Q2 2024 ARMOUR Residential REIT Inc Earnings Call

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Unknown Executive: Good morning, and welcome to the ARMOUR Residential REIT second quarter 2024 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the start key followed by zero. After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your touch-tone phone. To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Scott Ulm. Please go ahead.

Unknown Executive: Good morning, and welcome to the ARMOUR Residential REIT's second quarter of 2024 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialists by pressing the start key followed by zero.

Speaker Change: Good morning, and welcome to the ARMOUR Residential REIT Second Quarter 2024 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Unknown Executive: After today's remarks, it will be an opportunity to ask questions. You may press star then one on your touchtone phone. To withdraw your question, please press star, then two.

Speaker Change: After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press Star, then 1 on your touch-tone phone. To withdraw your question, please press Star, then 2.

Unknown Executive: Please note this event is being recorded.

Scott Ulm: I would now like to turn the conference over to Scott Ulm. Please go ahead. Thank you, and good morning, and welcome to the ARMOUR Residential REIT's second quarter of 2024 conference call. This morning, I'm joined by our CFO, Gordon Harper, as well as our co-CIOs, Sergey Losyev and Desmond Macauley.

Speaker Change: Please note this event is being recorded. I would now like to turn the conference over to Scott Ulm. Please go ahead.

Scott Jeffrey Ulm: Thank you and good morning, and welcome to the ARMOUR Residential REIT second quarter 2024 conference call. This morning, I'm joined by our CFO, Gordon Harper, as well as our co-CIOs, Sergey Lozov and Desmond Macaulay. I'll now turn the call over to Gordon to run through the financial results.

Scott Jeffrey Ulm: Thank you and good morning and welcome to the ARMOUR Residential REIT second quarter 2024 conference call.

Scott Jeffrey Ulm: This morning, I'm joined by our CFO , Gordon Harper, as well as our co-CIOs, Sergey Lozov and Desmond Macaulay. I'll now turn the call over to Gordon to run through the financial results. Gordon?

Gordon Harper: I'll now turn the call over to Gordon to run through the financial results.

Gordon Harper: Gordon? Thank you, Scott. By now, everyone has access to ARMOUR's earnings release, which can be found on ARMOUR's website, www.armoury.com.

Gordon M. Harper: Thank you, Scott. By now, everyone has access to ARMOUR's earnings release, which can be found on ARMOUR's website, www.armoureit.com. This conference call includes forward-looking statements, which are intended to be subject to the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995. The risk factors section of ARMOUR's periodic reports filed with the Securities Exchange Commission describes certain factors beyond ARMOUR's control that could cause actual results to differ materially from those expressed in, or implied by, these board-working statements. Those periodic reports can be found on the SEC's website at www.sec.gov. All of today's forward-looking statements are subject to change without notice. We disclaim any obligation to update them unless required by law.

Speaker Change: Thank you, Scott. By now everyone has access to ARMOUR's earnings release, which can be found on ARMOUR's website, www.armourreit.com.

Gordon M. Harper: Also, today's discussion refers to certain non-GAAP measures. These measures are reconciled with comparable GAAP measures in our earnings release. An online replay of this conference call will be available on ARMOUR's website shortly and continue for one year. Turning to results,

Gordon Harper: This conference call includes four looking statements, which are intending to be subject to the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995. The risk factor section of ARMOUR's PR reports filed with the Security Exchange Commission described certain factors beyond ARMOUR's control that could cause actual results to differ materially from those expressed in or implied by these four looking statements. Those three articleings can be found on the FEC thread site at www.sec.gov. All of today's four looking statements are subject to change without notice. We display many obligations to update them unless required by law.

Speaker Change: This conference call includes forward-looking statements, which are intended to be subject to the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995.

Speaker Change: The Risk Factors section of ARMOUR's periodic reports filed with the Securities Exchange Commission describes certain factors beyond ARMOUR's control that could cause actual results to differ materially from those expressed in, or implied by, these board-looking statements.

Speaker Change: Those periodic filings can be found on the SEC's website at www.sec.gov. All of today's forward-looking statements are subject to change without notice.

Gordon Harper: Also, today's discussions refer to certain non-GAAP measures. These measures are reconciled with comparable GAAP measures in our earnings release.

Speaker Change: We disclaim any obligation to update them unless required by law.

Speaker Change: Also, today's discussion refers to certain non-GAAP measures. These measures are reconciled with comparable GAAP measures in our earnings release.

Gordon Harper: An online replay of this conference call will be available on ARMOUR's website shortly and continue for one year. Turning to results. ARMOUR's Q2 gap net loss available to common stockholders was $51.3 million, or $1.5 per common share. Net interest income was $7 million. Distributable earnings available to common stockholders was $52.5 million, or $1.8 per common share. This non-gap measure is defined as net interest income plus TBA drop income adjusted for interest income or expense on our interest rate swaps and futures contracts minus net operating expenses. ARMour Capital Management continued to waive a portion of its management fees, waiving $1.65 million per Q2, which offsets offering expenses.

Speaker Change: An online replay of this conference call will be available on ARMOUR's website shortly and continue for one year. Turn in your results.

Gordon M. Harper: Are we due to a gap net loss available to common stocks? Stockholders were $51.3 million, or $1.05 per common share. Net interest income was $7 million, and distributable earnings available to common stockholders was $52.5 million, or $1.08 per common share. This non-GAAP measure is defined as net interest income plus TBA drop income adjusted for interest income or expense on our interest rate swaps and futures contracts minus net operating expenses. ARMOUR Capital Management continued to waive a portion of its management fees, waiving $1.65 million in Q2, which offsets operating expenses. This waiver continues until further notice.

Speaker Change: Are we due to gap net loss available to common stocks?

Speaker Change: Stockholders was $51.3 million or $1.05 per common share.

Speaker Change: Net interest income was $7 million.

Speaker Change: Distributed earnings available to common stockholders was $52.5 million, or $1.08 per common share. This non-GAAP measure is defined as net interest income plus TBA drop income adjusted for interest income or expense on our interest rate swaps and futures contracts minus net operating expenses.

Speaker Change: ARMOUR Capital Management continued to waive a portion of its management fees, waiving $1.65 million for Q2, which offsets operating expenses. This waiver continues until further notice.

Gordon Harper: This waiver continues until further notice. ARMour paid monthly common stock dividends per share of $0.24 per common share per month for a total of $0.72 per quarter. Taken together with the contractual dividends on the preferred stock, ARMour has made team-learned distributions to stockholders of approximately $2.3 billion over its history. Quarter-end book value was $20.30 per common share. Our most recent available estimate of book values as of Monday, July 22, which was $20.37 per common share.

Gordon M. Harper: ARMOUR paid monthly common stock dividends per share of $0.24 per common share per month for a total of $0.72 for the quarter. Taken together with the contractual dividends on the preferred stock, ARMOUR has made cumulative distributions to stockholders of approximately $2.3 billion over its history. Quarter-end book value is $20.30 per copy chair. Our most recent available estimate of book value is as of Monday, July 22nd, which was $20.37 per common share.

Speaker Change: ARMOUR paid monthly common stock dividends per share of $0.24 per common share per month for a total of $0.72 for the quarter.

Speaker Change: Taken together with the contractual dividends on the preferred stock, ARMOUR has made cumulative distributions to stockholders of approximately $2.3 billion over its history.

