Q4 2024 Orchid Island Capital Inc Earnings Call
Okay.
Yeah.
Good morning, and welcome to the fourth quarter 'twenty 'twenty four earnings conference call.
Orchid Island capital.
Call is being recorded today January 31, 'twenty 'twenty five.
At this time the company would like to remind the listeners that statements made during todays conference call relating to matters that are not historical facts are forward looking statements subject is the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Listeners are cautioned that such forward looking statements are based on information currently available on the managements good faith.
Belief with respect to future events and are subject to risks and uncertainties that could cause actual.
Performance or results to differ materially from those expressed in such forward looking statements.
Yeah.
Factors that could cause such differences are described in the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K.
The company assumes no obligation to.
Such forward looking statements to reflect actual results changes in assumptions or changes in other factors affecting forward looking statements.
Now I would like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead Sir.
Thank you operator, and good morning. Thank you for joining US today, hopefully everybody has had a chance to download the slide deck and they can follow along with us during the call as usual will be following the slide deck loosely.
And just to give you a kind of an intro how we plan to proceed we are going to make one slight change this quarter.
Jerry syntax, our controllers joined US he will go over the financial results.
I'll walk you through the market developments, which are the things that occurred in the market that shaped our decision, making and the positioning of the portfolio.
Hunter, the Chief investment Officer will walk you through the portfolio and hedge positions and things that we did during the quarter.
Now with the portfolio.
So with that I will turn it over to Gerry and he will walk us through the financial highlights.
On page five.
We are showing a net income of seven cents per.
<unk> per share for the fourth.
Quarter.
Compared to 24 cents per share for the third quarter.
Book value decreased from $8 40 for Q3 and eight out of nine to 12 31.
Total return per quarter was 0.6% on annualized.
And that includes <unk> 36 in dealing with that.
Declared during that period.
On page six we present some other portfolio metrics.
Fourth quarter, we had $5 3 billion in MBS assets.
Our leverage ratio decreased slightly to seven three times equity.
Prepayment speeds increased to $10 five CPR compared to $8 eight CPR in Q3 and our liquidity.
At 12, 31 was approximately 53% of that.
On page seven.
Year to date.
Full year income.
<unk> 57 per share compared to a loss of 89 cents per share for 2023.
Book income book value went down from $9.10 at the end of 'twenty three to 809 at the end of 'twenty for a total return for the year was $4 seven 3%.
And our dividend for the year was $1 44.
Our initial calculations show that that 96% of that was paid out of REIT taxable income and 4% of return of capital.
On page eight we present, our financial statements for your review, we're not going to get into the detail of that year end.
And with that I'll turn it back over to Bob Thanks Gerry.
Now turning to the market development. So on slide 10, the biggest development and really it was quite a pivotal quarter for fourth quarter that is and that the curve the treasury curve, especially the cash curve, which had been inverted for two years, which by the way I believe is a record period of inversion.
This inverted if you will the swap curve as you can see on the right side of the page still slightly inverted not just because swap spreads had been trending negative in a meaningful way for some time. It remains so and so that curve is still slightly inverted.
With cash Kurt did this inverted now is positively sloped so mechanically how that came about a fed starting in September lowered rates the overnight rate by 100 basis points.
But more importantly longer term rates went up quite meaningfully in the case of the tenure by about 80 basis points. So the question is why and I'm just going to briefly give you. Some highlight reasons why we can probably all aware of them, but just to bring them in the focus for the call.
Yes, I would highlight five things the first would be the fact that the economy has just been strong all through 2020 for GDP was two 3% three plus percent.
Retail sales as a proxy for consumer spending are very strong off throughout the year retail sales reported on a monthly basis generally exceeded expectations by Congress almost all year.
The labor market, which had been weakening stopped doing so year came to an end labor market appeared to be at least leveling off if not improving the unemployment rate, which have been rising stopped doing so and has settled in at a low level infill.
