes them look all the more appealing because they are attractive from a historical perspective, and they have no credit risk. So I would think that would bode well for us due to the negative with the bank. So is that a lot of our large number of banks acquired a lot of mortgages, especially lower coupon mortgages and as you found out last.
Year to.
To the extent they were very far underwater and they were forced to sell them as a source of potential selling pressure. That's why lower coupons had a rough day. The last two days just because it is new York community Bank issue. If they were forced to liquidate they might be selling some mortgages. So that it's bit of a overhang to the mortgage market.
Robert E. Cauley: If they were forced to liquidate, they might be selling some mortgages, so that is a bit of an overhang on the mortgage market. So if they were forced to liquidate, that's a problem.
So if they were forced to liquidate that as a problem, but just having losses and from the perspective of asset managers, who are not banks.
Robert E. Cauley: But just having losses from the perspective of asset managers who are not banks is a positive for the mortgage sector. Yeah, I'd just add that, you know, our last three really sort of pronounced episodes, if you will, like for agency re, We came out of the global financial crisis and the, you know, early days of the pandemic. Funding Pressures, Spread Widening, Liquidations Occurring, and the Taper Tantrum as well was sort of a point, and agency mortgages always performed relatively well even if there were some very dire days during the pinch of the liquidity moments where people were getting stopped out. And what we find is that..., www. OrchidIslandCapitalInc.com. They are the most liquid, and sometimes that creates a lot of pressure for agency mortgages.
It's a positive for the mortgage sector, yeah, I'd just add that.
Last three really sort of pronounced episodes, if you will like.
For agency Reits.
We came out of the global financial crisis in the early days of the pandemic, we certainly had funding pressures spread widening liquidations occurring in taper tantrum as well.
Sort of a point and.
Agency mortgages always performed relatively well even if there were some very dire days during the pinch of the liquidity moments, where people were getting stopped out and what we find is that.
Hmm.
To your point about the commercial real estate market a lot of times people are selling the most liquid things because.
They are the most liquid and.
Sometimes that creates a lot of pressure for agency mortgages that was the as pronounced as we've ever seen it in the last year or so so people were selling what they could not what they should.
Christopher Nolan: That was the most pronounced as we had ever seen it in the last year or so. People were selling what they could, not what they should, to a certain extent, and so if you are all along some commercial real estate and you are losing money because of that, your leverage is obviously increasing, whether it is deposit leverage or repo leverage, whatever kind of leverage you employ. So, in the last year or so, agency mortgages have been sort of the relief valve for people to go ahead and pay. We are at levels that are relatively wide enough that money starts coming in pretty quickly to the extent that we retrace the wide. I think those levels, in particular, in and around 200 basis points over funding, we've taken a couple of runs at those levels, have, at least so far, firmed up pretty quickly when we get to those extremes. Great, that's it for me, thank you.
To a certain extent.
And so if you're all along some commercial real estate.
And you are losing money because of that your leverage is obviously, increasing whether its deposit leverage our repo leverage what are kind of leverage you employ.
So you know in.
The last year or so agency mortgages have been sort of the relief valve for people to.
Go ahead and.
Bolster their liquidity positions and so that's.
Thats been tough for us but.
And you know and it could certainly happen again, but I think at we're at levels that are relatively wide enough that money starts coming in pretty quickly to the extent that we retrace.
The wide and I think those levels in particular kind of in and around 200 basis points over funding.
We've taken a couple of runs at that at those levels and things have at least so far firmed up pretty quickly when we get to those extremes.
Great. That's it for me. Thank you for the detail Thanks, Chris.
Jim Fowler: Thanks, Chris. Your next question comes from the line of Jim Fowler from Kings Barn Capital Management. Your line is open.
Okay.
Your next question comes from the line of Jim Fowler from King's Byron Capital Management. Your line is open.
Jim Fowler: Good morning, Bob and Hunter. Thank you for taking the question. Also, as always, I really appreciate the work you do on the market development section. A great recap. The question I have pertains to page 31.
Good morning, Bob and Hunter. Thank you for taking the question also as always I really appreciate the.
Work you do on the market development section a great recap.
Question I have pertains to page 31, I think that tells the story behind my question.
Robert E. Cauley: I think that tells the story behind my question. With the economic crisis now for the quarter approaching where you were in early 2022, I'm wondering, you know, since we went through the period where you were more exposed to lower coupons and had a lower economic basis that ostensibly resulted in the dividend reduction, I'm wondering how many quarters of, you know, 230, 240 plus basis points of economic basis you'll let tick by until you address the dividend again? Good question, good to talk to you Jim. Definitely a good question. We're very much aware of that. Management and the board.