Speaker Change: Quarter-end book value is $20.30 per common share.

Speaker Change: Our most recent available estimate of book value is as of Monday, July the 22nd, which was $20.37 per common share.

Gordon Harper: In July 2024, the voluntary notice of dismissal by the plaintiffs of their previously filed appeal in the Javelin Mortgage Investment Court, chair of this litigation, was processed by the court.

Gordon M. Harper: In July 2024, the Voluntary Notice of Dismissal by the plaintiffs of their previously filed appeal in the Javelin Mortgage Investment Court Charitable Litigation was processed by the court. I'll now turn the call back to Scott Ulm to discuss ARMOUR's portfolio position and current strategy.

Speaker Change: In July 2024, the voluntary notice of dismissal by the plaintiffs of their previously filed appeal in the Javelin Mortgage Investment Court Charitable Litigation was processed by the courts.

Scott Ulm: I'll now turn the call back to Scott Ulm to discuss it on this portfolio position and current strategy. Thanks, Gordon. The second quarter of Mark could become a turnaround point for the Fed and its fight on inflation initiated just over two years ago. Overcoming months of mixed economic data, May and June consumer prices finally formed this disinflationary trend toward the Fed's 2% annual inflation goal. Cooling prices, along with a rising unemployment rate, set the market expectations for the start of an easing cycle to commence at the September 18th FMC meeting. The market is currently pricing in two-and-a-half cuts this year, and another four-and-a-half cuts by the end of 2025.

Scott Jeffrey Ulm: I'll now turn the call back to Scott Ulm to discuss ARMOUR's portfolio position and current strategy.

Scott Jeffrey Ulm: The second quarter could become a turning point for the Fed in its fight against inflation initiated just over two years ago. Overcoming months of mixed economic data, May and June consumer prices finally affirmed the disinflationary trend toward the Fed's 2% annual inflation target.

Scott Jeffrey Ulm: Thanks, Gordon.

Scott Jeffrey Ulm: The second quarter of Mark's book could become a turnaround point for the Fed in its fight on inflation initiated just over two years ago.

Speaker Change: Overcoming months of mixed economic data, May and June consumer prices finally affirmed the disinflationary trend toward the Fed's 2% annual inflation goal.

Scott Jeffrey Ulm: Cooling prices, along with a rising unemployment rate, set market expectations for the start of an easing cycle to commence at the September 18th FOMC meeting. The market is currently pricing in two and a half cuts this year and another four and a half cuts by the end of 2025. While we acknowledge that the trajectory of economic activity has shifted notably, we continue to evaluate each month's data and remain cautious against pricing in too deep of a cutting cycle.

Speaker Change: Cooling prices, along with a rising unemployment rate, set the market expectations for the start of an easing cycle to commence at the September 18th FOMC meeting.

Speaker Change: The market is currently pricing in two and a half cuts this year and another four and a half cuts by the end of 2025.

Scott Ulm: While we acknowledge that the trajectory of economic activity has shifted notably, we continue to evaluate each month's data and remain cautious against pricing in too deep of a cutting cycle. We can all recall a bit of over-enthusiasm on the path to the rate cuts last year. The yield on a 10-year-to-US Treasury closed the second quarter at 4.4%, after reaching 4.7% in early April, and as of July 22, just hits just about 4.2%. The first quarter closing level. Mortgage-backed securities remain range-bound between roughly 135 and 155 basis points in nominal spreadly quarter. Despite an overall range-bound environment in the second quarter, input quarter trading remained choppy.

Speaker Change: While we acknowledge that the trajectory of economic activity has shifted notably, we continue to evaluate each month's data and remain cautious against pricing in too deep of a cutting cycle. We can all recall a bit of over-enthusiasm on the path of rate cuts last year.

Scott Jeffrey Ulm: We can all recall a bit of over-enthusiasm on the path of rate cuts last year. The yield on a 10-year U.S. Treasury closed the second quarter at 4.4% after reaching 4.7% in early April, and as of July 26, it's just above 4.2%. The first part at closing.

Speaker Change: The yield on a 10-year to U.S. Treasury closed the second quarter at 4.4 percent after reaching 4.7 percent in early April , and as of July 26, it's just about 4.2 percent.

Scott Jeffrey Ulm: Mortgage-backed securities remain range-bound between roughly 135 and 155 basis points in nominal spread loops. However, despite an overall range-bound environment in the second quarter, inter-quarter trading remained choppy. MBS nominal spreads finished the second quarter 10 basis points wider, while the SOFR swap rate in the intermediate and longer part of the curve shifted 12 to 15 basis points above their respective marks at the end of the first quarter. These factors were the driving contributors to our negative 4.8% economic return in the second quarter. As of July 22nd, ARMOUR's book value was $0.2037 per share after accounting for July's dividend of $0.247.

Speaker Change: The first quarter, closing level. Mortgage-backed securities remain range-bound between roughly 135 and 155 basis points in nominal spread loop order.

Speaker Change: Despite an overall range-bound environment in the second quarter, inter-quarter trading remained choppy.

Scott Ulm: MBS nominal spreads finished the second quarter 10 basis points wider, while the so-first swap rate in the intermediate and longer part of the curve shifted 12 to 15 basis points above their respective marks at the end of the first quarter. These factors are the driving contributors to our negative 4.8% economic return in the second quarter. As of July 22, Armaged book value was 0.37 cents per share after accounting for July's dividend of 24 cents. Looking ahead, we expect lower rates and eventual normalization of the yield curve to provide exceptionally strong tailwinds to the MBS market, the mortgage-REITs sector, and armor-REITs specifically.

Speaker Change: NBS nominal spreads finished the second quarter 10 basis points wider, while the SOFR swap rate in the intermediate and longer part of the curve shifted 12 to 15 basis points above their respective marks at the end of the first quarter.

Speaker Change: These factors were the driving contributors to our negative 4.8% economic return in the second quarter. As of July 22nd, ARMOUR's book value was $0.2037 per share after accounting for July's dividend of $0.24.

Scott Jeffrey Ulm: Looking ahead, we expect lower rates and eventual normalization of the yield curve to provide exceptionally strong tailwinds to the MBS market, the mortgage REIT sector, and ARMOUR REIT in particular. A full 25 basis point cut in the official overnight rate will flush out the cash sitting in short funds and the overnight reverse repo facility into high quality assets like USMBS. It won't happen overnight, but with every subsequent interest rate cut, this momentum will build and multiply.

Speaker Change: Looking ahead, we expect lower rates and eventual normalization of the yield curve to provide exceptionally strong tailwinds to the MBS market, the mortgage REIT sector, and ARMOUR REIT specifically.

Scott Ulm: A full 25 basis point cut in the official overnight rate will flush out the cash, sitting in short funds, and overnight reverse repulsion into high quality assets like USMBS. It won't happen overnight, but with every subsequent interest rate cut, this momentum will build and multiply. We expect back from portfolios to follow a similar strategy. Only mortgages right now is, in many cases, a negative carry versus short term borrowing rates. Yet we've already seen bank demand flip positive for the first time since 2022. Once the 25 basis point cut is implemented, MBS carry will turn decisively positive and provide an even greater momentum to MBS demand from banks.

Speaker Change: A full 25 basis point cut in the official overnight rate will flush out the cash sitting in short funds and overnight reverse repo facility into high quality assets like US MBS. It won't happen overnight, but with every subsequent interest rate cut, this momentum will build and multiply.

