Q2 2026 Orchid Island Capital Inc Earnings Call
Speaker #1: Good day, and thank you for standing by. Welcome to the Orchid Island Capital Q2 2026 earnings call. At this time, all participants are on listen-only mode.
Speaker #1: After this speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press *11 on your telephone.
Speaker #1: You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please note that today's conference will be recorded.
Speaker #1: I will now hand the conference over to your first speaker today, Melissa Alfonso, Investor Relations. Please go ahead.
Speaker #2: Good morning, and welcome to the Q2 2026 earnings conference call for Orchid Island Capital. This call is being recorded today, July 24, 2026. At this time, the company would like to remind listeners that statements made during today's conference call relating to matters that are not historical facts are forward-looking statements, subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Speaker #2: Listeners are cautioned that such forward-looking statements are based on information currently available, on management's good faith belief with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in such forward-looking statements.
Speaker #2: Important factors that could cause such differences are described in the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K.
Speaker #2: The company assumes no obligation to update such forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking statements.
Speaker #2: Now, I'd like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir.
Speaker #3: Thank you, Melissa. Good morning, Melissa. I hope everybody's had a chance to download our deck, as usual. We will be focused on the deck for the call.
Speaker #3: Just to begin, on slide 3, we have our table of contents. So, the first order of business will be our controller, Jerry Sintes.
Speaker #3: We'll go over our financial results. Then, I'll go over the market developments that occurred during the quarter. These are what shaped our decision-making and our results.
Speaker #3: And then we'll go through the portfolio characteristics, hedge positions, and then also our positioning going forward and our outlook on the market.
Speaker #3: So with that, I will turn it over to Jerry.
Speaker #4: Thank you, Bob. If we turn to page 5, we'll start with the financial highlights for the quarter. During Q2, we earned $0.44 per share.
Speaker #4: That's compared to a loss of $0.11 during Q1. Book value at the end of the quarter was $7.022 compared to $7.008 at the start of the quarter.
Speaker #4: Total return during the quarter was 6.2%, compared to -1.3% in the previous quarter. Our dividend during Q2 was $0.30, which we reduced from $0.36 during Q1.
Speaker #4: On page 6, we'll go over some portfolio highlights. Our average portfolio was $11.4 billion during Q2, up slightly from approximately $11 billion at the end of Q1.
Speaker #4: Economic leverage ratios at the end of Q2 were 7.3 to 1, compared to 7.9 to 1 at the end of Q1. During Q2, we experienced prepayment speeds of 10.9%, compared to 14.7% in Q1.
Speaker #4: And our liquidity is down slightly to 53.7% compared to 54.5% at the end of Q1. And with that, I'll turn it back over to Bob to discuss market developments.
Speaker #3: Thanks, Jerry. I'll start on slide 9. A picture's worth a thousand words. If you look at the top left side of the page, you can see the movements in the curve from year-end, which is the red line; the green line is June 30th, and the blue line is last Friday.
Speaker #3: As we all know, the market has moved quite a bit since then. So, if you were to put in a line for today, it would be above the blue line.
Speaker #3: Basically, a couple of things have changed. The first was that we had a change at the head of the Fed. As you recall, when Fed Chairman Powell left his last meeting, there were three dissents at his meeting, either in favor of or against retaining the easing bias.
Speaker #3: So, kind of a hawkish development. And then we had the transition in May to Kevin Warsh, and he is very, very strongly against inflation.
Speaker #3: In fact, he stated that the fact that inflation has been running above the Fed's target for five years is unacceptable. And he intends to do everything he can to bring it into line.
Speaker #3: When that type of development occurs, obviously it's going to push the front end higher because the market's going to price in Fed hikes, which is the case.
Speaker #3: But also, from the perspective of the long end of the curve, to the extent the head of the Fed is more hawkish—fighting inflation tends to do well.
Speaker #3: In fact, on the day of that press conference, the long bond actually was slightly up in price. So both of those forces tend to flatten the curve.
Speaker #3: And in case that's exactly what we've seen, so the curve has flattened. And it may continue to flatten depending on how events related to the war unfold and how those events affect the domestic economy.
