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DATE
Friday, Jan. 30, 2026 at 10 a.m. ET
CALL PARTICIPANTS
- Chairman, Chief Executive Officer, and President — Robert E. Cauley
- Chief Financial Officer and Chief Investment Officer — Hunter P. Haas
- Controller — Jerry Sintes
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TAKEAWAYS
- Net Income -- $103.4 million, or 62¢ per share, increased from 53¢ per share in fiscal Q3 (period ended Sept. 30, 2025).
- Book Value per Share -- $7.54 at fiscal Q4 period-end (Dec. 31, 2025), up from $7.33 at previous quarter-end.
- Stockholder's Equity -- Approximately $1.4 billion as of fiscal Q4 period-end.
- Dividend -- 36¢ distributed during the quarter, consistent with previous quarters.
- Total Return -- 7.8% for the quarter, up from 6.7% in fiscal Q3.
- Average Mortgage-Backed Securities (MBS) Balance -- $9.5 billion, compared to $7.7 billion in fiscal Q3; ending balance was $10.6 billion, signifying approximately 27% portfolio growth.
- Leverage -- 7.4%, unchanged from the previous quarter.
- Liquidity Ratio -- 57.7% at quarter-end, slightly above the historical average due to lower haircuts (around 4%).
- Prepayment Speeds (CPR) -- 15.7%, up from 10.1% in fiscal Q3.
- Agency MBS Purchases -- $3.2 billion acquired during the quarter, primarily in Fannie Mae 5.0% to 6.5% coupons, all with call protection features.
- Net Portfolio Growth (Annual) -- Equity base and MBS portfolio doubled over the course of 2025.
- Average Spread of 2025 Acquisitions -- 108 basis points weighted average, per Morgan Stanley’s par MBS index at acquisition time.
- Funding Cost Trend -- Weighted average repo rate declined from 4.33% at the start of the quarter to 3.98% by quarter-end.
- Hedge Notional Coverage -- 69% of outstanding repo at quarter-end versus 70% in fiscal Q3; unhedged notional could benefit from lower short-term rates.
- Portfolio Duration -- 2.08 years at quarter-end, reflecting increased allocation to higher coupon, lower duration pools.
- Expense Ratio -- 1.7% for 2025, down from over 5% during the post-COVID Fed tightening cycle.
- Dividend Coverage -- 95% of 2025 dividends derived from taxable income, with slight overdistribution versus taxable income.
SUMMARY
Orchid Island Capital (ORC 2.58%) reported sequential growth in net income and book value, driven by significant MBS portfolio expansion and improved net carry. Management highlighted disciplined risk management, noting lower expense ratios and a strategic shift into higher-yielding, call-protected MBS pools. Reduced funding costs and stable leverage contributed to profitability, while the company maintained a steady dividend supported by current taxable income. Portfolio duration was kept modest, with hedge coverage calibrated for changing rate environments and evidence of a flexible, data-driven asset allocation approach.
- Chairman Cauley stated, "shareholders' equity, or our total assets, they basically increased by a little over 100%." in 2025, while expenses grew "far far less than double" on a run-rate basis.
- Chief Financial Officer Haas explained that "Over 75% of the $7.4 billion in acquisitions that we made during the last year and a month or so occurred at a time when me and Nick's when this index was well over 100 basis points," highlighting opportunistic deployment during wide spreads.
- Orchid's hedge profile remained focused on "very heavily concentrated," targeting front-end curve exposures for rate risk mitigation.
- Management said portfolio duration gap moved from negative 0.07 years at Sept. 30, 2025, to positive 0.12 years at Dec. 31, 2025, then to approximately 0.17 years at the time of the call.
- Dividend policy aligned closely with taxable income, with "derived from taxable income," for 2025 and no significant return of capital component.
INDUSTRY GLOSSARY
- CPR (Conditional Prepayment Rate): A measure of the annualized percentage of a loan pool's principal that is expected to be paid off prematurely, indicating prepayment activity.