Scott Jeffrey Ulm: We expect bankful portfolios to follow a similar strategy. However, owning mortgages right now is, in many cases, a negative carry versus short-term borrowing. Yet, we've already seen bank demand flip positive for the first time since 2022. Once the 25 basis point cut is implemented, MBS carry will turn decisively positive and provide an even greater momentum for MBS demand. We're noting similar strong inflows into MBS mutual funds and ETFs this year and expect them to persist into the cutting cycle as flows into fixed income accelerate.

Speaker Change: We expect bank for portfolios to follow a similar strategy. Owning mortgages right now is in many cases a negative carry versus short-term borrowing rates.

Speaker Change: Yet we've already seen bank demand flip positive for the first time since 2022. Once the 25 basis point cut is implemented, MBS carry will turn decisively positive and provide an even greater momentum to MBS demand from banks.

Scott Ulm: We're noting similar strong inflows in the MBS mutual funds and ETFs this year and expect them to persist into the cutting cycle as flows in the fixed income accelerate. So taking all these factors together, we expect the Fed's action set and very profound impact on us in the markets. We believe we could see mortgage spreads move 10 to 15 basis points tighter into the year end, but the path there will not be a straight line.

Speaker Change: We're noting similar strong inflows into MBS mutual funds and ETFs this year, and expect them to persist into the cutting cycle as flows into fixed income accelerate. So taking all these factors together, we expect the Fed's actions to have a very profound impact on us and the market.

Scott Jeffrey Ulm: So taking all these factors together, we expect the Fed's actions to have a very profound impact on us and the world. We believe we could see mortgage spreads move 10 to 15 basis points tighter into the year-end, but the path there will not be a straight line. So we continue to stay disciplined in the way we approach leverage and putting cash in. Now, I'd like to ask Desmond McCauley to give some more detail on our mortgage strategy and how it has evolved this quarter. Desmond?

Speaker Change: We believe we could see mortgage spreads move 10 to 15 basis points tighter into the year-end, but the path there will not be a straight line. So we continue to stay disciplined in the way we approach leverage and putting cash to work.

Scott Ulm: So we continue to say discipline in the way we approach leverage and putting cash to work.

Desmond Macauley: Now we'd like to ask that's when we call you to give some more detail on our mortgage strategy and how it is involved this quarter. Thanks, Scott. Our mortgage strategy continues to target a well-diversified portfolio with approximately 10% market value exposures across each of the discount coupons from 3% and up, while maintaining our overweights to 5.5% and 6% coupon NBS for their wide ZV option adjusted spread and carry. While historically low existing home sales are keeping prepayment speeds in discount coupons very low, the spread offer or compelling value for an eventual toll in the housing market and consequently a pickup in tonable speeds first improving their yield returns.

Desmond Macaulay: Our mortgage strategy continues to target a well-diversified portfolio with approximately 10% market value exposures across each of the discount coupons from 3% and up while maintaining our overweight to 5.5% and 6% coupon MBS for their wide ZV option adjusted spread and carry. While historically low existing home sales are keeping prepayment speeds in discount coupons very low, their spreads offer compelling values for an eventual thaw in the housing market and, consequently, a pickup in turnover speeds, thus improving their yield returns. ARMOUR's average repayment rate on NBS assets in the second quarter of 2024 was 7.7 CPR, increasing from 4.6 CPR in Q1.

Desmond McCauley: Now, I'd like to ask Desmond McCauley to give some more detail on our mortgage strategy and how it has evolved this quarter. Desmond?

Desmond McCauley: Thanks, Scott.

Desmond McCauley: Our mortgage strategy continues to target a well-diversified portfolio.

Desmond McCauley: with approximately 10% market value exposures.

Desmond McCauley: across each of the discount coupons from 3% and up while maintaining our overweight to 5.5% and 6% coupon MBS for their wide ZV option adjusted spread and carry.

Speaker Change: Why Historically Low Existing Home Sales Are Keeping Prepayment Speeds

Speaker Change: In discount coupons very low, their spreads offer a compelling value for an eventual fall in the housing market, and consequently, a pickup in turnover speeds, thus improving their yield returns.

Desmond Macauley: ARMOUR's average prepayment rate on NBS assets in the second quarter of 2024 was 7.7 CPR, increasing from 4.6 CPR in Q1. A large portion of the increase was driven by speeds in discount coupons, and there the rate not effect is expected to dissipate even more as home loan season and mortgage rates turn less expensive. This benign prepayment environment and near-part prices continue to provide a tailwind for NBS. It is worth noting that we are starting to see an optic in the mortgage refi index signaling that prepayment speeds should continue to rise gradually into the year end.

Armour: ARMOUR's average prepayment rate on NBS assets in the second quarter of 2024 was 7.7 CPR, increasing from 4.6 CPR in Q1.

Desmond Macaulay: A large portion of the increase was driven by speeds in discount coupons, where the rate lock effect is expected to dissipate even more as home loan season and mortgage rates turn less expensive. This benign prepayment environment and near-par prices continue to provide a tailwind for MBS. It is worth noting that we are starting to see an uptick in the Mortgage Refi Index, signaling that prepayment speeds should continue to rise gradually into the year-end.

Armour: A large portion of the increase was driven by speeds in discount coupons, where the rate lock effect is expected to dissipate even more as home loan season and mortgage rates turn less expensive.

Armour: This benign prepayment environment and near par prices continue to provide a tailwind for MBS.

Armour: It is worth noting that we are starting to see an uptick in the Mortgage Refi Index.

Armour: Signaling that prepayment speeds should continue to rise gradually into the year-end.

Desmond Macauley: However, greater prepayment concerns would require a more significant drop in mortgage rates below 5%, and are easily mitigated in higher coupon NBS by moving our exposure towards the middle of the coupon stack. Additionally, we continue to see value in lower premium specified pools tied to geos, lower phyco and higher LTV loan characteristics, which will mitigate prepayment risk in the scenario of lower mortgage rates versus the more generic NBS cohorts. We also maintain around 12% of the portfolio in forward TBA contracts for the attractive dollar loan carry in premium coupon genie NBS and for better market liquidity versus specified pools in lower coupon conventional NBS.

Desmond Macaulay: However, greater prepayment concerns would require a more significant drop in mortgage rates below 5% and are easily mitigated in higher coupon MBS by moving our exposure towards the middle of the coupon stack. Additionally, we continue to see value in lower premium-specified pools tied to GEOs, lower FICO, and higher LTV loan characteristics, which will mitigate prepayment risk in the scenario of lower mortgage rates versus the more generic MBS cohorts. We also maintain around 12% of the portfolio in forward TBA contracts for the attractive dollar rule carry in premium coupon Gini MBS and for better market liquidity versus specified pools in lower coupon conventional NDS. ARMOUR continues to fund 50-60% of its MBS portfolio with Buckler Securities, and the remainder is diversified among 14 other counterparties with a weighted average haircut of just under 3%.

Armour: However, greater prepayment concerns would require a more significant drop in mortgage rates below 5% and are easily mitigated in higher coupon MBS by moving our exposure towards the middle of the coupon stack.

Armour: Additionally, we continue to see value in lower premium-specified pools tied to geos, lower FICO, and higher LTV loan characteristics.