With the economic stake now.
For the quarter approaching where you were in early 2022.
Wondering since we went through the period, where you were you were more exposed to lower coupons and had a lower economic basis that.
Ah sensibly.
Resulted in the dividend.
Duction understandably so.
Wondering how many quarters of 230 240 plus basis points of economic basis, Youll, let tick by until you addressed the dividend again.
Good question good to talk to you Jim.
Really good question, we're very much aware of that.
Robert E. Cauley: It is January, so we do need to see how things evolve. And I would say that there was definitely room for expansion of the dividend. I still lean that way, but today was a bit of a shock. I didn't really expect to see non-fund payrolls print $353,000, and who knows what this might mean for the Fed.
Management and the board.
It is January so we do need to see how things evolve.
And I would say that there was definitely room for expansion to the dividend.
<unk> still lean that way, but today was bit of a shock I didn't really expect to see non farm payrolls prints 353000.
And who knows what this might mean for the fed so I do want to be somewhat guarded in getting ahead of myself.
Robert E. Cauley: So I do want to be somewhat cautious in getting ahead of myself. If we were to see a wage spike and price spiral emerge, and the Fed starts talking about hiking again, that obviously could change things. But absent that, I don't like to say on a recorded phone call that we're going to do something to the dividend that gets me in trouble, but I think we kind of painted a picture that would lead you to believe that there is room for expansion. Yeah, great. Second question, if I might, more just weighing in on your experience and that of hunters as well.
If we were to see a wage space price spiraled emerge in the fed starts talking about hiking again that obviously could change things.
But absent that.
And I'd like to stay on a recorded phone that we're going to do something to the dividend. It gets myself in trouble, but I think we've kind of painted a picture that would lead you to believe that there is room for expansion.
Yes, great.
Second question, if I might.
Sure.
Weighing on your experience in hunters as well.
Jim Fowler: A lot of commentary from peers over the past earnings period that this trading basis of 140 basis points to 190 has been resilient. I guess my question is, and you alluded to being at a conference recently, and you're certainly in the market on an active basis. What do you think would give maybe that band of spreads, you know, reducing to maybe 120 to 150 or a level where the lower end and the upper end ratchet down a bit? Do you see that happening?
A lot of commentary from peers over the past.
Earnings periods that this trading basis, the 140 basis points to 190 <unk>.
Has been resilient I guess my question is and you alluded to being at a conference recently and you're certainly in the market on an active basis.
Or do you think would give rise to maybe that band of spreads reducing to maybe say 120 to 150 or or a level, where the lower end and the upper end ratchet down a bit do you see that happening.
Robert E. Cauley: Your comments on banks being in the market are interesting. I'm wondering, you know, if you think, it just seems like people talk about it programmatically, you know, buy at 190, sell at 140, rinse and repeat. But I'm wondering if you're saying there's a reason to believe that it either, you know, where that band, you know, ratchets down a bit.
Comments on banks being in the market are interesting.
Im wondering do you think it just seems like people talk about programmatically.
By 190 sell at 140, rinse and repeat but I'm wondering if.
<unk> been saying there is there's a reason for belief that it either.
Where that band Ratchets down a bit and thank you for taking the questions sure I would say I'll, let hunter answer I would say the reemergence of the banks, it's possible if the REIT sector went on a significant capital raising.
Robert E. Cauley: And thank you for taking the time to answer the question. Sure. Yeah, I would say, I'll let Hunter answer that. I would say the re-emergence of the banks, it's possible if the REIT sector went on a significant capital raising period and became large buyers, they could drive them down, and they probably would, I don't know how far, but the bigger guerrilla would be, the 800 pound guerrilla, would be the banks coming back because they've been downsizing their holdings as the feds drain reserves, not dollar for dollar necessarily
Period end became large buyers that they could drive them down and they probably would on how far the bigger.
Gorilla and would be 800 pound gorilla will it be the banks coming back because they have been downsizing their holdings as the fed's drain reserves.
Not dollar for dollar necessarily that they've been reducing exposure that has changed slightly if they were to come back into the market more meaningfully that would get us back down.