Speaker #3: If you look at the swap curve, obviously the only difference between the swap curve and the one on the left—which would be the nominal curve—are swap spreads.
Speaker #3: Over the last month, swap spreads have been moving more negative, which actually increases the spread between the two curves, but the convention is to refer to that as tightening.
Speaker #3: So, swap spreads have tightened, pushing the swap curve down, and it's actually flattened even more. If you look back over a long horizon, it's actually relatively unchanged, kind of in the middle of the range.
Speaker #3: But the developments of late have really pushed the swap curve down even more. Moving on to slide 10, we have some more generic mortgage slides. If you look at the top of the page, this is kind of a long-term look back, all the way to 2010.
Speaker #3: This is just the 10-year current coupon spread of the 10-year Treasury. As you can see, in early 2023—or mid-2023, actually May of '23—we kind of hit, at the time, an all-time high spread.
Speaker #3: And over the next three years, we've been on a tightening trend. It seems like we have leveled off. It's possible this spread tightening is over.
Speaker #3: Remains to be seen, but it's been quite a long run here that's been very favorable for mortgages. Looking on the bottom left, you can see just the normalized price changes of various TBA coupons.
Speaker #3: As you can see, at the end of the quarter, with the exception of the highest coupon—6—they were all negative. These are price returns only.
Speaker #3: The absolute returns for those TBAs are actually positive. The lowest return was about 0.2%, and higher belly coupons were a little over 1%. Looking on the right-hand side of the page, these are dollar rolls.
Speaker #3: Two things. You can see none of them are particularly attractive other than the 6 roll at the moment. But what we've observed over the last several months is when these rolls get hot, it tends to be driven by short-term technical factors.
Speaker #3: They don't tend to persist. And even in the case of the 6, you can see that's what's going on. That can be any number of factors driving that.
Speaker #3: It could be CMO desk demand. For the front month, production is used to create CMOs, or it could just be somebody trying to squeeze a certain coupon.
Speaker #3: But otherwise, the dollar roll market is not terribly attractive, and certainly nothing like it was during the days of QE. Moving on to some of the other variables that affect us.
Speaker #3: Obviously, volatility is very important for mortgage investors. And you can see that we've been in a long-term trend where vol was declining going back to Liberation Day in 2025.
Speaker #3: Obviously, the war caused a significant spike, and you can see that kind of around February. This does not update through today; it’s as of last Friday.
Speaker #3: But it's notable that the closing level of the MOVE Index yesterday was 80. And that really only kind of gets you to the high end of the range that we've been in since March.
Speaker #3: It still remains to be seen where we go from here. Obviously, there's a lot of uncertainty surrounding developments in the Middle East with the war.
Speaker #3: Moving on, as I mentioned earlier on slide 12, this is just swap spreads. They had moved in a positive direction—in other words, they're less negative.
Speaker #3: And as I mentioned, of late, that has turned around and gone the other way. Yesterday, swap spreads were anywhere from 0.8 to a little over 1 basis point.
Speaker #3: In other words, more negative. So that affects the performance of swaps as hedges. That's why we mention that on this call. And, as I said, it's a more recent development.
Speaker #3: We're not really sure where we go from here, again. There's just a lot of uncertainty out there. Slide 13 just gives you the backdrop for the refi or prepayment level.
Speaker #3: As you can see on the top left, on the bottom line there, that's just the REFI index. We've been very stable at a very low level.
Speaker #3: Refinancing activity, as you would expect, is extremely subdued. The red line is the mortgage rate. We don't have a firm read on that today, but late yesterday, that was somewhere in the neighborhood of 6.75%.
Speaker #3: That might even be a little generous. It could be higher. With respect to primary and secondary spreads, there are two things: they're relatively low, but also very volatile.
Speaker #3: As a proxy, if you look, it's 6.75% is the current mortgage rate. And the two-year or 10-year Treasury is around 4.70%. So you're a little over 200 off the 10-year.
Speaker #3: That is not tight by historical standards. Finally, slide 14. This is really not anything other than interesting to me. It just shows you the nominal growth in GDP over the course of—this goes back 17 years.