Inflation, which has been very sticky it's much lower than it had been when it peaked but it W saw it today it still seems to be stubbornly just above the fed's target and not really making meaningful progress towards it. So it has kept the fed.
I'm being overly aggressive in easing fiscal.
Fiscal spending deficits are still very large we don't expect those to decline and I guess finally with the election results in the fourth quarter, the New administration Republican sweep.
The current administration has a very strong pro growth agenda and in fact may even use tariffs, which probably if anything to the extent they are use might be inflation or at least in the near term. So.
For those reasons the curve has inverted.
Walk you through some more macro variables and then I'll finalize my comments by just kind of give you a summary of what these things mean for us specifically.
So you can see on slide 10, the bottom this.
This is the spread between the three months Treasury Bill and the 10 year note as of January 24th last Friday, and 31 basis points. So it is now in positive territory.
Moving to slide 11, looking more specifically at the mortgage market.
You can see it as a proxy for mortgage.
Performance in trading levels, the spread to the 10 year treasury at the current coupon.
While it may be say local lows it still remains at very attractive levels on a historic basis.
As of last Friday, a 125 basis points.
Prior to the outset of Covid trading levels, there, where typically in the 80 or so basis point range and really the reason. This is probably still the cases that one of the largest marginal buyers of mortgages, which would be banks.
We have not been huge buyers of late.
And to the extent that were to change I think there's a good chance we could trade back to those ranges we saw pre COVID-19.
With respect to mortgage performance for the quarter on the bottom left is a normalized prices. So the price of each coupon normalized to 100 and as you can see with rates higher prices were down but since year end, they've actually stabilized quite well with respect to the dollar roll market. They've all improved most of these roles are now positive and Thats.
Generally a positive for the sector, even though from what we understand a lot of money managers are overweight the sector. The fact that dollar rolls are strong while it may not be good for spec investing it is generally a good sign for the mortgage market. When those roles are attractive carries present in the market.
With respect to volatility, obviously, a very big driver of mortgage performance.
If you look at the bottom of the chart you can see on a long term perspective, we're still somewhat elevated but we're very much at the local lows and I think there is reason to believe that we may see more come off a little more on the near term.
The reason for that is the reason I have that view is that it seems the market and the fed are kind of comfortable with the notion that they are not going to have to act very quickly and they have a lot of time to normalize rates.
So absent any shock in the data or anything I think we could see.
Very stable rate environment for the next few months if that were to come past, that's obviously a positive for mortgages.
Slide 13, we show our mortgage bankers.
<unk> and the refi index and you can see with rates now above 7% refi activity is extremely low the housing market is not doing all that well just because of affordability is so low.
<unk> can and will likely continue to keep refinancing activity and purchase activity for that matter. The primary secondary spread did spike down recently, we've seen that in the past I don't think theres anything significant on that fact.
I think given the state of the housing market.
Don't expect that to be to drop much lower I think will remain at that level.
Finally.
Slide 14. This is just one of my favorite slides I don't want to read too much into it but does Shaun pointed out to the fact that.
With elevated money supply, we have seen GDP growth.
Saying that there is necessarily cause and effect, but it does appear to be the case, we have hedged above normal growth you can see this trend line going back all the way to 2009 by the way. This is just GDP in nominal dollars are the current growth rate is above that long term trend and if that is continues to be the case you would expect.
That the economy to continue to remain fairly strong.
Now as I mentioned I wanted to just kind of go through all of these developments and what they mean for us.
Before I turn the call over to Hunter. He talks about the portfolio first of all with the curve steepen.
And funding levels lower our cash interest expense has come down. So now our net interest income is positive absent the effect of hedges. So we now have positive net interest spread.
Which obviously is very good for income longer rates higher thats been a very good development for us because we have an up in coupon bias to the portfolio. So that results in slower speeds as we'll see later in the call. They have been in fact slowing which just means we get better carry out of the securities the.
The investment environment as I mentioned, if you look at the spread at current coupon mortgages, a proxy is still at very attractive levels.
