Q3 2024 ARMOUR Residential REIT Inc Earnings Call

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

Good day and welcome to the armour residential REIT third quarter 2024 earnings conference call.

Speaker Change: All participants will be in listen only mode.

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Unknown Executive: After today's presentation, there will be an opportunity to ask questions. To ask a question, you might press star, then one on your telephone keypad. To withdraw your question, please press star and then two. Please note, this event is being recorded.

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Scott Ulm: I would now like to turn the conference over to Scott Ulm, Chief Executive Officer. Please go ahead.

Speaker Change: I would now like to turn the conference over to Scott.

Speaker Change: Chief Executive Officer. Please go ahead.

Scott Ulm: Thank you.

Scott: Thank you good morning, and welcome to the armour residential REIT third quarter 2024 conference call.

Scott Ulm: Good morning and welcome to ARMOUR Residential REIT's third quarter 2024 conference call. This morning I'm joined by our CFO, Gordon Harper, as well as our co-CIOs, Sergey Losyev and Desmond Macauley.

This morning, I'm joined by our CFO Gordon Harbor, as well as our co CIO as Sergey Alicia and Desmond Mcauley.

Gordon Harper: I'll now turn the call over to Gordon to run through the financial results. Thank you, Scott. By now, everyone out access to ARMOUR's earnings release, which we can found on ARMOUR's website, www.armourleep.com.

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

Gordon: Thank you Scott.

Gordon: Everyone have access to our earnings release, which can be found on <unk> website Ww <unk> com.

Gordon Harper: This conference call includes board looking statements which are intended to be subject to the safe harbor protection provided by the Securities Litigation Reform Act of 1995. The risk factors section of ARMOUR's periodic reports filed with the Securities and Exchange Commission to provide certain risk factors beyond ARMOUR's control. That could cause actual results to differ materially from those expressed in or implied by these four working statements. Those periodic filings can be found on the SEC's website at www.sec.gov. All of today's four working statements are subject to change without notice. We display many obligations; update them unless required by law.

Gordon: 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 995.

Gordon: The risk factors section of Armours periodic reports filed with the Securities and Exchange Commission. Please go ahead certain risk factors beyond <unk> control that could cause actual results to differ materially from those expressed in or implied by these forward looking statements.

Gordon: Oh periodic filings can be found on the <unk>.

Gordon: Website at Ww SEC Gov.

Gordon: All of today's forward looking statements are subject to change without notice.

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

Gordon Harper: Also, today's discussion refers to certain non-yet 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, Charlie, and we'll continue from one year. ARMOUR's Q3 gap net income available to common stockholders was 62.9 million per dollar 21 per common share. Net interest income was 1.8 million. Distributor earnings available to common stockholders was 62 million dollars or $1 per common share. This non-yet measure is defined as net interest income plus TBA drop income adjusted for interest income or expense on an interest rate swaps and features contracts minus net operating expenses.

Gordon: Also today's discussion refers to certain non-GAAP measures. These measures are reconciled with comparable GAAP measures.

Gordon: Our earnings release.

Gordon: And online replay of this conference call will be available on Orbitz website, shortly and will continue for one year.

Gordon: Pardon me Q3, GAAP net income available to common stockholders was $62 9 million $3 21 per common share.

Gordon: Net interest income was $1 8 million.

Gordon: Distributable earnings available to common stockholders were $32 million or $1 per common share.

Gordon: These non-GAAP measures defined as net interest income plus TBA drop income adjusted for interest income or expense.

Gordon: Interest rate swaps and futures contracts minus net operating expenses.

Gordon Harper: ARMOUR Capital Management continues to weigh the portion of the management fees, weighing 1.65 million per Q3, which offsets operating expenses. The way they're continues until further notice. During Q3, however, issued 6,413,735 shares of common stock to our at-the-market offering program, raising 129.4 million capital at one tenth of the percent alluded to book value or essentially flat to book value. Since the end of the quarter, we've issued an additional 567,720 shares of common stock, adding 11.1 million of equity capital. ARMOUR made one of the common stock dividends per share of 24 cents per common share per month, for a total of 76 cents for the quarter.

Gordon: From a capital management continues to waive a portion of the management fees, leaving 165 million for Q3, which offset operating expenses.

Gordon: There continues until further notice.

Gordon: During Q3, however issued 6 million 413735 shares of common stock.

Gordon: Our aftermarket offering program.

Gordon: $129 4 million of equity capital at 110th of a percent dilutive to book value were essentially flat.

Gordon: At the end of the quarter, we have issued an additional 567720 shares of common stock.

Gordon: $11 1 billion of equity capital.

Gordon: Armour paid monthly common stock dividend per share of <unk> 24 per common share per month for a total of 76 for the quarter.

Gordon Harper: Taking together with the contractual dividends on the preferred stock, ARMOUR made human distribution to stockholders of 2.3 billion over its history. Ordering a book value was $20.76 per common share, up from $20.30 at your period, or up 2.3% for the quarter. As of October 18th, our estimate of book value was $19.50 per common share, after the approval of the October for a seed stock dividends and the common stock dividends.

Gordon: Taken together with contractual dividends on the preferred stock.

Gordon: We made cumulative distributions to stockholders of $2 3 billion over its history.

Gordon: Quarter end book value was $20 76 per common share up from $20 30 at June 30 were up two 3% for the quarter.

Gordon: As of October 18, our estimate of book value was $19 58 per common share.