Speaker #3: And the money supply—this is starting to get a little more attention. It just shows you that when you have inflation running high, that inflation, that GDP in nominal terms—in other words, not real, which is what we're accustomed to seeing—is accelerated.
Speaker #3: GDP growth in real terms is fairly stable in the 2 to 1 and a half to say 2 and a half percent. But in nominal terms, it is accelerating in that coincises with growth in the money supply.
Speaker #3: Now, let's talk more about the portfolio. I think the most important point to make for us is that not a lot changed. We're not active in raising new capital.
Speaker #3: We did do so. We increased our share count by about one and a half percent. But all in all, it was not a very big quarter for growth.
Speaker #3: We did do some trading. We'll talk about that more in a few minutes. We did shift the profile of the portfolio slightly down in coupon.
Speaker #3: The largest concentration of our holdings, which, by the way, are now all 30 years are in 5 and a half percent coupon. Basically, the portfolio is concentrated in the three coupons nearest the par.
Speaker #3: So, 5s, 5.5s, and 6s. The reason we did that is we moved slightly down in coupon, basically to take advantage of the fact that specified pool performance has not been that great of late, especially with refinancing activity so low.
Speaker #3: So, we went down in coupon—lower absolute dollar price, lower absolute payouts—with some upside in the event of a rally. Coinciding with the move slightly down in coupon, the hedge book had to adjust slightly as well.
Speaker #3: We added to our swap positions and are trying to move the swap book to coincide and line up better with the portfolio. With respect to the impact on the dividend going forward, absent fluctuations in the leverage ratio, it's actually been maintained more or less where it was prior to these changes.
Speaker #3: As I mentioned, our average coupon—against, it's mostly, it is all exclusively a 30-year portfolio—average coupon was down about 6 basis points. We had a slight decline in our economic and interest income.
Speaker #3: A 1 basis point decline in the yield of the portfolio, from 5.75% to 5.74%, and a 5 basis point increase in our economic funding cost resulted in a 6 basis point decline in our net interest spread.
Speaker #3: Moving on to slide 17 is kind of more appropriate. In prior quarters, when we were adding significantly to our capital base at a time when mortgages were attractive, we didn't do so much at all.
Speaker #3: This quarter, so it's really N/A, so to speak, for the quarter. With respect to slide 18, as I said, we didn't—if you look at the profile, we did move the profile to the left slightly.
Speaker #3: And it was really just driven by the performance of spec pools, which have been fairly weak. Dollar rolls, as I mentioned, there have been sporadic coupons that have gotten special—traded well.
Speaker #3: But the relative attractiveness of spec pools has just not been all that great in this environment. I do have to apologize—there's a slight error on the bottom left.
Speaker #3: It shows a four-and-a-half exposure. That is actually not accurate. There is no 15-year exposure at the end of June. That's all in 30-year.
Speaker #3: So basically, that's it. As I said, this is not a quarter where we did a lot—just fine-tuning the positioning of the portfolio. Moving on to slide 19.
Speaker #3: Our funding cost—this has been a very welcome development over the last several months. And that funding spread has compressed quite a bit.
Speaker #3: We've observed periods where SOFR trades through Fed funds, and our funding in the repo market has basically run high single-digit to low double-digit spreads.
Speaker #3: What's been driving this favorable funding market is kind of an offset between two opposite forces. On the one hand, you have the Fed's Reserve Management Purchase Program, whereby they purchase bills in the market.
Speaker #3: So they take away investments to cash providers and drive them into the repo market. We've also seen very high levels of money market AUM.
Speaker #3: So, in other words, cash available. It does appear just really this week that we are starting to see some movement away from these very, very attractive levels.
Speaker #3: Bill issuance by the Treasury is actually increasing. Money market AUM declined slightly. So, we have seen funding levels drift slightly higher, but there's no reason for us to think that there's anything ominous on the horizon.
Speaker #3: It's just kind of a drift slightly higher from what have been very attractive funding levels. And as you can see on this chart—or this graph—our funding, our economic funding levels have continued to converge with the absolute level of SOFR and what we pay in repo.