Dollar rolls positive that's another good development for the sector and volatility has been low and coming off and to the extent that continues also a positive. So we're very constructive on the outlook for the market for orchid and our business model and looking forward to the extent, we do get additional fed cuts not sure if we will or how many.
It would be a positive of course as well simply because that would lower our cash interest expense and to the extent that that.
Curve steepens enough and we get banks back into the market and meaningful way could also lead to tightening in the mortgage basis, which again would be good for orchid and the business model with that I'll turn it over to 100 is going to walk us through developments with the portfolio during the quarter.
Okay. Thanks, Bob.
Speaker Change: I just want to start by sort of given a little bit of background.
<unk>.
On what some of the points spot brought up which are we see a pro growth agenda from this administration, we see if.
Speaker Change: Market is largely priced out a lot of future fed cuts theres not too many more priced in one or two last I looked.
Speaker Change: And so we're.
Keeping with that sort of theme in the background back of your mind I think we'll talk about what we've done in the portfolio.
As you know we've been building a barbell strategy.
We continued with that in the third quarter.
<unk>.
We're buying assets that are.
Tend to be a little bit shorter in nature. So up in coupon we did put on us.
A new 15 year five positions.
<unk> million dollars in Tpa that CBA has been trading very special and it's been a good trade for us.
We covered some Fannie three shorts.
Speaker Change: Basically we sold some cheapest to deliver type of pools, we sold $190 million worth of New York and Investor Fannie Threes that were paying.
Sort of deliverable speeds, and we covered $100 million of the shorts and then we reinvested.
Speaker Change: The remaining variance in New York, five and five five as well as our repositioning.
Social bond, we like those that are.
We purchased one from us.
One of the faster Servicers, but we think there are good credit like stories, so elbow shift type of stories.
And later in the quarter, we haven't raised a little bit of capital. We purchased another 115 ish million a 200 K Max.
And FICO of six five.
Speaker Change: As it relates to developments that have occurred since year end we have.
We have purchased more.
<unk> $5 million to $183 million 30 year five five cents.
Almost $400 million 225, K, Max six and perhaps I will talk about the hedge position on.
Speaker Change: In a moment.
But again this is consistent with that.
The way, we are trying to position the portfolio, which is higher yielding assets. The Fannie three portfolio that was dominated the last year. The 2023 fiscal year, we're starting to lighten up on that.
Speaker Change: Assets have done very well, we liked them for a long time because they.
Represented a very easy asset to hedge they were mostly fully extended and they offered very widespread.
Speaker Change: We could even hedged some of them with Tpa is because the dollar rolls were negative so.
That has.
Picture has changed a little bit the Fannie threes have improved.
Over the course of 2024 and the dollar rolls have even spiked and are now trading positive. So we felt like it was time.
To take advantage of the fact that there is more spread in the market and has transitioned to a higher coupon focus again.
We're positioning for.
A strong economy potentially more inflation spook here and there and so we're trying to keep the assets relatively short.
You can see that on the next slide slide 17.
You can see kind of the migration of if you look from right to left our portfolio over the course over the last six months, so really building.
Large position in <unk>.
665.
And also bolstering so it went to five five.
No.
Lesser extent.
Just briefly on funding costs, Bob alluded. The fact that we were we.
We had.
Part of it is positive net interest income.
Speaker Change: Above our funding costs now at <unk>.
Third quarter, we averaged roughly $5 62 for a repo funding rate that came down to $4 98 in the fourth quarter and more recently, we're trending down to sort of a $4 $45 46 type of levels, where we're putting on new.
New repos.
Speaker Change: One other point I'd like to mention with respect to the funding portfolio, we have aligns and mras and place with 27 entities.
And we recently.
Executed in the fourth quarter, we executed our first indemnified repo.
So I don't want to get into too much but we are actively pursuing cash providers directly after this indemnified repo program.
So that's an exciting development for us.
With respect to the hedge book.
And again.