Robert E. Cauley: That has changed slightly. If they were to come back into the market more meaningfully, that would bring us back down. And in order for that to happen, though, I really think you need to see the curve spread out more, and you need to see it moving towards a normalization of the curve and, you know, disinversion. And then if that were to happen, then you would expect that to happen fairly quickly. Yeah, I think we've all, At first, we were all very thankful for the money managers community sort of stepping in at the, you know, as you alluded to in the prior calls referring to kind of the Genetic Testing Force & Gardening, part taken from 4Hourson he Guardians of the Environment. When he would go on and call them out, no one would turn up and say, Bark slash Tara, did you lose something, man? One dog barked twice.
In order for that to happen, though I really think you need to see the curve more spread in the curve and you need to see it moving towards a normalization of the curve and disinvestment.
And then if that were to happen then you would expect that to happen fairly quickly.
Yeah, I agree I think we've all.
At first we were all very thankful for the money managers community sort of stepping in.
And as you alluded to in the prior calls referring to kind of the two.
200 bps over sort of market 190, 200, whatever the top of that range is.
Now I think are starting to get a little <unk> from the overlay underway as we bounce around that range you alluded to so I think the banks are certainly key.
Today.
Yeah.
Robert E. Cauley: I say telling a story, well, if it doesn't work out, we can try it next time. ORCHID ISLAND CAPITAL INC. Our Fed eased quite as quickly as the market was anticipating, so maybe 2024 is, you know, a market where we're waiting to see when and if the Fed goes up, but I think the very fact that the curve is so inverted, people are starting to, you know, pull some of that forward. I mean, we look at funding levels that have been, you know, Prior to today, you know, you could lock up 350 pretty quickly. I mean, you don't have to go out 10 years to get 350 basis points of hedged funding, right, by paying a fixed on the swap. You know, the front end of the curve is very inverted.
Took a little bit of a wind out of the sales I think of.
That happening.
Sooner than later I don't know if were going to get our.
Our fed eases quite as quickly as the market was anticipating so maybe 2024 is.
A market, where we're waiting to see when and if the fed goes in.
But I think the very fact that the curve is so inverted.
People are starting to to pull some of that forward I mean, we look at funding levels that have been.
Prior to today, you could you could lock up 350 pretty quickly I mean, you don't have to go out 10 years to a tick.
To get 350 basis points of hedged funding rate, but by paying fixed on swap.
You know the front end of the curve is very inverted so I suspect that while that's not a.
Robert E. Cauley: So, you know, I suspect that while that's not a Standard Bank play that, to the extent that they can, you know, help alleviate their NIMS by pulling some of that forward, they have to be looking at it. I know we are. So, you know, I think a little bit of that. Banked in easing is going to be helpful to the extent that people can pull it forward, and that's going to be supportive of increased yields and increased demand for redeployment of income.
Standard bank play that to the extent that they can help.
Help alleviate their nims by pulling some of that forward they've got to be looking at it I know we are so.
I think it's a little bit of that.
Baked in easing is going to be helpful to the extent that people can pull it forward and that's going to be supportive of increased yields and increased demand for.
Redeployment of income.
Jim Fowler: Yep, great. Thanks, guys. Enjoy your weekend and good luck in the first quarter. Talk to you then.
Yes, great. Thanks, guys.
Enjoy your weekend and good luck in the first quarter plugging them. Thanks chip.
Operator: Thanks, Jim. And once again, if you would like to ask a question, please press star then the number one on your telephone keypad. Again, that's star one.
And once again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Robert E. Cauley: Thank you. With no further questions, I'll turn the call back over to Mr. Cauley. Thank you, Operator, and thank you, everybody, for tuning in. To the extent that anybody has any questions that come up after the call, please feel free to call us. Or if you have a question that comes up after you listen to the replay because you couldn't make it this morning, again, feel free to call. The office number is 772-231-1400.
Again that star one.
Okay.
Yes.
Okay.
Thank you with no further questions I'll turn the call back over to Mr. Kelly.
<unk>, you operator, and thank everybody for tuning in.
To the extent anybody has any questions that come up after the call. Please feel free to call us.
Or if you have a question that comes up after you listen to the replay because you couldnt make it. This morning again feel free to call. The office number is 770 22311400, otherwise we look forward to speaking to you again at the end of the first quarter. Thank you.
Operator: Otherwise, we look forward to speaking to you again at the end of the first quarter. Thank you. Thank you, and this does conclude today's conference call. You may now disconnect.
Thank you and this does conclude today's conference call you may now disconnect.
Yeah.