Speaker #3: Obviously, with the Fed on the horizon, it's probably likely we're going to see a few hikes. Obviously, the exact timing of those is unknown.
Speaker #3: But that being said, the last easing cycle was three 25-basis-point moves. Those were kind of characterized as taking out insurance, if you will, and the potential for a slowing economy.
Speaker #3: And maybe they take those back—remains to be seen. We have a new Fed Chair, and we have a lot to learn in terms of how we tend to operate under his management of the Fed.
Speaker #3: So we will just stand by and wait for that. Moving on to slide 20. As I mentioned, our hedge position— we did increase. We basically added some 5-year and 10-year swap positions.
Speaker #3: As a result, the percentage of our repo funding that is covered by our hedges increased from 72% at the end of Q1 to 91% at the end of Q2.
Speaker #3: Our swap notional balance increased from about $7.9 billion to $10.1 billion, which meant that our swaps covered 70% of our repo versus 65%. Weighted average pay-fixed rate is 3.61%.
Speaker #3: That's up slightly. It just reflects the fact it's kind of marked to market as we put on new swaps in the current higher rate environment.
Speaker #3: They're at slightly higher levels. Short TBA positions increased. We use those kind of in conjunction with futures, opportunistically. So, for instance, if TBAs have a poor run and perform very poorly over a two- or three-year, even two-month period, sometimes we'll take those off and put on futures, and vice versa.
Speaker #3: But they're kind of used not as the predominant hedge vehicle, but used as part of the portfolio, kind of interchangeably. We also added a swaption position this year, or this quarter, which is detailed on the slide below.
Speaker #3: On slide 21, on the bottom right, this is something we often do, where we do a long and a short position. The idea with this is to kind of offset the cost of premium pay, to kind of minimize that.
Speaker #3: As I mentioned, if you look in the top right, our swap book grew. We added a $500 million five-year swap and a $300 million 10-year swap.
Speaker #3: So that's the major change with respect to the hedge book. Moving to the rest of the slides—22 is nothing that I need to dwell on.
Speaker #3: Those are just kind of FYIs for our viewers. On Slide 23, the sensitivity of the portfolio to shocks, as you can see, is very flat—probably the flattest it's been in memory.
Speaker #3: But again, we're kind of entering into a new environment here, so they may need to adjust that over the course of the balance of Q3.
Speaker #3: Kind of just going on to I'm going to skip slide 24. You can see our speeds as we mentioned, Jerry mentioned is the onset of the call with rates higher.
Speaker #3: Speeds did slow over the course of the quarter, and I suspect they will continue to slow as mortgage rates drift even higher. Offsetting this would otherwise be a seasonal factor that would tend to drive speeds higher.
Speaker #3: So, I don't expect we're going to realize that. So, kind of to wrap it up, on slide 25, where we stand—I prepared this deck.
Speaker #3: It was before the last few days, and things have changed with respect to the war. There's quite a bit of uncertainty with respect to the war and how that's going to impact rates.
Speaker #3: The economy and what the Fed's going to do to respond to that—we're kind of just watching with everybody else. But we are likely to have to start making some slight changes to the portfolio, just to account for the fact that our portfolio is extending. Our leverage ratio, as we mentioned, was 7.3 at the end of Q2.
Speaker #3: As of last night, it's up to about 7.73. So leverage has extended as book value has moved, and mortgages have extended, so we will be seeking to address that.
Speaker #3: But I don't have anything definitive to say. One thing I do want to mention, though, is that if you look at our existing portfolio versus the dividend, I tend to look at the dividend in terms of the dividend divided by book value.
Speaker #3: So, in other words, what is the book value yield of the portfolio? And the way I calculate book value is just to take the beginning and ending values for the quarter, take the average—so if I take our average book value for Q2 and use that as the denominator, and the numerator is the dividend—I get a yield of about 16.8%.
Speaker #3: And then, if I look at what we were earning on the portfolio using GAAP measures, we're right around the same level, right around 16.7%.
Speaker #3: So, the portfolio continues to yield something very much in line with the dividend. And to the extent we are able to raise capital, I suspect that mortgages may continue to cheapen here.