<unk>.
The new securities that we added during the fourth quarter.
On the hedge side of the equation. We are also focusing on this.
Speaker Change: This idea of a fair steepen there.
Stronger economy being.
Our biggest risk really so we're trying to address that risk by pushing some of the hedges further out the curve so in the.
The fourth quarter.
We unwound.
So we put on for the new purchases, we put on we did a combination of some seven year swaps.
Roughly 320 million five year and seven year.
<unk> wise on futures, we unwound.
Saar is roughly 425 million equivalent of.
So for futures. So we think of those in swap terms it was roughly $400 million.
You'll recall, we put those on throughout the course of last year when the market was pricing in.
Really deep fed cuts through going out into 'twenty five 'twenty six 'twenty seven so we locked a lot of that stuff in with sort of an implied terminal fed funds rate and a very low threes.
We unwound them at a time when the future after the December meeting after the December.
Cut and there was basically no not much by way of cuts priced into the market at that point so.
If the market reverses course, the economic data weakens a little bit here in the near term, we will look to reload those positions and capture capture more implied fed cuts to the extent the market cooperates with us to do that but right now where we're flat.
<unk> on that theme into the us into the first quarter of this year, we unwound.
500 million legacy payer pay fixed swaps, which were very low strike, but again.
One of them was a two year five months to experian one of them was a one year two months to expiry. So we're keeping with that theme of getting the hedge out of the front end of the curve because there is not much by way of effect cuts priced into that right now and pushing that out a little bit further five seven turns as sort of a place where we'd like to hang out so.
A little bit of there might be a little bit of a dip duration mismatch with respect to some of the things that we've added.
Because they are a little bit shorter in nature, but again, we're trying to position ourselves to be have our assets are really sort of there are incrementally the assets that we're buying with incremental capital will be more in the sort of.
To middle part of the curve and pushing our hedges out just in slightly longer than that because we think that.
A selloff bear Steepening scenario is one where companies like ours are going to suffer mortgages will probably suffer in that environment. So we're trying to over hedged that a little bit.
Conversely, a big rally, we think mortgages will tend to do very well.
Into that type of move, especially if it's.
If it's a rally in rates and it's driven by some kind of.
Speaker Change: Equity markets selling off that kind of thing could be very positive for bonds. So that's what we're trying to keep our hedges.
Yes.
I will go into its next slide couple of slides too much I'll leave that for you.
I would just like to point out on slide 22.
Extremely fat flat from our modeled duration perspective about two eight as our duration gap. If you were to take these shocks and what sort of average them in.
And see what the resulting.
<unk> would be from from those two plus or minus 50.
On the $5 $3 billion portfolio, so very flat model wise and again leaning into a bear steepness, because not because we think thats necessarily going to what's going to happen.
But because we think that's the scenario that would be the most pain.
Speaker Change: Painful for our portfolio.
Not going to touch on 'twenty three.
I would like to turn it back over to Bob now too.
Wrap up.
Give us his outlook.
Just kind of reiterating what we've already said.
Speaker Change: The barbell strategy, we think is a very appropriate strategy for the market. We do have an up in coupon bias to it.
We do have a kind of a bullish view of the market and the economy.
We think the administration will be very pro growth and we think the risk of a recession is extremely low now that all being said, we also think that the fed has made it quite clear that they have no compelling reason whatsoever to start or continue to ease aggressively.
We'll see we may not see anymore, who knows it might be one or two.
But we think that to the extent, we do as a positive.
We don't see a reason for them to hike and we expect long term rates to be at or where they are slightly higher under pressure deficit spending is probably here to stay and inflation has been very sticky in the growth of the economy is very strong so.
Very good carry for the bonds that we own higher rates are good for premiums.
As Hunter said, we've moved our hedges off the curve so to the extent, we do get a more meaningful sell off in the long end and those bonds start to extend.
Much longer duration hedges in place to help with the convexity of those so that's pretty much it I.
I will turn the call over to questions. So operator.