Gordon: After the accrual of the October for acuity stock dividends and common stock dividends.

Scott Ulm: By now, we'll return to call back to Scott to discuss ARMOUR's portfolio position in current strategy. Scott?

Speaker Change: I now will return the call back to Scott to discuss Armours portfolio position and current strategy Scott.

Scott Ulm: Thanks, Gordon.

Scott: Thanks Gordon.

Scott Ulm: I want to start by sharing our perspective on the current macro environment. In late August, Fed Chair Jerome Powell signaled that, after nearly two and a half years of restrictive monetary policy, the rest around inflation and the labor markets are in balance, and that interest rates are set to decline. The Federal Reserve, can they follow this up with a jumbo 50 basis point interest rate cut in September, prompting a rapid steepening of the U.S. Treasury yield curve. Quarter over quarter, the two-year and the ten-year Treasury is rallied by 111 and 62 basis points, respectively, with the two's 10 spread reaching a high positive 22 basis points.

Scott: I'll start by sharing our perspective on the current macro environment.

Scott: In late August Fed chair, Jerome Powell signaled a bit after nearly two and a half years of restricted monetary policy the rest around inflation and labor markets are in Dallas and that interest rates are set to decline.

Scott: The Federal reserve can they followed this up with a jumbo 50 basis point interest rate cut in September, prompting a rapid strengthening of the U S treasury yield curve quarter over quarter, the two year and the 10 year treasuries rallied by 111, and 62 basis points, respectively, with the 210 spread reaching a high of positive 22 basis.

Scott Ulm: The drastic turnaround from the negative 35 basis points close to the second quarter. Over the last three decades, Fed easing cycles of resolving curve steepening of 50 to 300 basis points. With this in mind, we anticipate that the curve steepening trend has more room to run than the coming quarters.

Scott: It's.

Scott: A drastic turnaround from the negative 35 basis points close to the second quarter over the last three decades fed easing cycles have resulted in curve steepening of 50 to 300 basis points with this in mind, we anticipate that the curve Steepening trend there is more room to run in the coming quarters.

Scott Ulm: A scenario of Fed easing, without the accompanying volatility of a severe economic recession, sets up a particularly constructive environment for a potential future of book value appreciation and earnings growth at ARMOUR. We expect both book value and earnings to benefit from the return of positive carry in production NBS, declining volatility, and the still historically wide nominal mortgage spreads of nearly 150 basis points versus the average spread of 106 basis points over the last decade. While the U.S. elections could lead to near-term volatility; we expect monetary easing to remain the primary driver for mortgage spreads once the political uncertainty resolves.

Scott: I'll scenario fed easing without the accompanying volatility of a severe economic recession setup, a particularly constructive environment for potential future book value appreciation and earnings growth at AMR.

Scott: We expect both book value and our earnings to benefit from the return of positive carry and production MBS declining volatility and there's still a historically wide nominal mortgage spreads of nearly 150 basis points versus the average spread of 106 basis points over the last decade.

Scott: While the U S elections could lead to near term volatility, we expect monetary easing to remain the primary driver for mortgage spreads once the political uncertainty resolves.

Scott Ulm: Overall, we believe we're well-positioned to benefit from these favorable market trends over the coming months.

Scott: Overall, we believe we're well positioned to benefit from these favorable market trends over the coming months.

Scott Ulm: There are also a number of other specific factors that will benefit us in the next year, and probably beyond. Our strong liquidity and access to financing, particularly through our securities finance affiliate Buckler, gives us more flexibility to increase leverage to take advantage of this environment. We're keenly aware of the risks and volatility in today's world, but we have the ability to capitalize on this environment when the time is right. We have a demonstrated capability raised capital at very low cost.

Scott: There are also a number of other specific factors will benefit us into next year and probably beyond.

Scott: Our strong liquidity and access to financing, particularly through our securities Finance affiliate Buckler gives us more flexibility to increase leverage to take advantage of this environment.

Scott: We are keenly aware of the risks and volatility in today's world, where we have the ability to capitalize on this environment. When the time is right.

Scott: We have a demonstrated capability to raise capital at very low cost in short despite some volatility which is not unexpected. This is shaping up to turn into a great environment overall for our business at this point I'll turn the discussion over to Sergey <unk>.

Scott Ulm: In short, despite some volatility, which is not unexpected, this is shaping up to turn into a great environment overall for a business.

Sergey Losyev: At this point, I'll turn the discussion over to Sergei. Thank you, Scott. In the third quarter, our most portfolio experienced approximately five basis points of tightening the nominal spreads, and we progressively increased our portfolio size and leverage taken advantage of full back to the market. As the market's closed on October 21st, our portfolio's duration and implied leverage stood at 0.91 years in 8.6 times, respectively. We maintain healthy levels of available liquidity at approximately 50% of total capital, and we continue to closely monitor as well as rigorously stress test our liquidity levels to ensure appropriately reflect market conditions and can support our portfolio growth.

Sergey: Thank you Scott in the third quarter Armours portfolio experienced approximately five basis points of tightening of nominal spreads and we progressively increased our portfolio size and leverage taken advantage of pullbacks in the market.

Sergey: As the markets close on October 21, our portfolio's duration and implied leverage stood at <unk> 91 years, and eight six times respectively.

Sergey: We maintain healthy levels of available liquidity at approximately 50% of total capital.