- MBS (Mortgage-Backed Securities): Securities backed by pools of residential mortgages, providing cash flows from borrower repayments.
- TBA (To-Be-Announced): Forward contracts for the purchase or sale of agency mortgage-backed securities, with settlement and pool specifics determined at a future date.
- DVO1: Dollar Value of a One basis point move; measures a portfolio's sensitivity to a 1 basis point change in interest rates.
- SOFR (Secured Overnight Financing Rate): A benchmark interest rate for dollar-denominated derivatives and loans, reflecting the cost of overnight borrowing collateralized by U.S. Treasury securities.
- OAS (Option-Adjusted Spread): The yield spread of a fixed-income security over a benchmark yield curve, adjusted for embedded option risk.
Full Conference Call Transcript
Robert Cauley: Thank you, Melissa, and good morning. I hope everybody's had a chance to download our deck off of our website. As usual, that's what we will be using for the basis of the call today. And, again, as usual, I'll just walk you through the deck. I'm joined here today by Jerry Sintes, our controller, and Hunter Haas, our chief financial officer and chief investment officer. Starting on the third page, I'll just kind of give you an outline. Jerry will quickly go through our results and discuss our liquidity position.
I'll then go through the market developments, which basically shape the market that we operated in and the impact that had on both our results for the fourth quarter and then also our outlook going forward into 2026. Then Hunter will spend some time discussing the portfolio, hedge positions and so forth, developments during the quarter, positioning in the portfolio as of today. And then we'll have a few concluding remarks. We have some information in the appendices that we want to share with you. And then we will take your questions. So with that, I'll turn it over to Jerry.
Jerry Sintes: Thank you, Bob. If we go to page five, I'll begin with financial highlights for the fourth quarter. During the fourth quarter, we earned $103.4 million in net income, which equates to 62¢ per share compared to 53¢ in Q3. Our book value at the end of the quarter was $7.54 compared to $7.33 at the end of Q3. Stockholder's equity at the end of Q4 was approximately $1.4 billion. We paid dividends during the quarter of 36¢, which has been the same rate for a couple of years now. Total return for the quarter, taking into account the change in book value and the dividend, was 7.8% for Q4 compared to 6.7% for Q3.
During Q4, we had average MBS of $9.5 billion compared to $7.7 billion in Q3. The actual balance was $10.6 billion, so we grew a lot, approximately 27% during the quarter. Leverage for Q4 was 7.4%, which is the same as Q3. Liquidity during the quarter at the end of the quarter was 57.7% and 57.1% at the end of Q3. That's a little higher than our historic numbers, which are usually around percent. The reason for that is primarily because of lower haircuts, which are around 4% at the end of the year. Prepayment speeds for the quarter were 15.7% compared to 10.1% in Q3.
On pages seven and eight are our financial statements, which you can read in the deck or in our earnings release last night. And now I'll turn it back over to Bob.
Robert Cauley: Thanks, Jerry. I will start with the market developments on page 10. I always do. The top left, this treasury curve here, this curve is actually a very good place to start because it basically encapsulates what went on during the quarter, recognizing that these three lines just represent snapshots, if you will, of the cash curve as of 09/30, 12/31, and 01/23 or one week ago. In fact, rates were more or less steady throughout the quarter, and rates traded in a very tight range, realized interest rate volatility obviously was in for low, and implied vol in the swap ship market was declining throughout the quarter and really has declined for quite some time. What's behind this?
Well, typically, economic data for one as it comes out tends to drive interest rate movements. Prior to the quarter, the data was basically considered to be suspect because of well-discussed issues at the various entities that collect the data. Then we had the government shutdown on 10/01. So, basically, we went from having suspect data to no data at all. And then when the government reopened, you had very much delayed data that was still considered suspect. So, basically, there was not much to drive interest rate other than geopolitical events, or political events, which did, but not meaningful. So.