Speaker Change: Please construct and we will answer any and all questions.
To ask a question. Please press star one one on your telephone and wait for your name to be announced.
To withdraw your question. Please press star one again.
Please standby, while we compile the Q&A roster.
Our first question comes from Jason Stewart.
With Janney Montgomery Scott Your line is open.
Alright, Thank you guys for all the details today.
And we can start with the <unk>.
Book value update year to date, if you don't mind.
Sure just because some of our peers have already announced this week and I believe in all cases, they gave book value as of last Friday.
So we can have an apples to apples comparison, our book value was unchanged as of last Friday in fact, our daily estimate, which is not a gap or not unaudited number but just an estimate.
Literally unchanged to the Penny as of last Friday.
<unk>.
This week mortgages have had a good run so we're up about 1% this week.
Got it okay. Thank you for that and then if I could just shift to ROE.
<unk> ROE on a go forward basis, maybe on an economic basis, and if you don't mind footing that thanks for the taxable income number that's helpful and putting that to where you see.
Taxable income I mean, I guess I'm coming at it I'll just start there and we'll follow up if you don't mind.
Yes.
Mentioned the way we ended the quarter net interest income is positive so even though for the year. The taxable income number which we pretty much covered as I said, 96% of the dividend the trend.
It was positive so I think we ended the year the fourth quarter was probably a higher percentage.
So we're entering the year on a good note there roe's.
You were just saying we could get is well north of 150 <unk>.
200.
If you could get the 200, obviously with our leverage has been on the low end of the range we didn't.
That point on the call, but we're in the low to mid Sevens, even today, it's still in the low seven a quarter, if we would stay there.
The 200 over Thats, 14th plus the Unlevered return, so youre comfortably into the mid teens at a relatively low leverage level. The swap curve is very flat so.
Speaker Change: We will again.
Speaker Change: Leverage.
I guess I was kind of a basis moves around so where things have tightened up a little bit. So we're on the tighter end, but when we think about the investing environment swap curve is very flat.
So take your point and it's going to be low, 4% pay fix right and.
I think 6% yields are achievable with the up in coupon strategy, especially in some some sort of specified pool thats going to payroll Tivoli slow.
So.
High fives to low sixes, so I think 200 basis points is right in the sweet spot.
Pick your pick your leverage ratio from that point and I would say the risk to that as a rally obviously, because we have another coupon bias so to the extent, we do get a rally.
The economy softens whatever.
Then those numbers are a little probably not obtainable, but the way we see things evolving we think that that is doable.
Got it Okay and then on the ATM program do you have handy what the discount to book was.
For the issuance in the fourth quarter.
No I don't have it I think for the year, we were around 17.
For the book, we were running around we try to.
We've said in the past, we won't close the bulk or above book will sell I think we were generally in the 97, 5% to 99, 5% range. When we're selling we didn't sell a ton of stock in the third or the fourth quarter was $36 million.
So we had done much more in the third and fourth quarter the impact on book I'm guessing is less than a penny.
Okay.
I guess I'm kind of comments or all of this is I'm trying to figure out how much book value degradation, you're willing to sort of accept I mean, if we have the 18th.
Does the dividend on book 717, 8% dividend book.
I guess based on the numbers you gave you very close to that on a taxable basis.
Just sort of how you're thinking about maintaining the dividend, which is obviously, it's a great yield.
But it's definitely north of where some of your peers are pegging Roe.
Put together, how youre thinking about the dividend versus maintaining or growing book value and I know theres, a tactical element to that but that's really I guess, what I'm trying to go high levels of that question.
I would say that the trend. This year was I said was in our favor.
So where we're.
Obviously, it depends on where the stock's trading and we don't want to do much of a discount, but if we're going to be earning those kind of levels on a GAAP basis.
Our taxable basis, I guess, I should say and we can maintain that dividend level, we're not.
We're seeing an increased asset meaningful steepening of the curve, but if we can maintain that level and basically earn what we pay.