Sergey: And we continue to closely monitor unwell and rigorously stress test our liquidity level to ensure appropriately reflect market conditions and can support our portfolio growth.

Sergey Losyev: In anticipation of a Fed cutting cycle and a more positively sloped yield curve, we steadily increased our duration of risk exposure to shorter interest rates while limiting duration exposure in the longer part of the curve. We terminated 1.75 billion of emotional slops with a weighted average maturity of 29 months and 1.8 billion of treasury futures with a weighted average duration of less than four years. Terminating the slops versus receiving their cash loads carries no economic impact given that the slops' positive book value is already reflected in their forward pricing. The proactive reduction in a swap position has lowered our ratio of hedges to repo funding to approximately 62%.

Sergey: In anticipation of a fed cutting cycle in a more positively sloped yield curve, we steadily increased our duration risk exposure to short term interest rates, while limiting duration.

Sergey: Exposure in the longer part of the curve, we terminated 175 billion of notional swaps with a weighted average maturity of 29 months.

Sergey: And $1 8 billion of Treasury futures with a weighted average duration of less than four years.

Sergey: Jeremy in your swaps versus the receiving their caseloads carries no economic impact given that the swaps positive book value is already reflected in their forward pricing the proactive reduction in our swap position has lowered our ratio of hedges to repo funding to approximately 62%. We expect these to recalibrate our profile to be.

Sergey Losyev: We expect this recalibrated profile to be economically beneficial for our investors in an environment with a steepening yield curve. While earnings available for distribution related to swap income may be lower in subsequent quarters, over time we expect EAD to benefit from lower financing costs and therefore increasing carrying income as the Fed continues its rate-cutting cycle. We continue to run at the Versified Hedge Book composed of Interstraight Slops, Treasury Shorts, and Futures totaling just over 7.7 billion of emotional amount to dampen the volatility of the firm's book value. Our investment portfolio remains very liquid, 100 agency NBS, and is well diversified across 30-year specified pools ranging from 2.5 to 6.5% coupons.

Mccurry: Mccurry beneficial for our investors in an environment, where the steepening yield curve.

Mccurry: While earnings available for distribution related to swap income may be lower in subsequent quarters over time, we expect <unk> to benefit from lower financing costs and therefore increase in carry income as the fed continues its rate cutting cycle.

Mccurry: We continue to run a diversified hedgeable composed of interest rate swaps treasury shorts and futures totaling just over 7.71 billion of notional amount to dampen the volatility of the firm's book value.

Mccurry: Our investment portfolio remained near Lakewood, 100 agency MBS and is well diversified across 30 year specified pools, ranging from two five to six 5% coupons, while the largest composition of our holdings in the near par price coupons, we carry strategic exposure to deep discount and premium coupons totaling.

Sergey Losyev: While the largest composition of our homings is a near-power price coupons, we carry strategic exposures to dip discounts and premium coupons totaling 30 and 22% of market value, respectively. This diversification shields the portfolio from pre-payment volatility when rates decline. In light decrease from 7.7 CPR and Q2 and below 8.2 CPR so far in October, it is worth noting that the September's uptick and the mortgage refi index is expected to show up in the pre-payment reports later this fall, and we believe this has already been priced into the market. We have with mortgage rates already back and up to 6.5%, the valuations on premium MBS offer very compelling value as a forward-looking pre-payment begins to receive.

Mccurry: 30, and 22% of market value, respectively. This diversification shields the portfolio from prepayment volatility when rates declined.

Mccurry: In Q3 constant prepayment rate averaged seven five CPR a slight decrease from seven seven CPR in Q2, <unk> and below eight two CPR so far in October.

Mccurry: Worth, noting that the September uptick in the mortgage refi index is expected to show up in the prepayment reports later this fall and we believe this has already been priced into the market.

Mccurry: With mortgage rates already backing up to six 5% devaluations on premium MBS over very compelling value of our forward looking prepayments begin to recede.

Sergey Losyev: Additionally, higher mortgage rates and weaker winter seasonals set up low net supply of MBS as yet another favorable near-term driver for spreads. Within the premium coupons, we are focused on specified pools tied with loans to lower credit-fifle scores, higher LTV loan characteristics, and states with traditionally lower-refi response rates to help mitigate the pre-payment risk versus more generic pools and TBA. In discounts, our analysis shows that some of the more season holdings were a substantial contributor to a gradual increase in the portfolio CPR this year, proving that mortgage pre-payments can also work to investors' benefit. The expected benefit to grow in the future when the housing market begins to recover as the interest rates decline.

Mccurry: Additionally, higher mortgage rates and weaker winter seasonal set up low net supply of MBS as yet another favorable near term driver for spread.

Mccurry: Within the premium coupons, we are focused on specified pools tied with loans to lower credit FICO scores higher LTV loan characteristics and states with traditionally lower refi response rates to help mitigate the prepayment risk versus more generic pools, and TBA and discounts our analysis show that some of the more.

Mccurry: <unk> holdings were a substantial contributor to a gradual increase in the portfolio CPR. This year proving that mortgage prepayments can also work to investors benefit and we expect this benefit to grow in the future when the housing market begins to recover as interest rates decline.