Armour: which will mitigate prepayment risk in the scenario of lower mortgage rates versus the more generic MBS cohorts.

Armour: We also maintain around 12% of the portfolio in forward TBA contracts for the attractive dollar rule carry in premium coupon Gini MBS and for better market liquidity versus specified pools in lower coupon conventional MBS.

Desmond Macauley: Armor continues to fund 50-60% of its NBS portfolio with popular securities, and the remainder is diversified among 14 other counterparties with a weighted average haircut of just under 3%. The repo markets remain liquid and well-bid. However, we began observing some funding pressures in so far rate and repo spreads towards the end of June. While it's a normal turn of events to see some upward pressure on funding costs into the quarter of the UN, which remained 2-3 basis points above running averages into July, indicating that this use record treasury issuance is beginning to weigh in on primary dealer balance and their ability to intermediate bonds quickly and efficiently.

Armour: ARMOUR continues to fund 50-60% of its MBS portfolio with Buckler Securities, and the remainder is diversified among 14 other counterparties with a weighted average haircut of just under 3%.

Desmond Macaulay: The repo markets remain liquid and well bid; however, we began observing some funding pressures on software REITs and repo spreads towards the end of June. While it's a normal turn of events to see some upward pressure on funding cuts into the quarter and year-end, which remained two to three basis points above running averages into July, indicating that this year's record treasury issuance is beginning to weigh in on primary dealer balance sheets and their ability to intermediate bonds quickly and efficiently.

Armour: The repo markets remain liquid and well-bid, however, we began observing some funding pressures in software REIT and repo spreads towards the end of June .

Speaker Change: While it's a normal turn of events to see some upward pressure on funding paths into the quarter and year-end,

Speaker Change: which remained 2-3 basis points above running averages into July .

Speaker Change: Indicating that this year's record treasury issuance is beginning to weigh in on primary dealer balance sheets and their ability to intermediate bonds quickly and efficiently.

Desmond Macauley: We see the start of an easy cycle and rising expectations to an end of the quantitative patent program as two major tailwains to alleviate some of the pressures in funding spreads for the dealer community. Looking forward, we remain constructive on spreads over the medium to longer horizon as we await the start of an easy cycle to drive the steepness of the youth curve back to historical norms. A positively sloping curve is much needed to support the inflow of fresh funds into the NDS market, a major tailwind for mortgage rates. Yet in the near term, we are mindful of the fact that mortgage spreads are trading near these year's tights, and the rebound in macroeconomic data from its current trajectory would roll back an aggressive pricing of easy-fed expectations.

Desmond Macaulay: We see the start of an easing cycle and rising expectations of an end to the quantitative tightening program as two major tailwinds to alleviate some of the pressures in funding spreads for the dealer community. Looking forward, we remain constructive on strides over the medium to longer horizon as we await the start of an easing cycle to drive the steepness of the yield curve back to historical norms. A positively sloping curve is much needed to support the inflow of fresh funds into the MBS market, a major tailwind for mortgage rates.

Speaker Change: We see the start of an easing cycle and rising expectations to an end of the quantitative tightening program as two major tailwinds to alleviate some of the pressures in funding spreads for the dealer community.

Speaker Change: Looking forward, we remain constructive on spreads over the medium to longer horizon as we await the start of an easing cycle to drive the steepness of the yield curve back to historical norms.

Speaker Change: A positively sloping curve is much needed to support the inflow of fresh funds into the MBS market, a major tailwind for mortgage rates.

Desmond Macaulay: Yet in the near term, we are mindful of the fact that mortgage spreads are trading near this year's lows, and a rebound in macroeconomic data from its current trajectory would roll back an aggressive pricing of easy Fed expectations, with a disinflation story already priced in. Return to all the labor market data in the coming months to indicate the health of economic growth. For now, we have increased our exposure to MBS at 7.7 terms of implied leverage and trimmed our duration risks to 0.1 year as of July 22nd.

Speaker Change: Yet, in the near term, we are mindful of the fact that mortgage spreads are trading near this year's tides, and a rebound in macroeconomic data from its current trajectory would roll back an aggressive pricing of easy Fed expectations.

Desmond Macauley: With this inflation story already priced in, we turn toward the labor market data in the coming months to indicate the health of economic growth. For now, we have increased our exposure to NDS at 7.7 turns of implied leverage and trimmed our duration risks to 0.1 year as of July 22nd. We have one to two turns of leverage to deploy at better risk-reward levels, and as we see increased demand from the banking community. Our earnings are available for distribution sufficiently covered our dividend for P2. We believe our current dividend is appropriate, and we expect earnings to cover the dividend rate into the year end.

Speaker Change: With the disinflation story already priced in, we turn toward the labor market data in the coming months to indicate the health of economic growth.

Speaker Change: For now, we have increased our exposure to MBS at 7.7 turns of implied leverage and trimmed our duration risks to 0.1 years as of July 22.

Desmond Macaulay: We have one to two tons of leverage to deploy at better risk-reward levels and as we see increased demand from the banking community. Our earnings available for distribution sufficiently covered our dividend for Q2. We believe our current dividend is appropriate, and we expect earnings to cover the dividend rate into the year end. Our primary focus remains on generating total economic return on our portfolio to deliver to our shareholders. I now turn the call back to Scott.

Speaker Change: We have one to two tons of leverage to deploy at better risk-reward levels and as we see increased demand from the banking community.

Speaker Change: Our earnings available for distribution sufficiently covered our dividend for Q2.

Speaker Change: We believe our current dividend is appropriate and we expect earnings to cover the dividend rate into the year-end.

Desmond Macauley: Our primary focus remains on generating total economic return on our portfolio to deliver to our shareholders.

Speaker Change: Our primary focus remains on generating total economic return on our portfolio to deliver to our shareholders.

Scott Ulm: I'll now turn the call back to Sky. Thanks, Sezman.

Scott Jeffrey Ulm: I'd like to comment on capital raising. We've not been active raising capital this year because of an equity valuation that was just too low. Our thinking on raising equity remains as it has been. We will look to raise equity if there are good investment opportunities and we can achieve a fair price, all factors considered, including whether it would lower per share expenses and minimize the negative impact on our stock market. But we'll always look for prices that make sense for our shareholders. At this point, we're less likely to be involved in the preferred model.

Scott Ulm: I'd like to comment on capital raising. We've not been active raising capital this year because of an equity valuation that was just too low. Our thinking on raising equity remains as it has been. We will look to raise equity if they're good investment opportunities and we can achieve a fair price, all factors considered, including whether it would lower per share expenses and minimize the negative impact on our stock price. But we'll always look for prices that make sense for our shareholders.

Speaker Change: I'll now turn the call back to Scott.

Speaker Change: Thanks, everyone.

Scott Jeffrey Ulm: I'd like to comment on capital raising. We've not been active raising capital this year because of an equity valuation that was just too low. Our thinking on raising equity remains as it has been.

Scott Jeffrey Ulm: We will look to raise equity if there are good investment opportunities and we can achieve a fair price, all factors considered, including whether it would lower per share expenses and minimize the negative impact on our stock price.

Scott Ulm: At this point, we're less likely to be involved in the preferred market. As you know, our preferred remain fixed once they enter the call period. A feature we're very pleased with, given where today's floating levels would be.

Scott Jeffrey Ulm: But we'll always look for prices that make sense for our shareholders. At this point, we're less likely to be involved in the preferred market.