And.
With some upside I think as I mentioned, I think mortgages are still attractive and we've been staying there for a while who knows how long they stay that way, but there is upside which would offer some book value appreciation potential, but if we can earn this dividend on a taxable income basis.
And with minimal cost on the book value of your selling shares to the ATM, We plan to continue to do so.
Okay.
I would add that I appreciate I would add that.
Money.
Assets that we've been acquiring.
Speaker Change: With the incremental capital are adding to the earnings power of the portfolio. So.
That's not to say that what was the legacy portfolio was.
Worse, it's just we have that we have that.
Lower coupon part of our bar bells already built not where we expect it to grow much and so the growth has been in higher income earning assets. So.
As you've seen over the course of the year, we've had a lot to six and six 5% coupons six years largely when they are kind of hanging out around par. So I don't think our numbers are that far.
200 basis points over at seven X leverage is.
Over 16, 5% return plus we're still earning.
For almost four 5% on Unlevered capital.
Speaker Change: And.
Money market funds right. So.
I think high teens is kind of where we're at right now and also let me know.
Wishful thinking maybe but it would be nice to see the stock trade at a lower yield.
As a result of price appreciation.
I mean to the extent, we're earning this dividend we're paying out 96% of the dividend on tax.
<unk> earnings <unk>.
Trending higher.
You would think that the stock should not be trading at a discount I don't control that obviously.
Right.
We've seen our peers, especially this week all now I believe dynamics annually.
It's Jordan agency trading at a premium to book and I think that that is an artsy is justified.
Justified we haven't seen it yet, but I think it's very much justified given what we just said about the nature of the dividend we're paying so.
That would be helpful.
In a meaningful way for us to the extent that would've come true.
Yes, I guess I would just pull it all together.
I don't think the stocks are traded discount to book either.
Speaker Change: If you're if.
If youre using front assets shorter duration assets are hedging the long part of the curve.
You should have a pretty good risk profile, I guess, where I'm struggling is.
I don't think anybody it appears has noted ROE close to 20, I mean, they're mostly in the 16% to 18% range.
Speaker Change: Okay.
So that's what you said there was 200 over.
Speaker Change: Hunter was saying, 16% yes.
16%.
That's an incremental capital as well, we have part of our portfolio that doesn't.
Speaker Change: Yes.
What we are discussing is what I was.
Trying to articulate was what we've been doing with incremental capital is putting it to work in some of the higher earning assets so across the entire portfolio ROE blends out a little bit lower than that but.
I think.
There is no reason why we couldnt continue to add in the upper <unk>.
<unk> portion of the book and I think it fits our strategy right now just to walk you through the marginal return on capital just so we're clear.
Swap spreads are all right in a very low 4% range.
Speaker Change: So thats, our hedge instrument and we can get yields on assets and a very high fives, if not six or you are close to 200 over using a fairly conservative leverage multiple of 7% quarter on I'll round up to 200 over that gets you in that 14 plus percent range plus the return on Unlevered capital It gets up to about 16.
So that's what we're saying is the return on marginal capital today is around 16% and that.
Reflective of the fact that we started 2024 with a lower yielding portfolio and still managed to payout a $1 44 dividend, 96%, which was taxable income.
That trajectory plus the return of marginal capital.
We're comfortable where we are.
The stock should trade at a premium to book for that reason, whether or not it does islands, Kevin controller that but.
And we're comfortable with where we are.
Speaker Change: Okay Alright.
Alright, I appreciate the help walk you through that thank you.
Yes.
Speaker Change: Thank you. Our next question comes from Jason Weaver with <unk>.
Jones trading your line is open.
Jason Weaver: Hey, guys. Good morning, Thanks for taking my question.
Good morning.
Hey, Bob I appreciate your comments on the outlook, but.
I'm interested in your thoughts on what's priced in so could you could you speak to how you see the incremental risk to spreads under the fed moving towards more of a holding pattern versus possibly even reversing to a more hawkish stance.