Sergey Losyev: And finally, the repo market remains liquid, albeit some of the funding pressures observed at the end of Q2 have persisted throughout Q3. These pressures are expected to remain throughout the end of the year, with dealers' capacity to intermediate somewhat constrained amid record levels of U.S. Treasury issuance. But Scott had already alluded to earlier, we are funding 40-60% of our MBS portfolio with our affiliate Buckler Securities, while spreading out the remaining repo balances across 15-20 other counterparties to provide armor with the best financing opportunities. Buckler allows flexibility of overnight funding while seeking out value and market color in term repo markets.

Mccurry: And finally, the repo market remains illiquid, albeit some of the funding pressures observed at the end of Q2 have persisted throughout Q3. These pressures are expected to remain throughout the end of the year with dealers capacity through intermediate somewhat constrained amid record levels of U S Treasury issuance.

Speaker Change: As Scott had already alluded to earlier, we're finding 40% to 60% of our MBS portfolio with our affiliate Buckler securities while spreading out the remaining repo balances across 15 to 20 other counterparties to provide AMR with the best financing opportunities in.

Speaker Change: Butler allows flexibility of overnight funding, while seeking out value and market color and term repo markets overall repo funding for agency MBS remains plentiful and competitively priced across the board back to you Scott.

Sergey Losyev: Overall, repo funding for agency MBS remains plentiful and competitively priced across the board.

Scott Ulm: Back to you, Scott. Thanks, Sergey.

Scott: Thanks Sergei.

Scott Ulm: I'd also like to mention our preferred stock. We're around where we want to be with preferred as a proportion of our capital structure. So we're less likely to be involved in the preferred market. As you know, our preferred remain fixed once they enter the call period. We're pleased with this feature, given where today's floating levels would be. As we look out over the next few quarters, we believe that our current dividend rate is appropriate. Our dividend outlook is based on the portfolio's future earnings power over the median term, not the current period earnings.

I also like to mention our preferred stock.

Scott: And where we want to be with preferred as a proportion of our capital structure. So we are less likely to be involved in the preferred market. As you know our preferreds remained fixed once they enter the call period. We are pleased with this feature given where today's floating levels would be.

Scott: As we look out over the next few quarters, we believe that our current dividend rate is appropriate our dividend outlook is based on our portfolio's future earnings power over the medium term that the current period earnings.

Scott Ulm: Our primary focus remains on generating total economic return on our portfolio and delivering that value to our shareholders.

Scott: Our primary focus remains on generating total economic return on our portfolio and delivering that value to our shareholders.

Scott Ulm: Thank you for joining today's call, and you're interested, Norma. We're happy to now answer your questions.

Scott: Thank you for joining today's call and your interest in armour, we're happy to now answer your questions.

Unknown Executive: Thank you.

Speaker Change: Thank you we will now begin the question and answer session to ask a question you May Press Star then one on the telephone keypad.

Unknown Executive: We will now begin the question and answer session. To ask a question, you may press star and then one on a telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the star keys. If at any time your question has been addressed and you would like to withdraw your question, this first star and then two.

Speaker Change: Using a speakerphone please pick up your handset before pressing the star keys.

Speaker Change: Is that any time your question has been addressed and you would like.

Speaker Change: To withdraw your question. Please press Star and then Qi.

Unknown Executive: We will pause momentarily to assemble our roster.

Speaker Change: We will pause momentarily to assemble our roster.

Trevor Cranston: The first question we have is from Attribu Cranson of Citizens JMP. Please go ahead. Hey, thanks. Good morning. With the cell-off and rates we've seen here on October, could you give us an update on what your current duration exposure is and if you've made any significant changes to either the assets or hedge composition, you know, compared to what your discourse does in September 30th.

Speaker Change: The first question, we have is from Trevor Cranston of citizens JMP. Please go ahead.

Trevor Cranston: Hey, Thanks, good morning.

Speaker Change:

Trevor Cranston: Yes, with the the selloff in rates, we've seen here in October.

Could you give us an update on.

Trevor Cranston: What's your current duration exposure is and if you've made any.

Trevor Cranston: Significant changes to either the assets or hedge compensation.

Trevor Cranston: There compared to what you disclosed as of September 30.

Desmond Macauley: Thanks. Yes, hi.

Trevor Cranston: Yeah.

Speaker Change: Yes, Hi, Trevor this is.

Desmond Macauley: Travel.

Desmond Macauley: This is Desmond MacPolly. So we did say in our prepared remarks that our duration was 0.9. That's actually as of October 21st. Overall, we, as we mentioned, we positioned focus deeper. Most of that duration is in the front end of the curve. In the back end, we have some duration we're looking to delta hedge. So we have a program of keeping the back end duration very close to 0. But, you know, we have 0.9.1. So we've moved our hedge. We talked about a couple of things we've done so far. But overall, 0.9.1 duration as of October 21st, most of it in the front end of the curve.

Speaker Change: Asthma Macquarie.

Speaker Change: So we did say in.

Speaker Change: The prepared remarks that our duration was.

Speaker Change: Nine that's actually as of October 21st.

Speaker Change: Overall, we are as we mentioned we position <unk> deep new move.

Speaker Change: Just on that duration is in the front end of the curve in the back end to be some duration when you're looking to delta hedge. So we have a program of keeping the back integration very close to zero.

Speaker Change: But we had 91, so we've moved out a hedge as we talked about couple of things we've done so far but overall.

Speaker Change: Nine month duration as of October 21st most of it in the front end of the curve.

Okay.

Desmond Macauley: Okay. And then, in terms of leverage, you know, it looks like it's gone up a little bit since September 30th.

Speaker Change: Okay, and then in terms of leverage.