Scott Jeffrey Ulm: As you know, our preferred stocks remain fixed once they enter the call period, a feature we're very pleased with given where today's floating levels would be. We look at our dividend over the intermediate term, rather than focusing on short-term market fluctuations. We continue to believe that our dividend is appropriate for today's environment.

Scott Jeffrey Ulm: As you know, our preferred remain fixed once they enter the call period, a feature we are very pleased with given where today's floating levels would be.

Scott Ulm: We look at our dividend over the intermediate term rather than focusing on short-term market fluctuations. We continue to believe that our dividend is appropriate for today's environment. You can also expect us to continue the fee rebate we've had in place.

Scott Jeffrey Ulm: We look at our dividend over the intermediate term rather than focusing on short-term market fluctuations.

Scott Jeffrey Ulm: You can also expect us to continue the fee rebate we've had. Thank you for joining today's call. That wraps up our prepared remarks for the second quarter of 2024. We'd be happy to answer any questions. Operator. Thank you.

Scott Jeffrey Ulm: We continue to believe that our dividend is appropriate for today's environment. You can also expect us to continue the fee rebate we've had in place.

Unknown Executive: Thank you for joining today's call. That wraps up our prepared remarks for the second quarter of 2024.

Speaker Change: Thank you for joining today's call. That wraps up our prepared remarks for the second quarter of 2024. We'd be happy to answer any questions. Operator?

Unknown Executive: We'd be happy to answer any questions.

Unknown Executive: Operator? Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchstone phone. If you're using a speaker phone, please pick up your handset before press. in the Keys. To withdraw your question, please press star and then two.

Unknown Executive: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.

Speaker Change: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster.

Unknown Executive: To withdraw your question, please press star, then 2. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Doug Harter from UBS. Please go ahead.

Unknown Executive: At this time, we'll pause momentarily to assemble a roster.

Douglas Harter: Our first question comes from Doug Harter from UBS. Please go ahead. Thanks. Desmond, hoping to just go into a little bit more about some of the potentially bullish outlook for MBS. It's obviously priced in at the market; it's going to have cuts. How much of that do you think is kind of already reflected in MBS, or does the actual kind of current carry cause more incremental investors? Just trying to get a sense of how MBS markets are already thinking about those cuts.

Speaker Change: Our first question comes from Doug Harder from UBS. Please go ahead.

Douglas Michael Harter: Thanks, Desmond. I'm hoping to just go into a little bit more about, you know, some of the potentially bullish, you know, kind of outlook for MBS. You know, it's obviously priced in that the market is going to have cuts, but just how much of that do you think is kind of already reflected in MBS? Or, you know, does the actual, you know, kind of current carry cause more incremental investors? So just trying to get a sense of, you know, how MBS markets are already thinking about those cuts.

Desmond Hopkins: Thanks Desmond.

Douglas Michael Harter: Just go into a little bit more about, you know, some of the potentially bullish, you know, kind of outlook for MBS.

Douglas Michael Harter: Unknown Speaker You know, it's, you know, obviously priced in that the market is going to have cuts, you know, just how much of that do you think is kind of already reflected in MBS? Or, you know, does the actual, you know, kind of current carry?

Douglas Michael Harter: cause more incremental investors, you know, so just just trying to get a sense of, you know, how MBS markets are already thinking about those cuts.

Desmond Macauley: Yes, good morning, Doug. This is mentioned. Our view is very constructive on kind of medium and long-term horizon. Near-term, we do see like the markets have priced in a lot of easing already. So we feel like the inflation slowdown has been digested by the market. Right now, we're watching the labor markets to give us a sign if a more aggressive Fed cuts on a horizon should be in play. But in terms of interest rate markets, we feel like that's very well priced in. In terms of mortgage spreads, we also feel like near-term we are trading year-to-date tights.

Sergey Lozov: Yes, good morning, Doug. This is Sergey Losiev.

Douglas Michael Harter: Good morning, Doug. This is Sergey Losev. I'll try to answer your question and see if it doesn't have any follow-up.

Sergey Lozov: I'll try to answer your question and see if Desmond has any follow-up. But yeah, currently, as Desmond mentioned, our view is very constructive on kind of a medium and long-term horizon. Near term, we do see that the markets have priced in a lot of easing already. So we feel like the inflation slowdown has been digested by the market. Right now, we're watching the labor markets to give us a sign if more aggressive Fed cuts on the horizon should be in play.

Speaker Change: But yeah, currently we, as Desmond mentioned, our view is very constructive on kind of medium and long-term horizon. Near term, we do see like the markets have priced in a lot of easing already, so we feel like the inflation slowdown has been digested by the markets.

Speaker Change: Right now, we're watching the labor markets to give us a sign if more aggressive Fed cuts on the horizon should be in play. But in terms of interest rate markets, we feel like that's

Sergey Lozov: But in terms of, you know, interest rate markets, we feel like that's very well priced in. In terms of mortgage spreads, we also feel like, near term, we're trading year to date tight. But we have very strong conviction that as we start to, as we have started the journey on the Fed's easing cycle, that's going to really impact the spread tighter. Additionally, one other thing that maybe is not being talked about a lot about yet is the potential end to the quantitative tightening program.

Speaker Change: very well priced. In terms of mortgage spreads, we also feel like

Desmond Macauley: But we have a very strong conviction that, as we start the journey on the Fed easing cycle, that's going to really impact the spread side.

Speaker Change: In the near term, we are trading year-to-date tights.

Speaker Change: But we have a very strong conviction that as we start to, as we start the journey on the Fed easing cycle, that's going to...

Desmond Macauley: Additionally, one other thing that may not be talked a lot about yet is the potential end to the quantitative tightening program. We feel like the markets could start pricing it in sooner than later, as bank reserves could continue to wind down. So a couple of these factors is what we're looking for in terms of really giving the boost.

Speaker Change: really impact the spread slider. Additionally, one other thing maybe is not being talked a lot about yet is the potential end to the quantitative tightening program. You know, we feel like the markets could start pricing it in sooner and then later bank reserves could...

Sergey Lozov: You know, we feel like the markets could start pricing it in sooner than later, as bank reserves could continue to wind down. So a couple of these factors is what we're looking for in terms of really giving the boost. It's going to be a long journey in terms of banks entering the market in full force. They've already seen it this year finally turning net demand positive, but the first cut will actually turn their carry, you know, positive. So I think that will be a real big boost to the spreads. As you know, there are a ton of money market funds sitting on the sidelines. We're ready to enter fixed income markets as well. So we're looking for signs of the first cut to really change that equation additionally too.

Speaker Change: continue to wind down. So a couple of these factors is what we're looking for in terms of really giving the boost.

Desmond Macauley: It's going to be a long journey. In terms of banks entering the market in full force, they're ready to clean it. This year, finally turning the net demand positive. But the first cut will actually turn their carried positive. So I think that will be a really big boost to the spreads. As you know, there's a ton of money market funds sitting on sidelines ready to enter fixed income markets as well. So we're looking for signs of the first cut to really change that equation additionally, too.

Speaker Change: You know, it's going to be a long journey in terms of

Speaker Change: Thanks, you know, entering the market in full force. They're already seen it this year, finally turning the net demand positive.

Speaker Change: But the first cut will actually turn their carry positive, so I think that will be a real big boost to the spreads.