Well I think the market and the fed are fairly in line in terms of the number of eases its depending on the day between one and two over the course of the year.
And inflation, we saw today.
I think the three and six month annualized numbers are still in the low twos theyre not there.
So I think what's priced it is what we agree with very consistent with that view the hawkish outcome would be if it reaccelerate.
And then which gets youll, probably see potential the pricing and heightened but also probably a sell off in the long end and Thats what were kind of talking about how were positioning with our barbell strategy, we're using lower coupon higher our higher coupon low duration mortgages hedged long so as Hunter said, that's what we see as the greatest risk is a turnaround.
The market bear Steepens and Thats, how were positioned hedge wise.
And in that case, if it were to move more hawkish Lee and that cause for say a decline in the equity market, causing a flight to quality would that be beneficial to MBS spreads as well.
How do you see that.
Jason Weaver: The project will notice kind of scenarios play out you always get a spike involved and that's never good for mortgages you'd start to see the market sell off in repricing, the fed and you'd have a bulk buy so in the short term would be probably detrimental to mortgages and Reits in general if.
If we settled in at a much higher rate environment with a steeper curve.
And of that that will be a very good investment opportunity.
Stable carry environment, but getting there will probably be painful.
Got it got it thank you very much.
Jason Weaver: Mhm.
Thank you. Our next question comes from Eric Hagen with <unk>. Your line is open.
Eric.
Eric Hagen: Hey, good morning, guys good to hear from you.
Although the yield curve steepness, where you might have more appetite.
Deliberately extended duration gap, maybe express it more of a view on rates or spreads in historically.
But what would you say is the widest duration gap you guys have to put in the portfolio.
Model duration gap, I don't know year and a half maybe.
Yes, we've been talking about that this week about mortgages had a good run is this the time to maybe.
Eric Hagen: Extended duration a little bit.
But days like today, we're probably going to see a lot of profit taking yet it is still very much relative value asset there is not a huge marginal buyer out there.
<unk> are fairly active but not as meaningfully as they've been in the past money managers are generally considered to overweight the sector mortgages lagged corporates in the fourth quarter. So are they going to have a huge run.
Not without and I think the banks coming back in a meaningful way and they're just not there you need a steeper meaningfully steeper curve for them to get meaningfully back in and then there's the whole issue about balance sheet constraints and do they have the capacity to do so.
Certainly with deficits running where they are he's auctions growing slowly over time.
Is that the government has grown much faster than the equity capital bases of the banks. So you can do the math eventually they just don't have room.
Right.
Okay.
Yes sure.
I think I heard you guys say you don't you don't expect a lot of spread widening.
Eric Hagen: And the current coupons if long term rates are coming down can you, maybe unpack that a little bit and share why you don't expect a lot of <unk>.
Widening when there seems to be a lot of.
Maybe refi risk in these higher coupons.
Hey, guys. Thank you.
Eric Hagen: Yes.
Yes.
<unk> is quite poor and Thats why we have paid some special holes, where we can we've actually moved into some slightly higher quality loan bal versus like the cheaper cheapest forms.
Eric Hagen: The problem is you have high gross wax in these polls.
100 basis points over the net and we saw briefly last fall that when they got the money they prepaid fast so they have up to quality.
Eric Hagen: Let's the other side of the barbell really.
Talking about <unk>.
Mortgage spreads are still relatively wide by historic standards, the really low coupon stuff has tightened up a little bit.
We have been focusing on in like five and five five switch not crazy about it as like a coupon but in specified pool space, some higher quality stuff there like we put on some new Yorks.
Those are.
Those are solidly discount coupons right now and so the pay ups on those pools is relatively low so that half of the portfolio a little less than half of the portfolio.
<unk> three <unk> 4555 <unk>.
We expect those to do well into that rally scenario.
The longer duration stuff like the Fannie threes.
We would expect them to grind tighter as rates came down and spreads tightened and offset some of the erosion in book that would come from.