Speaker Change: Like it's gone up a little bit since September 30th.

Desmond Macauley: You know, with the volatility price into the market, you know, coming up on the election, you know, it's the points at level kind of what you guys are comfortable running with near term. Yes. So that's a leverage. We see it more as an output. We have ample levels of liquidity, which is typically what we looked at. So we're very comfortable with this environment.

Speaker Change: With the volatility price into the market.

Speaker Change: You know coming up on the election.

Speaker Change: Is the $8 six level kind of what you guys are comfortable running with near term or how are you thinking about that.

Speaker Change: Okay.

Speaker Change: Yes, so as far as our leverage we see it more as an output.

We have ample ample levels of liquidity, which is typically what we look at.

Speaker Change: So were very comfortable will reduce environment, we see.

Desmond Macauley: We think that the third easing cycle is going to be the key driver. And of course, we have a lot of volatility, which we think are going to be short-term.

Speaker Change: Think that the fed easing cycle is going to be the key driver.

Speaker Change: And of course, we have bouts of volatility, which we think are going to be short term. So yes, the presidential election and sees one.

Desmond Macauley: So yes, the presidential election is one. And we wouldn't be looking to add risk into that. But at the same time, in terms of where we are right now with our leverage, we have pretty comfortable. Okay, appreciate the comments.

Speaker Change: And.

Speaker Change: We wouldn't be looking to add risk into that but at the same time in terms of where we are right now with higher leverage we are pretty comfortable.

Speaker Change: Got it okay I appreciate the comments thank you.

Doug Harter: Thank you. The next question we have is from Doug Harder of UBAs. Please go ahead.

The next question, we have is from Doug Harter of UBS. Please go ahead.

will NASA: Good morning. This is actually Will NASA on for Doug today. Thanks for the book value update you gave, but given the rate volatility this week, is there any chance we get another update on how book is shared so far this week? I don't think we're planning to update the book value more frequently than we do. You know, I think, yeah, yeah, it's been a bit of all the week. No question of that, but I don't think we have any plans to, you know, do to go to move the frequent book value updates. Okay, that makes sense.

Hi, Good morning. This is actually will NASA on for Doug today.

Speaker Change: Thanks to the book value update you gave but given the rate volatility. This week is there any chance we get another update on how bookings fared so far this week.

Speaker Change: I don't think we're planning to update the book value more frequently than we do.

Speaker Change: I think yeah, well, it's been a been a volatile week.

Speaker Change: No question of that but.

Speaker Change: But I don't think we have any plans to do to go to move to frequent book value updates.

Speaker Change: Okay that makes sense and then just one more question on just given the ATM issuance you had in <unk> can you just update us on how you're thinking about raising capital going forward.

will NASA: And then just one more question. I'm just given the ATM issue and you had in 3Q.

will NASA: Can you just update us on how you're thinking about raising capital going forward? You know, we, you know, we look at a number of factors on it, you know, and probably the most important is the price that we can raise it at. You know, we attempt to raise capital, you know, very close to an ideally over book value, which we've been able to achieve. Which is not to say that we wouldn't issue different prices, which goes to the second leg of it, which is looking at investment opportunities and how we view the environment that we'd be putting that capital to work in.

Speaker Change: You know we you know we're looking at a number of factors on it and probably the most important.

Speaker Change: Is the price that we can raise of that.

We attempt to raise raise capital.

Speaker Change: Very close to and ideally over book value, which we've been able to achieve.

Speaker Change: Which is not to say that we wouldnt issue of different prices.

Speaker Change: Goes to the second leg of it which is looking at investment opportunities and how we view the beauty environment that we'd be putting that capital to work at.

Speaker Change: So we carefully I that and.

will NASA: So, you know, we carefully eye that, and, you know, we see exceptional opportunities and an environment that we like. We may be more aggressive on getting capital. That's the right answer for shareholders. But generally, you know, we remain pretty conservative at the prices that we're willing to issue it and then keep a very close eye to the returns that we can generate with it.

Speaker Change: If we see exceptional opportunities in an environment that we like.

Speaker Change: We may we may be more aggressive on getting capital that's the right answer for shareholders.

Speaker Change: But generally we remain pretty conservative with the prices that were well.

Speaker Change: We're willing to issue it and then take that keep a very close eye to the returns that we can generate with it.

Jason Stewart: Thanks for taking the questions. The next question we have is from Jason Stewart of Janie Montgomery Scotch. Please go ahead.

Speaker Change: Great. Thanks for taking my questions.

Speaker Change: The next question, we have is from Jason Stewart of Janney Montgomery Scott. Please go ahead.

Jason Stewart: Megan Warren, thank you. Could you talk a little bit more in detail about where you see current returns in terms of carry, you know, how that relates to the cost of capital, maybe including the cost to operate. But if you could just break it down one more level in terms of carry versus total return and how you're thinking about those two components as you raise and deploy capital. I'm short, short cut. So production coupons are always, you know, six percent, six and a half percent coupons in the high teens. Belly coupons, like fours and four and a half in the mid to high teens, depending on the specified pools, and lower coupons are trading over a wide range, depending on the pool characteristics.

Jason Stewart: Hey, good morning. Thank you could you talk a little bit more in detail about where you see current returns in terms of Kerry.

Jason Stewart: How that relates to the cost of capital, maybe including the cost to operate and if you could just break it down one more level in terms of carry versus total return and how you're thinking about those two components as you raise and deploy capital.