Speaker Change: You know, as you know, there's a ton of money market funds sitting on sidelines ready to enter fixed income markets as well.

Speaker Change: So we're looking for signs of the first cut to really change that equation additionally too.

Sergey Lozov: I appreciate that, Sergey. And then just one, one other question. You know, on the treasury hedges you have, what is the duration of those hedges?

Desmond Macauley: Appreciate that, Sergey.

Desmond Macauley: And then just one other question. On the treasury hedges you have, what is the duration of those hedges? Yeah, so on the treasury specific, we have treasury shorts in the 10-year part of the curve. And we use treasury futures, and those are kind of barbells between the two and the 10-year part of the curve. As you know, swap spreads are really tightening in here. So we're starting to see as owning swaps more favorable, and we have a really big hedge book in interest rates lots as well.

Speaker Change: I appreciate that, Sergey. And then just one other question. On the Treasury hedges you have, what is the duration of those hedges?

Sergey Lozov: Yeah, so on the treasury specific, we have treasury shorts on the 10 year part of the curve, and we use treasury futures. And those are kind of a barbell between the two and the 10 year part of the curve. As you know, swap spreads are really tightening here. So, you know, we're starting to see owning swaps more favorable. As you know, we have a really big hedge hedge book and interest rate swaps as well.

Speaker Change: Yeah, so on the treasury specific, we have treasury shorts in the 10-year part of the curve, and we use treasury futures, and those are kind of barbelled between the two and the 10-year part of the curve.

Speaker Change: As you know, swap spreads are really tightening in here, so we're starting to see owning swaps more favorable. As you know, we have really big hedge book and interest rate swaps as well.

Sergey Lozov: Great. I appreciate that. Thank you, Sergei.

Desmond Macauley: Great. Appreciate that.

Desmond Macauley: Thank you, Sergey.

Jason Weaver: The next question comes from Jason Weaver from Jones Trading. Please, go ahead. Hey, good morning. Thanks for thinking about the question.

Unknown Executive: The next question comes from Jason Weaver from Jones Trading. Please go ahead.

Speaker Change: Great. Appreciate that. Thank you, Sergei.

Jason Price Weaver: Hey, good morning. Thanks for taking my question. Can you just briefly discuss how your leverage trended by inch or quarter in 2Q and whether that was greater at the beginning or nearing the end?

Speaker Change: The next question comes from Jason Weaver from Jones Trading. Please go ahead.

Unknown Executive: Can you just briefly discuss how your leverage trended ancient quarter into Q and whether that was greater at the beginning or near near again?

Jason Price Weaver: Hey, good morning. Thanks for taking my question. Can you just briefly discuss how your leverage trended inch or quarter in 2Q and whether that was greater at the beginning or nearing the end?

Desmond Macauley: Good morning. Yeah, thank you for your question. Yeah, our leverage has increased towards the end of the quarter as we saw a confirmation that economic data that the Fed, you know, is on route to begin cutting rates potentially later this year. So as we saw economic data come in, as we saw FOMT meetings express the factor we're getting closer to the target for the Fed, you know, we began to increase leverage into the quarter and currently running 7.7, as Desmond mentioned.

Unknown Executive: Good morning. Yeah, thank you for your question. Yeah, our leverage increased towards the end of the quarter as we saw confirmation in the economic data that the Fed, you know, is on the path to begin cutting rates potentially later this year. So as we saw economic data come in, as we saw FOMC meetings expressed the fact that we're getting closer to the target for the Fed, we began to increase leverage into the quarter end and are currently running 7.7, as Desmond has mentioned. All right, and that's down from a 7.8, I guess, just due to...

Speaker Change: Good morning. Yeah, thank you for your question. Yeah, our leverage has increased towards the end of the quarter.

Speaker Change: As we saw confirmation in economic data that the Fed is en route to begin cutting rates potentially later this year. So as we saw economic data come in, as we saw FOMC meetings express

Speaker Change: The fact that we're getting closer to the target for the Fed, you know, we began to increase leverage into the quarter end and are currently running 7.7, as Desmond has mentioned.

Unknown Executive: All right, and that's down from the 7.8, I guess, just a little bit of red tightening since then.

Unknown Executive: 7.8, I guess I'll just do a little bit of spread tightening.

Desmond: All right, and that's down from the 7.8, I guess, just due to a little bit of spread tightening since then.

Unknown Executive: I'm sorry, I was hard to hear.

Unknown Executive: I'm sorry, I was a part two here. Could you repeat that, please?

Unknown Executive: Could you repeat that, please? No worries.

Unknown Executive: No worries; I'll actually move on. And then, alongside Desmond's comments, this is a little bit of a difficult task, but where's the range you see as the real inflection point for prepays on benchmark 30-year mortgages? And I'm really asking about the post-2022 vintage.

Speaker Change: I'm sorry I was a part two here could you repeat that please

Desmond Macauley: I'll actually move on. And then alongside with Desmond's comments, this is a little bit difficult task, but where is the range you see is the real inflection point for prepays on benchmark 30-year mortgages. And I'm really asking about the post-2022 vintage paper. Yeah, so in the production coupons, five, five and a half, and six is, you know, it would take usually 25 to pay the base points of incentive to begin refinancing. You know, so we're still quite a bit away there. So I think when we see rates rally towards those levels, we'll reevaluate the coupon position.

Speaker Change: No worries, I'll actually move on. And then alongside with Desmond's comments,

Speaker Change: This is a little bit difficult task, but where is the range you see as the real inflection point for prepays on benchmark 30-year mortgages? And I'm really asking about the post-2022 vintage paper.

Unknown Executive: Yeah, so on the production coupons, five, five and a half, and sixes, you know, it would usually take 25 to 50 base points of incentive to begin refinancing. You know, so we're, we're still quite a bit away there.

Speaker Change: Yeah, so on the production coupons, five, five and a half and sixes, you know, it would take usually 25 to 50 basis points of incentive to begin refinancing, you know, so we're still quite a bit of way there.

Unknown Executive: Um, so I think when we see a rate, Valley, towards those levels, we'll reevaluate the coupon positioning. As we mentioned, a few things we're doing right now are kind of adding specified pools that have better convexity and prepaid protection versus more generic cohorts. And then the other step would be to migrate lower coupons. Now our book is very well diversified; we have 10 to 8% discount coupons across the stack. As you know, we remain very liquid and tactical across the coupon stack.

Speaker Change: So I think when we see rates...

Speaker Change: Sally

Desmond Macauley: As we mentioned, a few things we're doing right now is kind of adding specified pools that have better complexity and prepare protection versus more generic cohorts. And then the other step would be to migrate lower coupons. Now, our book is very well diversified. We have 10 to 8 percent discount coupon across the stack. So, you know, we remain very liquid and tactical across the coupon stack.

Speaker Change: Toward those levels, we'll re-evaluate the coupon positioning.

Speaker Change: As we mentioned, a few things we're doing right now is kind of adding specified pools that are

Speaker Change: We have better convexity and prepaid protection versus more generic cohorts, and then the other step would be to migrate lower coupons. Now, our book is very well diversified. We have 10 to 8% discount coupons across the stack.

Speaker Change: So, you know, we remain very liquid and tactical across the coupon set.

Unknown Executive: All right, thank you. That's helpful, Culler.

Unknown Executive: Yeah, all right.