Eric Hagen: The higher coupon portfolio.
Lagging so.
Thats.
That's the other side of the strategy, we didn't really talk about too much today, because we're like we said we're sort of at Ben.
Eric Hagen: And focusing on that <unk> stronger economy type of scenario, but there is definitely still a large portion of the portfolio that is designed to do well in a rally.
And I would just add one thing we have seen in this backup is that the loan balance pools premium loan balance pools months Im sorry, discounted loan balance pools.
Eric Hagen: Formed very well, especially with any seasoning.
And they are very much in demand as a result, we've seen.
Not so much the very lowest loan balance even even like the $150 Pete pay very well as discounts mid teens. So those are pretty attractive returns.
Thank you. Our next question comes from Mikael Guberman.
Citizens GMT your.
Your line is now open.
In Macau.
And so hope everybody's doing well just to clear up the current book value that you mentioned does that include today's dividend or are we going up 1% and then taken the dividend.
That's inclusive of the dividend so up 1% this week.
Great.
And.
Obviously, you guys covered a lot of territory.
I guess, if I could just maybe get your thoughts on MBS your outlook for MBS supply and how any potential GSE reform.
Might affect that and just in general any thoughts on.
Any potential.
Regulatory changes coming down the Pike with the new administration.
Yes, that's certainly getting a lot of press now regulatory form that is I don't think it's going to happen.
That's just my personal view I think that the given the fact that housing has set an all time low in terms of affordability and rates are high anything that would make that worse I think it's just political capital that's not worth spending you have a new administration.
I've talked about what they want to do they are talking about.
Eric Hagen: Tariffs and tax cuts.
That doesn't seem to me like Thats the place they want to spend their capital.
The housing market less affordable.
It may happen, but.
Given a low probability in terms of supply.
I think it's I've already started to see a few of the street shops lowered our estimates for the year I think that probably continues.
Eric Hagen: I think that the banking sector is already in.
This has allowed us fresh stars on it and given the regulatory environment that they're dealing with I don't think it would be very likely to see.
Eric Hagen: The Gse's privatize and now all of a sudden you have.
Jeff.
An enormous portion of their holdings become private label credit I don't see how they would be able to.
Eric Hagen: Comply.
Those two concepts of Basel, III, and GSE privatization or kind of not to grow with one another.
Great point, nobody makes that point at all I mean, if you're if you.
Actually we have.
Eric Hagen: Got a chart in here and the fact, we did if you look at slide 26.
Give me a second to get there.
That shows.
Mortgage backed security holdings by commercial banks and the fed.
If all of a sudden you changed the risk weighting on all of those.
That would be devastating for the banks.
All of a sudden they these are no longer agency their private label I mean, that's.
That would be very challenging, especially given where the environment. We're in where bank balance sheets are fairly constrained as it is.
Eric Hagen: I'm going to take up more capital is where all of that would be.
Very challenging to do and the one.
Type of entity that stepped into the banks place as they lost deposits were.
Money managers, which often have very strict investment guidelines.
I think you would create a lot of chaos I guess is what I'm getting at.
Great. Thank you for your thoughts guys.
Best wishes going forward. Thanks, Yep. Thank you Mikael.
Thank you as a reminder to ask a question. Please press star one one on your telephone.
Again that is star one one to ask a question.
I'm showing no further questions at this time.
Speaker Change: I would now like to turn it back to Mr. Robert Cauley for closing remarks. Thank.
Thank you operator, thanks, everybody.
If anybody does have any questions that come up after the call. Please feel free to call or if you listen to the replay. The office number is 770 2231400 always willing to take any calls otherwise we look forward to speaking with you at the end of the first quarter. Thank you.
Speaker Change: This concludes today's conference call.
You for participating you may now disconnect.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Yes.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Yes.
Yes.
Speaker Change: Sure.
Yes.
Okay.
[music].
Speaker Change: Okay.
Yes.
Okay.
[music].
Yes.