Speaker #3: I do see there's a lot of measures you can use to gauge the movement—performance versus hedges, or OAS, whichever your preferred measure is.
Speaker #3: There's no question that mortgages are cheapening over the course of this week, and so the market's becoming more attractive. So, if we do have the opportunity to raise capital, it's probably not a bad time to deploy.
Speaker #3: I do want to give you an update on book value, because I know you're going to ask, and so I want to follow kind of the convention of our peers. I'm going to give you two book value numbers.
Speaker #3: One is as of last Friday, just to coincide with those who reported earlier in the week. And then I’ll give you a book value number as of last night.
Speaker #3: And then I'm going to give you those numbers both with and without the dividend. So, as of last Friday, our book value was down 2.1%.
Speaker #3: As of last night, it was down 4.3%. Those do include the dividend accrual. If you back out the dividend accrual, the numbers are: as of last Friday, down 0.7%, and as of last night, down 2.9%.
Speaker #3: So, that's basically it. I'd say for the prepared remarks, operator, we can open up the call to questions.
Speaker #1: Thank you. At this time, we'll begin the question-and-answer session. As a reminder, to ask a question, you'll need to press star 1-1 on your telephone and wait for your name to be announced.
Speaker #1: To adjourn your question, please press star one one again. Please stand by while we compile the Q&A roster. And our first question comes from the line of Doug Harter of BTIG.
Speaker #1: Your line is now open.
Speaker #3: Oh, thanks.
Speaker #2: It is?
Speaker #3: And good morning. Hey, could you talk a little bit about slide 19 and how you think the economic cost of funds should trend in the coming quarters?
Speaker #3: If the forward curve plays out and we get rate hikes, just kind of think about that. And then, just any differences on how that shows up on GAAP versus how you think about the dividend.
Speaker #2: Sure. So, just looking at the chart there, you would expect the red line and the average one-month-so-far lines to pivot and start heading higher.
Speaker #2: Our hedge coverage is at a very high percent; it's about, as I mentioned, 91%. So, absent changes in the size of the portfolio, I would expect our economic cost of funds to remain fairly stable.
Speaker #2: So, it should be akin to what we saw in 2023. So, we would have pretty sizable protection from the increased funding levels. To the extent that we, of course, try to grow the portfolio, we'd be putting in place more hedges and mark-to-market more.
Speaker #2: So it would be moving higher with respect to the average pay-fixed rate. But if we don’t, and we stay at this level, there will be pressure because we’re at 91% coverage.
Speaker #2: That's not 100, so there would be some leakage into our funding cost. The impact on the dividend is going to depend on what happens to the yield on the assets.
Speaker #2: To the extent that they drift higher or not, but all else equal, the fact that we only cover 91% of the funding with hedges implies there’s some room there for leakage in terms of compressing the dividend.
Speaker #2: But again, to put numbers to it, it really depends on what happens on the asset side.
Speaker #3: Great, I appreciate that answer. You talked about the current portfolio and how the return covers the dividend, and that you're feeling comfortable relative to the dividend.
Speaker #3: How do you think about incremental returns? Where do you see them today relative to that required return you talked about for the dividend?
Speaker #2: Yeah, there's something to move higher. I would suspect that the move we're in the midst of is not over, simply because I think the forces that are driving this move are far from having played out.
Speaker #2: An important development yesterday was where the 10-year Treasury closed. We had a support level, or support range, somewhere in the 4.60s. We broke through that level.
Speaker #2: So now we've established that we're in the midst of establishing a new range in rates. Vol was higher yesterday, taking somewhat of a reprieve today.
Speaker #2: But I think the primary driver is the war. I don't see any end in sight to the war. In fact, I suspect that it's probably going to get worse.
Speaker #2: I think that's going to keep market uncertainty at a high level. There's another development from yesterday. Nick Chimeros put out an article. He's kind of been viewed as the mouthpiece of the Fed.
Speaker #2: And in his article, he basically said two things. One, he doesn't have any idea what the Fed's going to do. And he also implied that there are members of the FOMC who don't know what the Fed's going to do.