If you look to the right, you can see the swap curve is fairly similar but it did move more, and that's all swap spreads. And I'll discuss in a few moments why that is, but we basically had swap spreads moving up as in less negative and that's why you see movement in the curve from the red line up to the blue and the green line. If you look at the spread between the three-month treasury and the ten-year bill, really hasn't changed much over for over a year, but there's been movements elsewhere in the curve. Moving on to slide 11. This is very germane to what's going on.
The spread of the current coupon mortgage to the ten-year treasury you can see, this is a very long look back period. This goes all the way back to 2010. And the thing that sticks out very obviously is how much we've tightened of late and especially since year-end. The most recent data point there is last Friday, you can see it's at about 80 basis points. You look back to the period, say, between the taper tantrum and '13, up until the outbreak of the COVID pandemic, mortgages trade in a very tight range centered at approximately 75 basis points, say. We're basically there.
And, obviously, the most recent development which just becomes evident on the bottom left, when you just look at these prices. This is, again, the same chart we always use. These are selection of thirty-year fixed-rate mortgages 3%, four, five, and six, and these are normalized prices. So this basically shows you the price movement relative to the starting point the beginning of the quarter. And as you can see, especially with respect to lower coupons, they had a very good quarter. And then if you kind of try to focus in on what happened around January 8 when the administration announced that the GSEs would be buying up to $200 billion of mortgages performance was affected.
In the case of lower coupons, they went materially higher. In the case of higher coupon, sixes, they gave up performance. And the reason
Operator: As reflected in the rural market, for any of the higher coupons five, five and a half, and six and above. Are for very, very fast speeds. And lower coupons did very, very well. Looking to the right, you can see in the rural market, especially the four roll and the three and a half have been really much on fire very strong. And this reflects the relative value trading because these coupons are below par, not gonna be cited to prepayments. And if the markets rallied, these will be obviously the targets for purchases. So they've done extremely well. So the technical they're strong.
And that being said, going forward into 2026, to the extent that plays out and those coupons are produced because rates are lower, then the supply will overwhelm the demand and that probably relative performance will delay. But that very much remains to be seen. Moving on to slide 12, I talked to Moe and Bill about swaption volatility. You can see that this trend is very, very clear and strong past year-end even today. Vol continues to decline. The peak that you see there on the top left, that's day, 2025. We all know what happened that day. But ball has done nothing but come off and continues to do so.
And if you kinda look at it in a historical context, going on the bottom of the page, we go back to you know, ten plus years now, pretty much back to the levels that we were at, back during the days of the Fed rate suppression regime when the Fed was using QE to keep rates artificially low and doing so, obviously, based suppress volatility, and it was indeed suppressed very low for many years. And we're basically turning to the next slide. On slide 13, we see a sample of swap spreads. The blue line is the two-year swap. And the purple line is a ten-year.
And as you can see, going back to the quarter and really since the second half of the year, these have been moving higher or less negative. Why is that? Well, the Fed announced at the October meeting that they were going to end QT. The market anticipated that. Swap spreads started to move. And then they announced in December that they're meeting reserve management program in which they are going to be buying up to $40 billion of bills. And so the logic behind that is the recognition on the part of the Fed as the economy grows, that their balance sheet should grow in proportionate fashion.
As a result, they will be growing, so they're taking out bills which also helps bring the Fed treasury holdings in line with the outstanding universe of treasuries because historically, they have not owned bills. And also has implications for the funding market because bills are an investment option for money market lenders. And to the extent that the Fed is buying them, that allows more funding available for repo. Such as ourselves, repo borrowers. Our hedge position, and Hunter will discuss this in greater detail later, but as you can see, we look at our hedge positions from the perspective of DVO one. That's just our sensitivity of our hedge instruments the movements and rates.
And you can see it's very heavily concentrated in swaps. And this is the reason why, what we just discussed. We had expect that this may continue for some time. Moving on to Slide 14. These are the same trucks we've had for a while. As you can see, something has changed, but not much. On the top left, the red line is in the mortgage rate. But it's still at 6.38%. And the refi index while it's higher, it's not high. It's still quite low.