Speaker Change: President Martin <unk>.

Speaker Change: It doesn't mean I'm sure sure Scott.

Speaker Change: No.

Speaker Change: Production coupon Roe's.

6% six 5% coupons in the high teens.

Speaker Change: Belly coupons like fours and four fives.

Speaker Change: In the mid to high teens, depending on the specified pools, and lower coupons that trading level wide range, depending on the pool characteristics.

Jason Stewart: And so I think I think you're the second part of your question was in terms of, in terms of DVD and yield. You have to look at the dividend yield plus the preferred overall. So if a dividend yield is about 15 percent, you have to adjust that for the preferred and then you're out of creating cost to that and you can kind of get a sense of what that break even is. But we're very comfortable, as we mentioned, in terms of looking forward. We think that these returns as these are good enough to maintain our dividend.

Speaker Change: So I think I think the second part of your question was in terms of.

Speaker Change: In terms of.

Speaker Change: Our dividend yield.

Speaker Change: You have to look at a dividend yield plus the preferreds overall.

Speaker Change: If our dividend yield is about 15% after I just ask for the preferreds and then you add operating cost through that and you can kind of get a sense of.

Speaker Change: What's that.

Speaker Change: Breakeven is although we are very comfortable with as we mentioned in terms of looking forward.

We think that these returns as these.

Speaker Change: Good enough to maintain our dividend and we also like the environmental brawl, where we can get some spread tightening which would include our overall economic return there.

Jason Stewart: And we also like the environmental overall, where we can get some spread tightening, which would include our overall economic return there. Okay, that's helpful. I thank you for that.

Okay. That's helpful. Thank you for that and then my second just a macro question there's.

Jason Stewart: And then a second, just a macro question. You know, there's, in terms of prepayments, I mean, what's your view on the service and capacity in the industry? You know, there obviously, there's been a lot of rate fall that taking some refinements out. But in general, what's your view on, especially for current production, to pawn the near-term outlook for prepays given the capacity in the service industry? So let me start, and I'm sorry to add more to that. So, as we mentioned, you know, prepare and remarks, we did see an optically refi activity over the summer.

Speaker Change: And in terms of prepayments I mean, what's your view on the servicing capacity in the industry.

Speaker Change: Obviously theres been a lot of rainfall that taken some refi incentive out but in general what's your view on especially for current production coupons, the near term outlook for Prepays given the <unk>.

Speaker Change: Capacity in the servicing industry.

Speaker Change: So let me start.

Speaker Change: It could add more to that so as we mentioned.

Speaker Change: In our prepared remarks, we did see an uptick in refi activity over the summer.

Desmond Macauley: And that should play out to faster speeds over the next month or two. But mortgage rates have already backed up to six and a half percent. So looking forward beyond that time period, we can expect prepayments to decline. Now, over time, if you look even further into 2025, at the third easing cycle difference, we think rates overall would come down. And that would lead to faster speeds. We've prepared for that. We maintain a dive. I see right forth folio of both local coupons and higher coupons. And the higher coupons, in terms of their current valuation, have priced in a lot of that prepayment risk already.

Speaker Change: And that should play out to faster speeds over the next month or two but mortgage rates are already back up to six 5%. So.

Speaker Change: Looking forward beyond that time period, we can expect prepayments to decline now.

Speaker Change: Over time, if you look even further into 2025 at the fed easing cycle deepens, we think rates overall would come down.

Speaker Change: And that could lead to faster speeds we.

We are prepared for that we maintain a diversified portfolio of both global coupons and higher coupons.

Speaker Change: And the higher coupons in terms of their current valuation as priced in a lot of that of that prepayment risk already.

Desmond Macauley: Yeah, and just to add to that, you know, it's very hard to define current coupons right now when rates are moving as they are this month. So a longer term review is that interest rates are coming down. But it would take mortgage rates, you know, to drop much lower than 5 percent, given the composition of the outstanding mortgage universe. And our portfolio reflects that composition. As we mentioned, we have coupons between two and a half and six and a half coupons in 30 years. So it's really easy to mitigate some of the prepayment concerns just by shifting your exposures along the coupons back.

Speaker Change: Yes, and just to add to that.

Speaker Change: It's very hard to define current coupon right now and our rates are moving as they are.

Speaker Change: This month, so a longer term our view is that interest rates are coming down.

Speaker Change: But it would take mortgage rates.

Speaker Change: Now to drop much lower than 5% given the composition of outstanding mortgage universe, and our portfolio reflects that composition.

Speaker Change: We mentioned, we have coupons between two and a half and six five coupon.

Speaker Change: In 30 years, so it's really easy to mitigate some of the prepayment concerns just by shifting your exposures along the coupon stack.

Desmond Macauley: Got it. Okay, that's good color. Thank you.

Speaker Change: Got it okay. That's good color. Thank you appreciate that the taking the questions.

Desmond Macauley: Appreciate that's taking the questions.

Matthew Oedner: Sure. The next question we have is from Matthew Oedner of Jones Trading. Please go ahead. Hey, good morning, guys. Thanks for taking the question.

Speaker Change: Sure.

Speaker Change: The next question, we have is from Matthew <unk> of Jones trading. Please go ahead.

Matthew <unk>: Hey, good morning, guys. Thanks for taking the question could you talk a little bit about how you guys are thinking about tail risk outlook. If the tenure were to run a little bit higher than where it is now or if it were to contract significantly and how the recent changes to the hedge portfolio kind of reflect the way that you guys are thinking about it.