Speaker #2: As we all know, markets don't like uncertainty. So, when you couple that with the developments with respect to the war, volatility is probably going higher.
Speaker #2: I suspect we're in the midst of a move to a higher level of rates, and a cheapening of mortgages. So I suspect, given all this, our stock is trading well below book.
Speaker #2: So, I don't expect that we're going to be able to raise capital. When and if we are, it's probably going to be down the road.
Speaker #2: And at that point, I wouldn’t be surprised if mortgages were quite a bit more attractive than they are now. So it’s really hard to answer your question precisely, just because I think we’re moving into a period of higher volatility and certainly higher levels of uncertainty.
Speaker #2: So I really can't handicap exactly where it is. We'll be able to put money to work and what ROEs will be at the time.
Speaker #2: Other than that, I can't say much more.
Speaker #3: All right. Appreciate it. Thank you.
Speaker #2: Yep.
Speaker #1: I'm going to move to our next question. Our next question comes from the line of Jason Weaver of Jones Trading. Your line is now open.
Speaker #4: Good morning. Hey, Bob. Thanks for all the comments. Are you there? I was just saying, thanks for the commentary as always. Just one from me.
Speaker #4: And as you look at the market today, obviously we're somewhat defensive, but where would you see the most attractive areas within the coupon stack or various specified cohorts for incremental deployment?
Speaker #4: And what do you think the ROEs look like presently?
Speaker #2: Well, presently they're moving higher, so I would have said somewhere in the 16% to 17% range. I think they could be moving higher.
Speaker #2: In terms of what's the most attractive coupons, to the extent we continue to move higher in rates, the extension potential of the highest coupons is going to drive them quite a bit cheaper.
Speaker #2: So they could become the most attractive. With lower coupons, they've done well in this environment, but they're not something we would typically own, just because of the carry that's associated with them.
Speaker #2: The coupons we're in, yesterday the 5% coupon suffered the worst. And that may be kind of a telltale sign of what to expect. It's the cuspiest coupon, in conjunction with 5.5.
Speaker #2: Depending on the measure you looked at, 7 to 8 ticks wider yesterday. They could continue to cheapen, and so they could become the most attractive coupon.
Speaker #2: Those with higher coupons also—I think they call it 5 to 6.5, would be my guess. Two weeks, whatever it is from now, whenever the dust, hopefully, settles, and I think, as I said, the ROEs are probably moving higher.
Speaker #2: I wouldn't be surprised by another percent or so, but it's really hard to say, given that we're in the midst of this move.
Speaker #4: Thank you. I appreciate that comment.
Speaker #1: Thank you. One moment for our next question. Our next question comes from the line of Jason Stewart of Compass Point. Your line is now open.
Speaker #5: Hey, good morning. Thank you. Just a quick follow-up on something. Hey, Bob. On Doug's question about hedging and the pass-through of rates and the dividend.
Speaker #5: If we do see the curve flattened, can you talk us through how you think about the 70% hedge on the funding cost versus the total portfolio at 90%?
Speaker #5: And how do you think that flows through to your objective impact on the dividend?
Speaker #2: Yeah, I mean, the curve's going to flatten. I think it's going to continue to flatten. And the fact that only 70% of the book is in swaps, I think, is what you're saying.
Speaker #2: And that's kind of locked in. The rest of the book is less explicit. But what's really going to drive the dividend is not just going to be what happens to our funding and our funding levels versus our hedge protection.
Speaker #2: Obviously, there's some leakage there. But it's also going to be what happens on the asset side. And I think we're going to see the spreads compress a lot less—the spread level is going to compress less than the curve.
Speaker #2: I think we're going to see mortgages cheapen some more, and I don't think the spread between current yields that are going term versus funding are going to compress that much.
Speaker #2: And one drives the other, because a lot of the investor base in mortgage spaces is levered money. And clearing levels, as the Fed is entering a hiking phase, are going to have to reflect that.
Speaker #2: So I think that it remains to be seen, but I don't expect a massive compression in spread levels such that you would have dramatic decreases in the dividend.
Speaker #2: You may have some, but I don't think you're going to have exorbitant ones.