I think if you look on the right-hand chart, you get an idea why while mortgages have tightened substantially, and we mentioned that the current coupon mortgage spread to the ten-year treasury was 80 or 90 basis points. The ten year's about $4.25. And these spreads and available mortgage rates to borrowers are still north of six. So the spread for the borrower, not for mortgage-backed security, but for the borrower is still relatively wide. It has not tight as much as mortgage-backed securities have. As a result, mortgage rates available to borrower are still close to 200 off the ten year. And therefore, refinancing activity involves picked up some, it's still not particularly high.
Chart 15, just basically the same picture I like to show. The red line just shows you the supply of money M2, and the blue line is just the economy, GDP, and nominal terms. And as the chart implies, the economy is still awash in liquidity. The takeaway from my list, I believe, is that it's hard to say that financial conditions are overly tight. And if you look at the economy, the GDP data, retail sales, you know, there's not really weakened precipitously, and this might be help explain why that might be. With that, that's the end of my discussion of the MAC backdrop. I will turn it over to Hunter to discuss the portfolio.
Hunter Haas: Thanks, Bob. Turning to slide 17. Just a few highlights for the quarter. During the quarter, we purchased $3.2 billion of agency expenses agency specified pools. The breakdown of the purchases is $892 million in Fannie fives, $1.5 billion in Fannie 5 and a halfs, $600 million in Fannie sixes, and $283 million in Fannie 6 and a halfs. All these pools had some form of call protection.
Primarily, lower loan balances, loans that were originated in refined challenged states like New York or Florida, and loans backed by borrowers with low credit scores high LTVs, or high DTIs or the like, some sort of credit impairment that would keep them from being able to refinance as readily as borrowers that didn't have those constraints. On a modeled yield, our acquisitions were in basically the low 5% range. And we did sell some assets that were yielding us mid fours, at the time we sold them. The model yield on I'm sorry. The repositioning enhanced our carry profile while mitigating our exposure to higher rates.
And spread widening as the higher coupon mortgages, have much less spread duration sensitivity than the lower coupons that we sold. 18 is a new chart we just put in to kind of recapture what happened throughout the course of the year. Over 2025, we experienced substantial growth, doubling both our equity base and MBS portfolio. Important to note that this growth occurred at a time when MBS spreads were at wides, allowing us to build a portfolio with strong long-term return potential. The line on slide shows a time series of Morgan Stanley index that tracks zero volatility spread over the treasury curve. For a hypothetical thirty-year, MBS priced at par.
And the green shaded area highlights the timing of our asset purchases during 2025 and into early 2026. Over 75% of the $7.4 billion in acquisitions that we made during the last year and a month or so occurred at a time when me and Nick's when this index was well over 100 basis points. On average, the spread level of all of our was 108 basis points. And, that's the weighted average of the Morgan Stanley index at the time we made the acquisitions, I should say. So turning to slide 19. As you can see, we've talked about this in the past, our portfolio evolution.
As mortgage spreads tightened throughout the year, we increased our allocation to production and premium coupons. Primarily fives through six and a halfs. This strategic shift reflects the fact that lower coupon MB Edge which carry greater spread sensitivity, I. Duration, significantly outperformed higher coupon assets during the course of the last year. Initially, we executed this sort of strategic portfolio shift through acquisitions deploying new capital into higher coupons. And then in mid-December, we took more active portfolio, management approach by actually selling lower yielding threes, three and a halfs, and fours, reallocating that into higher carrying, lower duration, spread duration pools, the five to six and a half percent range as I previously discussed.
Turning to slide 20, just to make a few quick notes about our funding costs. Our funding costs saw meaningful improvement over the quarter, driven primarily by Federal Reserve policy actions. Benefited from two rate cuts and the Fed's announcement that it would begin purchasing $40 billion in treasuries per month plus an additional roughly $15 billion tied to MBS paydowns, through its reserve management purchase program. Oregon's average repo rate declined from 4.33% at the beginning of the quarter to 3.98% by quarter end. After the December 10 FOMC meeting, SOFR initially settled in to the upper three sixties. Before spiking to three eighty seven into, year end.