Unknown Executive: Thank you. That's the helpful color.

Jason Stewart: The next question comes from Jason Stewart from Janney. Please go ahead. Hey, good morning. Thank you.

Unknown Executive: The next question comes from Jason Stewart from JANI. Please go ahead.

Culler: All right, thank you. That's helpful, Culler.

Jason Price Weaver: Good morning. Thank you.

Speaker Change: The next question comes from Jason Stewart from JANI. Please go ahead.

Scott Ulm: I want to go back to the capital raising question. And if we look at your outlook for the mortgages and then one of the two turns of leverage, and we're the stock trading, I mean, how likely are you to take leverage up before raising capital? It's sort of like books I drift higher or, you know, you're more likely to capitalize on where the stock is now and the investment environment giving your view. You know, I think we're fortunate we've got some flexibility. You know, we don't, you know, we're not tied to capital raising to, you know, to manage the portfolio.

Jason Price Weaver: Hey, good morning. Thank you.

Jason Price Weaver: I wanted to go back to the capital raising question and if we look at your outlook for

Speaker Change: mortgages

Jason Price Weaver: and the one or two terms of leverage and where the stock's trading. I mean, how likely are you to take leverage up before raising capital, sort of let book value drift higher, or are you more likely to capitalize on where the stock is now in the investment environment, given your view?

Unknown Executive: I wanted to go back to the capital raising question. And if we look at your outlook for mortgages, and the one or two terms of leverage, and where the stock's trading, I mean, how likely are you to take leverage up before raising capital, sort of let book value drift higher? Or, you know, are you more likely to capitalize on where the stock is now, in the investment environment, given your view?

Unknown Executive: You know, I think we're fortunate we've got some flexibility, you know, we don't we don't you know, we're not tied to capital raising to, you know, to, you know, to manage the portfolio Desmond mentioned. We feel we have some dry powder there that we could take advantage of things. And as we all know, capital raising opportunities come and go. So, you know, I think the two are fortunately a little bit disconnected, not ultimately disconnected, but a little bit disconnected, you know, within the concept of, you know, a turner or a bit more.

Speaker Change: You know, I think we're fortunate we've got some flexibility, you know, we don't we don't, you know, we're not we're not tied to capital raising to, you know, to, you know, to manage the portfolio is, as Desmond mentioned, you know, we feel we got some dry powder there that we could take advantage of things.

Scott Ulm: As Desmond mentioned, you know, we feel we've got some drive powder there that we could take advantage. of things. And as we all know, you know, capital raising opportunities come and go. So, you know, I think the two are fortunately a little bit disconnected, not ultimately disconnected, but a little bit disconnected, you know, within the concept of, you know, a tourner or a bit more of leverage. Okay. All right. Thank you for that.

Speaker Change: And as we all know, you know, capital raising opportunities come and go. So, you know, I think the two are fortunately a little bit disconnected, not ultimately disconnected, but a little bit disconnected, you know, within the concept of, you know, a turner or a bit more of leverage.

Unknown Executive: All right, thank you for that. And then so far in 3Q, you know, obviously, we use pre-sale data from 1Q to project where book value is, but 2037 is a little light. Are there any meaningful moves in July on the portfolio or the hedge side that would be notable?

Desmond Macauley: And then, so far in 3Q, you know, obviously, we use pre-stale data from 1Q to project where book value is, but 2037 is a little light. Is there any meaningful moves in July on the portfolio or the head side that would be notable? I don't know. Go ahead. Sorry. Yeah. No, I'm nothing to report as of yet. Our page book tactic is very dynamic right now. You know, a head ratio is very close to one. If you assume that our TBAs follow the path of, you know, REIT on the pool as well. So, but we continue, you know, evaluating every day.

Speaker Change: Okay.

Speaker Change: All right, thank you for that. And then so far in 3Q, you know, obviously, you know, we use pretty stale data from 1Q to project where book value is, but 2037 is a little light. Is there any meaningful moves in July on the portfolio or the hedge side that would be notable?

Unknown Executive: I don't know. I don't know.

Unknown Executive: Yeah, go ahead. Sorry. Sorry, Scott.

Unknown Executive: Yeah, nothing to report as of yet. Our hedge book tactic is very dynamic right now. As you know, our hedge ratio is very close to one. If you assume that our TBAs follow the path of, you know, repo on the pools as well, so, but we continue, you know, evaluating every day. And right now, there's no changes to report. Okay, thanks for that.

Speaker Change: I don't know.

Speaker Change: Yeah, go ahead. Sorry.

Speaker Change: Nothing to report as of yet. Our Facebook tactic is very dynamic right now.

Speaker Change: As you know, our hedge ratio is very close to one, if you assume that our TBAs follow the path of, you know, repo on the pools as well, so.

Desmond Macauley: And, but right now there's no changes to report. Okay. Thanks for that.

Speaker Change: We continue evaluating every day, but right now there are no changes to report.

Unknown Executive: Okay, thanks for that. Last one for me, and I'll jump out. You know, the increase in coupon, increase in CPRs on real discounted coupons, I'm going to call it fours, and below would be my likely guess as the most impactful. Is there any way to quantify that increased quarter to quarter on net interest spread or earnings?

Desmond Macauley: Last one for me, and I'll jump out. You know, the increase in coupon, increasing in CPRs on real discounted coupons, including a call of force and below would be my likely guess is the most impactful. Is there any way to quantify that increase quarter to quarter on net interest spread or earnings? This is, this is a number. We'll probably have to come back to you on, but just roughly speaking, yeah, four and a half in force contributed kind of close to third of the increase quarter or quarter in CPRs. And we're starting to see other coupons pick up there as well.

Speaker Change: Okay, thanks for that. Last one for me and then I'll jump out. You know, the increase in coupon, increase in CPRs on real discounted coupons, I'm going to call it fours and below would be my likely guess, is the most impactful. Is there any way to quantify that increased quarter-to-quarter on net interest spread or earnings?

Unknown Executive: This is a number we'll probably have to come back to you on, but just roughly speaking, you have four-and-a-halfs and fours contributing kind of close to a third of the increased quarter-over-quarter in CPRs, and we're starting to see other coupons pick up there as well. But in terms of specific accounting income impact, I don't think we have that analysis ready just right now.

Speaker Change: This is a number we'll probably have to come back to you on, but just roughly speaking, you have four and a half and fours contributed kind of close to a third.

Speaker Change: of the increased quarter-over-quarter in CPRs. And we're starting to see other coupons pick up there as well. But in terms of specific accounting income impact, I don't think we have that analysis just really just right now.

Desmond Macauley: But in terms of specific encountering income impact. I don't think we have that amount. It's just rated just right now. Yeah. No, it's okay. Thanks for that. I think conceptually your expectation would be that most of that move and just kind of coupons has happened. And maybe you get some migration in CPRs up in coupon, but I wouldn't expect you to think that, you know, four and four and a half have that sequential increase again at three queues. That fair? You know, it's a fair question, but also, you know, we're keeping in mind the fact that the housing market is at record lows, right?

Unknown Executive: Yeah, no, it's okay. Thanks for that. And I think conceptually, your expectation would be that most of that move in discounted coupons has happened. And maybe you get some migration and CPRs up in coupons, but I wouldn't expect you to think that, you know, Forge and 4.5 would have that sequential increase again in 3Q. Is that fair?