Matthew Oedner: Could you talk a little bit about how you guys are thinking about tail risk outlook, you know, if the 10-year order run a little bit higher than where it is now or if it were to contract significantly and how the recent changes to the head's portfolio kind of reflect the way that you guys are thinking about it. Hi, Mark. So, as I mentioned, we are positioned for Osteeper. We dynamically hedge up with Folio, particularly that backhand. So the backhand has run up a lot already. In terms of looking, in terms of outlook, where we do have the elections and there could be some other volatility there, we do expect, though, that as the Fed easing cycle deepens, that backhand rate should come down as well.

Speaker Change: Yeah, Hi, Matt.

Speaker Change: As I mentioned, we are positioned for steepness.

Dynamically hedge outflows folio, particularly vast backend.

Speaker Change: So the backend has run up a lot already in terms of.

Speaker Change: Looking in terms of outlook, while we do have the elections and there could be some other.

Speaker Change: <unk>, we do expect though that as the fed easing cycle deepens that backend.

Speaker Change: Rates should come down as well.

Matthew Oedner: But in terms of how we're preparing for it, it's about dynamically hedging our duration to meet the profile that we think feeds with our macroeconomic views. Got it. That's helpful.

Speaker Change: But in terms of how we are preparing for <unk> H each about dynamically hedging our duration to meet the profile that we think.

Speaker Change: Cadence with our macroeconomic views.

Speaker Change: Okay.

Speaker Change: Got it that's helpful. Thanks for taking the question.

Matthew Oedner: Thanks for taking the question. Thank you.

Speaker Change: Thank you.

Christopher Nolan: Ladies and gentlemen, I would just like to give our mind a, if you would like to ask a question, you may praise the star and then one. The next question we have is from Christopher Nolan of Layton Brookthalman. Please go ahead. Hey guys, back to the returns question. On a return on equity, given the improved environment that you guys are sort of anticipating, where should we expect our equity returns to go? So Chris, in terms of just looking across, if we think of it as incremental return based on new purchases, I mentioned earlier, we see the higher coupons now in the high teens.

Speaker Change: Ladies and gentlemen, I would just like to give a reminder, you can launch it.

Speaker Change: I'll ask a question you May press Star and then one the next question. We have is from Christopher Nolan of Ladenburg Thalmann. Please go ahead.

Christopher Nolan: Back to the returns question on a return on equity.

Christopher Nolan: Given the improved environment that you guys are sort of anticipating where should we expect equity returns to go.

Speaker Change: So Chris in terms of just looking across.

Speaker Change: If we think of it as incremental B, two and based on new purchases I mentioned earlier, we see the.

Speaker Change: Hi, a coupon is now in the high teens.

Christopher Nolan: So 18 to 20% now. Obviously, we do have; we try to maintain a diversified portfolio. Some of the medical person in the mid teens and lower coupons trade over a wide range. We try to maintain the diversified portfolio. We also include; we have those securities as well. So we're looking at overall returns in terms of how it improves our convexity. So sometimes there's a trade-off positive convexity securities. We have lower ROEs, but we try to balance it to maintain a well diversified portfolio in terms of what those risks, those returns are the risks that we take.

Speaker Change: So 18% to 20% now obviously, we do have we try to maintain a diversified portfolio.

Speaker Change: Some of the belly coupons in the in the mid teens and.

Speaker Change: Local postpaid over a wide range, we try to maintain a diversified portfolio. We also include we have <unk> securities as well. So we're looking at overall returns.

Speaker Change: In terms of how it improves our.

Speaker Change: Convexity, so sometimes as a tradeoff positive convexity securities may have lower our Oems, but we try to balance sheets to maintain a well diversified portfolio in terms of what those risks those returns the beliefs that we paid.

Christopher Nolan: And if I may, really quick, we also apply, you know, of course, solar return scenarios to all potential investments, not running just to the forwards. But using some assumptions, we can have on the market using spread and rates given our macro outlook. And given the volatility so far in the month, you know, a lot of these assumptions starting to look, could start to look more favorable from a solar return perspective in addition to ROE numbers that doesn't quote it.

Speaker Change: And if I may really quickly also apply of course solar return scenarios to all potential investments not running just to the forwards, but using some assumptions. We can have on the market using spreads and rates given our macro outlook and given the volatility so far in the month.

Speaker Change: A lot of these.

Speaker Change: Assumptions starting to look stock could start to look more favorable from a total return perspective, and additional ROE numbers, but desmond quota.

Christopher Nolan: So if I heard Desmond correctly, I heard 18 to 20% or so in there. In the in the in the high up with funds, yes, 18, 19%, which is pretty much in line with where, you know, the four EPS is four stock.

Speaker Change: So if I heard that it's been correctly, I heard 18% to 20% or so.

Speaker Change: And there.

Speaker Change: In the India into higher coupons, yes, 18, 19%.

Speaker Change: Which is pretty much in line with where you know for EPS is four.

Speaker Change: The stock.

Christopher Nolan: And so you know, I hear what you're saying in terms of book value appreciation, stronger earnings, but I'm not hearing it in terms of the details you're providing. It sounds like, you know, equity returns will be pretty much in line with what the market is expecting as an air summary. So those, as I said, I mentioned those returns just looks at we are current spreads right, so.