During that time, repo spreads to SOFR also widened kind of pushing from the mid teens into the low to mid 20 basis point range. So we've had a little bit of funding pressure going into year end. Since year end, the funding environment improved markedly SOFR settled in the $3.63 to $3.65 range. And Orchid's repo spreads have trended to the to the 14 basis point area, call it, so we're kind of on track to turn over the repo book in sort of the 3.8% range, going into next few months as we don't really expect any Fed cuts before the next governor's sworn in. Turning to slide one. I just wanna do a overview of the hedges.
Our hedge notional remained relatively stable. Over the quarter. At the end of the quarter, were 69% of outstanding repo, just slightly lower than the 70% it was in at the end of the third quarter. The unhedged notional portion of the portfolio stands to benefit from a material decline in short-term rates. And tighter repo funding spreads as monetary policy continues to ease. As roles weaken and mortgage spreads tighten, we also adjust our hedges positions by, increasing our TBA shorts. Primarily in fives through six and a halfs. As mortgages tighten, we put on a little bit of basis hedge.
It's not material, but, you know, just sort of legging in as we saw mortgages that tightened for several months in a row. We added pay fix swaps on the very front end of the curve, further improving our, downside. Rate protection? Slide 22, in a little more detail, this slide helps visualize the hedge adjustments I just discussed. The end of the third quarter, we had virtually no outright TBA hedges. The short positions you see here reflected a fifteen thirties coupon swap we had in place, which we've maintained for several months. Now as shown here, we're outright short five and a halfs and six and a halfs.
And we put on a small short of fives, in early January. On the treasury hedge side, we continue to reduce our exposure there. And it's reflected in the top left table. And then as we require as we acquired new specified pools, we hedged them almost entirely with interest rate swaps. And we were focused more on the very front end of the curve. As rates come down to duration of the portfolio is shortened, and we put these hedges on, at a time when there were still several rate cuts, baked into 2026. Which is on around a little bit since.
Net of the unwinds that we did during the quarter, we added $950 million to your pay fixed swaps $800 million three years, $90 million five years, and $75 million in seven years. Strategy is aimed at locking in, as I said, the market predicted rate cuts will fine-tune the hedge book to account for shorter net duration of the portfolio. On slide 23, just gonna kind of quickly go over some of the risk metrics in the portfolio. We'd like to follow these measures. You'll notice portfolio duration remains low at two point o eight. That's a direct result of our higher coupon SKU, which carries less duration of exposure than the lower coupon alternatives.
The shorter duration profile is a key part of our risk management strategy. Perform better in a sell-off or spread widening event, which we think could occur. It offers us more defensive positioning than the threes, three and a halfs, and fours, which we sold in December. On the other hand, this profile, is will benefit less from further tightening, which we've actually seen in January. Which is consistent with our modestly lagging performance versus so what some of the other for some of the peer group has reported since Trump's announcement in January, how they wanted the GSEs to purchase $200 billion more MBS in their retained portfolios.
Also, just wanna note that OAS shown here So for OAS for fives, to six and a half remains quite attractive, and the fifty sixty basis point range, reflecting strong call protection in our portfolio. For comparison, when we published Q2 earnings call deck, the same OAS levels were at least 20 basis points wider. This tightening reflects improved technicals and more constructive tone in agency MBS markets. But also speak to still how, well-timed our 2025 purchases were. Slide 24 I'll discuss the interest rate risk profile. You see we continue to maintain a very flat interest rate profile. You know, this portfolio has some negative convexity.
This is reflected in the fact that both the plus digit and minus 50, interest rate shocks show small mark to market losses. It's a natural result of hedging and a convex agency MBS asset with more linear instruments like swaps and futures. December 31, our DVO one stood at a 122,000 long. As of now, more recently, it's increased slightly to a 178,000. The duration gap also moved modestly throughout the fourth quarter. It was negative point o seven years at nine thirty. Point one two positive point one two years at twelve thirty one, and currently sits at approximately point one seven years. Turning to slide zero twenty five.