Speaker Change: Yeah, no, it's okay. Thanks for that. And I think conceptually, your expectation would be that most of that move in discounted coupons has happened.

Speaker Change: And maybe you get some migration and CPRs up in coupon, but I wouldn't expect you to think that, you know, 4s and 4.5s have that sequential increase again in 3Q. Is that fair?

Unknown Executive: Um, you know, it's a fair question, but also, you know, we're keeping in mind the fact that the housing market is at record lows, right? And prepayments are near record lows as well. So we feel like there's nothing but upside to a lot of these discount prepays. It's just a matter of timing. And as Desmond mentioned, it's when the housing begins to thaw, and the turnover activity picks up. That's what we're looking for.

Speaker Change: You know, it's a fair question, but also, you know, we're keeping in mind the fact that the housing market is at record lows, right, and the prepayments are near record lows as well.

Desmond Macauley: And the prepayments are near record lows as well. So we feel like there's nothing but upside to a lot of these discount prepays. It's just a matter of timing, and the mention it's when the housing begins to talk, and the eternal activity picks up. That's what we're looking for. Yeah, yeah, I agree with you.

Speaker Change: So we feel like there's nothing but upside to a lot of these discount prepays, it's just a matter of timing, and as Desmond mentioned, it's when the housing begins to thaw and the turnover activity picks up. That's what we're looking for.

Unknown Executive: Yeah, yeah, I agree with you. And thanks for taking the questions. I appreciate it, guys.

Unknown Executive: And thanks for taking the questions. I appreciate it, guys.

Desmond: Yeah, yeah, I agree with you. And thanks for taking the questions. I appreciate it, guys.

Unknown Executive: Again, if you have a question, please press star, then one.

Unknown Executive: Again, if you have a question, please press star, then 1. And our next question comes from Christopher Nolan from Lattenberg-Solomon. Please go ahead.

Christopher Nolan: And our next question comes from Christopher Nolan from Ladinburg, Solomon.

Speaker Change: Again, if you have a question, please press star, then 1.

Gordon Harper: Please go ahead. Hey, guys, Gordon, were there any non-recurring items in earnings with quarter? No, you recall we had a discussion in the back and Q1 of the special committee costs, but no, nothing in this quarter.

Christopher Whitbread Patrick Nolan: Hey guys. Gordon, were there any non-recurring items in earnings this quarter?

Speaker Change: And our next question comes from Christopher Nolan from Ladenburg-Solomon. Please go ahead.

Christopher Whitbread Patrick Nolan: Hey guys. Gordon, were there any non-recurring items in earnings this quarter?

Gordon M. Harper: So, if you recall, we had a discussion back in Q1 of the special committee costs. No, nothing this quarter.

Speaker Change: So, if you recall, we had a discussion back in Q1 of the special committee costs. But no, nothing this quarter. Okay, and then also as a follow-up on that topic, just to reconfirm that you don't expect any restatements as a result of the special committee activities.

Unknown Executive: Okay, and then also, as a follow-up on that topic, just to reconfirm that you don't expect any restatements as a result of the special committee activities since the current queue indicates material weakness continuing into the quarter. And then I guess the final comment, and I guess it's really for Scott, is given the expectations for earnings to cover the dividend in the second half of the year, what are your thoughts on the direction of book value, given your outlook on the market?

Gordon Harper: Okay. And then also as a follow-up on that topic, just to re-confirm that you don't expect any restatements as a result of the special committee activity since the current Q indicates the material weakness continually into the quarter. Yeah.

Unknown Executive: Okay, and then also as a

Speaker Change: This is a summary, since the current queue indicates the material weakness continuing into the quarter.

Scott Ulm: And then I guess the final comments, and I guess it's really for Scott, is given the expectations is for earnings to cover the dividend in the second half of the year, what are the thoughts on the direction of the book that you're giving your outlook on the market? Well, look, if our outlook comes true and we get demand returning, you know, particularly from the bank sector, and I've got to tell you, there's nothing like actually getting cash spread rather than seeing it reflected in the forward curve to motivate buyers. That's real; the other one is a little different.

Speaker Change: [inaudible]

Scott Jeffrey Ulm: And then I guess the final comments, and I guess it's really for Scott, is given the expectations for earnings to cover the dividend in the second half of the year, what are the thoughts on the direction of book value, given your outlook on the market?

Scott Jeffrey Ulm: Well, look, if if our if our if our outlook comes true, and we get demand returning, you know, particularly from the bank sector, I gotta tell you, there's nothing like actually getting getting cash spread rather than seeing it reflected in the forward curve to motivate buyers, uh... that you know that that that that that's really a lot of uh... the other one is uh... is a little different uh... you know we could see we could see uh... you know some spread tightening here uh... you know you look at it you look at the charts over the last ten years and we are at elevated levels it's not to say the last ten years was normal in any way we all know that but uh... but certainly you know while we might might have flirted with a bit of tights for the year let's just remember how wide twenty three was so you know look uh... we are in the spread we we we we take spread risk for a living here uh... we're in the spread business and tightening spreads it would be very uh... very very strong element for us to book that

Scott Jeffrey Ulm: Well, look, if our outlook comes true and we get demand returning, you know, particularly from the bank sector, I got to tell you, there's nothing like actually getting cash spread rather than seeing it reflected in the forward curve to motivate buyers.

Speaker Change: That, you know, that's real. The other one is a little different.

Scott Ulm: We could see some spread tightening here. You look at the charts over the last 10 years, and we are at elevated levels. It's not to say the last 10 years is normal in any way; we all know that. But certainly, you know, while we might have floored a little bit of tights for the year, let's just remember how wide 23 was. So, you know, look, we are in the spread, we take spread risk for a living here. We're in the spread business, and tightening spreads would be a very, very strong element for us from book value.

Speaker Change: We could see some spread tightening here. You look at the charts over the last 10 years and we are at elevated levels.

Speaker Change: It's not to say the last 10 years was normal in any way. We all know that. But certainly, you know, while we might have flirted with a bit of tights for the year, let's just remember how wide 23 was. So, you know, look, we are in the spread. We take spread risk for a living here.

Speaker Change: We're in the spread business, and tightening spreads would be a very, very strong element for us for book value.

Unknown Executive: Great.

Unknown Executive: Thanks, guys.

Unknown Executive: There are no more questions in the queue.

Unknown Executive: There are no more questions in the queue. This concludes our question and answer session. I would like to turn the conference back over to Scott Ulm for any closing remarks.

Unknown Executive: This concludes our question and answer session.

Speaker Change: Great. Thanks, guys.

Scott Ulm: I would like to turn the conference back over to Scott Oom for any closing remarks. Great. Thanks all for joining us this morning.

Speaker Change: There are no more questions in the queue. This concludes our question and answer session. I would like to turn the conference back over to Scott Ulm for any closing remarks.

Scott Jeffrey Ulm: Great, thanks all for joining us this morning. As you know, we're always available. Ring the office, and we will be back to you, usually within the day, if not faster.

Scott Ulm: As you know, we're always available, bringing the office in. We will be back to you know, usually within the day, if not faster. Thanks so much for joining.

Scott Jeffrey Ulm: Great, thanks all for joining us this morning. As you know, we're always available. Ring the office and we will be back to you, you know, usually within the day, if not faster. Thanks so much for joining.

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Speaker Change: [inaudible]