Speaker #5: Okay. And then as I sort of think through that, being down in coupons, you give a little less carry for some duration protection. When you get to the end of it, you're going to be able to reposition into higher ROEs.
Speaker #5: But during that interim period, if you give up a little bit of ROE, are you willing to hold the dividend level for a quarter, or however long it takes, before the economics slow back through to the bottom line?
Speaker #2: I don't know that I'd be willing to do that. That's a pretty dramatic move. One thing we found is that, as you know, in the past, we've had larger exposures to those coupons.
Speaker #2: And generally, that's the area of the stack that money managers traffic in. They run money against the index. Those are large components of the index.
Speaker #2: And you tend to see that your performance is impacted a lot by flows into and out of their funds. So it doesn't always track what's going on in the rest of the stack.
Speaker #2: And it can be kind of challenging to manage through. So I don't know that we would make wholesale changes to the portfolio just to kind of wait out whatever happens to be—a month or two or three, or whatever period.
Speaker #2: I think we would try to hold tight. I do think we'll make some changes in the portfolio on the margin, but I don't think it would be in that direction.
Speaker #2: Certainly not in size.
Speaker #5: Okay, thanks for the color, Bob. Appreciate it.
Speaker #1: Thank you. One moment for our next question. Our next question comes from the line of Mikhail Goldbergman of Citizen J&P. Your line is now open.
Speaker #6: Hey, good morning, Bob. Most of my questions have already been touched on, but if I could maybe ask about expenses a little bit. The 2% expense ratio that I see in your slide deck—is there any more opportunity, you guys think, for more positive operating leverage, or is that a level that you guys are kind of comfortable with at the moment?
Speaker #6: And also, kind of parallel to that, I wanted to see what drove the sort of year-over-year increase in expenses from about $5 million to $6.75 million.
Speaker #6: Thanks.
Speaker #2: Glad you asked that. Let's go to slide 33, if you would. I'll give you a chance to get there. That is our expense ratio.
Speaker #2: And as you can see, it did bump up. So two things happened there. One, if you look at where it kind of was back in 2022—quite high—and we had a long downtrend, we got well under 2%.
Speaker #2: Management and staff were rewarded with bonuses this year as a kind of reward for driving the expense ratio down. So, two things to say about that.
Speaker #2: First, the awards are entirely in shares—stock—no cash. And second, it's not the kind of award I would expect to see repeated in the near future, or possibly ever again.
Speaker #2: I don't expect to see that kind of dramatic improvement. So, you did see a bump up there in our expense ratio, but it really reflects compensation costs related to the share awards that were made earlier this year.
Speaker #2: And I would expect to see this line continue to trend down. Obviously, the more that we can grow, the lower it gets, because our management fee is asymptotic to 1%.
Speaker #2: So, all capital raised from this point forward, the management fee is 100 basis points. If you're familiar with our management fee structure, it's 1.5% up to $250 million, 1.25% up to $500 million.
Speaker #2: And then everything after that is 100 basis points, so we're well above that level. And if you look at the chart on the slide above that, the growth in our expenses has trailed that of the capital by a meaningful amount.
Speaker #2: As I said, we had this kind of one-off award this year. Otherwise, our incentive comp structure is tied entirely to our relative performance. And most of the awards tend to be modest.
Speaker #2: This was an exception. But again, I think it's more of a one-off thing. I wish it weren't, but it probably is. And so, as I said, I would expect to see this line start to track back down.
Speaker #2: And our expense ratio should start trending back toward 1.7% or so, which is where it was a couple of quarters ago. That's it.
Speaker #6: Great. Thank you for the call. We appreciate it.
Speaker #2: Yep.
Speaker #1: I'm showing no further questions at this time. I'll now turn it back to Robert Cauley for closing remarks.
Speaker #2: Thanks, operator. Thanks, everyone. Appreciate you taking the time to join us today. To the extent that you have any additional questions or if you didn’t get a chance to listen to the call live and you have a question, feel free to reach out to us at the office.
Speaker #2: The number is (772) 231-1400. Otherwise, we look forward to talking to you at the end of the third quarter. Thank you.