Speaker Change: And so you know I.

Speaker Change: Here I hear what you're saying in terms of.

Speaker Change: Book value appreciation stronger earnings, but I'm not hearing it in terms of the details you're providing it sounds like you know equity return to be pretty much in line with with what the market is expecting is a fair summary.

Speaker Change: Sure.

Speaker Change: So all of those.

Speaker Change: I'm, sorry can measure those returns.

Speaker Change: <unk> Luxe at where current spreads are right. So.

Christopher Nolan: If you look at our dividend deal, let's say you take that in the meetings and you are just for operating costs and things like that. Will returns, as we see today, cover that. We think that in a fair using cycle, you can also see OAS is up for just mortgage grants tightening by 10 to 15 basis points. It's most likely post elections or into next year; that is an additional component of the returns that is baked into those numbers, so that easily gets you into the road 20s. For those good times. Yes, it does.

Speaker Change: If you look at our dividend yield.

Speaker Change: Let's see taking that in the in the mid teens and you adjust for operating costs and things like that.

Speaker Change: The returns as we see today covers back.

We think that in a fed easing cycle you can also.

Speaker Change: The OAS of just mortgage credit tightening by 10 to 15 basis points.

Speaker Change: It most likely post elections.

Speaker Change: Into next year.

Speaker Change: He's an additional component of the returns that <unk> baked into those numbers. So that easily gets you into the low twenty's.

Speaker Change: For those coupons.

Speaker Change: Okay.

Speaker Change: Yes. It does thank you so you're expecting a slightly higher roe than that.

Christopher Nolan: Thank you. So you're expecting a slightly higher ROE, and that's definitely helpful. It's slightly different.

Speaker Change: Definitely helpful.

Hum.

Speaker Change: Slightly different when given that you have negative investment spreads cost of funds relative to investment yield.

Christopher Nolan: When given that you have negative investment spreads, cost funds relative to investment yields. Any handicapping in terms of ideas in terms of when that could turn positive or is that sort of dependent on who wins the presidential elections or for. It's when you say negative investment spreads; we are currently, I mean, for some coupons, they are already positive. It depends. I mean, we do have no coupons that are negative carrier, as I mentioned. Sometimes we look at just the ability to balance up with all your in terms of the risks, the negative convexity. But there's some I can get some securities right now if you just want them currently to where the repo rate is.

Speaker Change: Any handicapping in terms of ideas in terms of when that could turn positive or is that sort of dependent on who wins the presidential election, and so forth.

Speaker Change: It's when you're saying negative investment spreads were.

Speaker Change: Currently I mean for some coupons theyre already positive.

Speaker Change: Alrighty depends I mean, we do have in the low coupons.

Negative area as I mentioned, sometimes we look at just the ability to buy that.

Speaker Change: I will stop with full year in terms of the risks the negative convexity.

Speaker Change: But there are some.

Speaker Change: There are some securities right now.

Speaker Change: He goes to the unbound currently to where the repo rate is.

Christopher Nolan: The already of this.

Speaker Change: They are already engaged.

Christopher Nolan: Okay, let's just look at these. A lot of that time, it depends on the Fed and where the Fed is going. And, you know, Full Curve has one view of it. We've got dot plots, but I think the direction is pretty clear. You could squint at it and see some timing as that sweeps through the coupon staff stack, gradually making more and more of it. See some daily positive positive carry.

Speaker Change: Okay I'm just looking at the time.

Speaker Change: Paul.

Speaker Change: But a lot of that timing depends on the fed and where the fed is going anywhere right.

Speaker Change: And.

Speaker Change: And the forward curve has one view of it we got Dodd plots, but I think the direction is pretty clear.

Speaker Change: You can see some timing as it sweeps through the coupon step with shaq gradually making more and more of it see some daylight a positive positive carry.

Christopher Nolan: Okay, that's it for me. Thank you very much.

Speaker Change: Okay. That's it for me thank you very much.

Unknown Executive: Thank you.

Speaker Change: Thank you.

Scott Ulm: This concludes our question and on position. I would like to turn the conference back over to Scott Home for any closing remarks. Thanks all. We appreciate your interest. If questions come up, give us a ring. We're around and always happy to talk with him. Have a great day. Thank you.

Speaker Change: This concludes our question and answer session.

Speaker Change: I'd like to turn the conference back over to Scott for any closing remarks.

Scott: Thanks, you all we appreciate your interest.

Scott: If questions come up give us a ring were around and always happy to talk with you.

Scott: Have a great day. Thank you.

Unknown Executive: The conference has now concluded.

Speaker Change: The conference has now concluded.

Unknown Executive: Thank you for attending today's presentation. You may now.

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Unknown Executive: Disconnect Jason Weaver, Trevor Cranston, Douglas Harter, Scott Ulm, Unknown Executive. Jason Weaver, Trevor Cranston, Douglas Harter, Scott Ulm. Jason Weaver, Trevor Cranston, Douglas Harter, Scott Ulm, Unknown Executive. Jason Weaver, Trevor Cranston, Douglas Harter, Scott Ulm. Jason Weaver, Trevor Cranston, Douglas Harter. Jason Weaver, Trevor Cranston, Douglas Harter, Scott Ulm, Unknown Executive. Jason Weaver, Trevor Cranston, Douglas Harter, Scott Ulm.

Speaker Change: [noise].

Speaker Change: Yeah.

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Speaker Change: Yeah.

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