Prepayment speeds were a major focus during the fourth quarter, especially given a relative underperformance of up in coupon TPAs. However, as we've emphasized in the past, Orchid's is exclusively invested in specified pools with call protection. This and this positioning insulated us from the more dramatic impacts seen in the TBA markets. That's been that said, she did trend a little bit higher in the quarter, particularly for six sixes and higher coupons. Which reduced carry slightly and trimmed yields in those positions. Looking forward, we expect prepay speeds to moderate modestly, which would improve carry.
We continue to closely monitor in light of the potential Fed actions and influence of GSU related policy headlines that could put a little bit of upward pressure on speeds. But think that most of that is probably baked in at this point. To wrap it up, 2025 was a was a great year for us. We took advantage of the dislocated market. And stay while staying very disciplined with respect to risk and liquidity. We raised capital when spreads were wide. Put it to work in production, coupons, and call it protected pools that should deliver great carry with lower interest rate sensitivity. Continue to manage our leverage tightly.
With a year with the we ended the year with a very flat duration profile. And, our hedging where we see the most risk, which is continued to be sort of into a reignition of inflation type of bear steepening rate shock scenario. That's where we think that companies like ours get pinched the hardest. So with that, I'll turn it back over to Bob for his concluding remarks.
Robert Cauley: Alright. Thanks, Hunter. Thank you very much. Just a couple of things I wanna go over. Just kinda spend a few moments just talking about our outlook. Hunter did a very good job of disclosing how discussing how we're positioned in our hedge outlook and so forth. But it seems even though mortgages have tightened quite a bit, based on what you see in the market and the sentiment in the market, it seems that it could continue. Especially if you look at alternative assets available to multi-sector fixed income investors. Investment grade corporate spreads are at or near the tightest levels we've seen since the late nineties. High yield spreads, tight as well.
And there's at least a prospect of the GSEs, you know, becoming more active, guess debatable. How much $200 billion per year represents in terms of an increase because from what we see, their current run rate's not far from that. But in any event, to the extent they become stay there or become more active, you could see mortgages tighten further from here. And then with respect to just the rate outlook, generally speaking, and, you know, with what would be on the horizon that would thank you think we're gonna see a meaningful change. You know, there isn't anything really there now, although, as know, those are famous last words.
So to the extent we kinda stick around here, mortgages continue to grind tighter, the portfolio should do well. You know, we everybody in our space is benefited from the benign rate environment in the fourth quarter and really two twenty five generally. We could see a continuation of that. And until we get the next black swan event or shock, it should remain a decent environment. Certainly, compared to a year ago, mortgages aren't as attractive. But that being said, I don't think it's unrealistic to think we could see some further tightening. One thing I do wanna point out though, which is I think very important, I wanna turn your attention to slide seven. And we discussed this.
Jerry went over this brief. But what I want to point out, if you look on Slide seven in our balance sheet, you can see that the company basically doubled over the course of the year size-wise. So whether it's shareholders' equity, or our total assets, they basically increased by a little over 100%. If you look at the income statement for the year, on slide eight, you see that our expenses were up much less than 100%. Now you could argue that's somewhat misleading because the growth occurred over the year. And what's more relevant is kinda your run rate at the end of the year, which would be consistent with the current size. That's a valid point.
So if you look at the income statement on the prior page, page seven for the fourth quarter, you compare the '25 to the '24, that should capture the lion's share of that growth. And indeed, our expenses did go up but certainly far less than double. And so now I wanna turn your attention to a slide in the appendix which is if I can get there. Slide 33. In slide 33, this is what we kind of our expense ratio. So, this is all of our G and A expenses. Inclusive of our management fee in relation to our shareholders' equity.
And as you can see, you know, back pre-COVID, we were running in the high twos close to 3%. Then we had the COVID breakout, and then, of course, this prolonged Fed tightening cycle, which forced some deleveraging in our expense ratio got up over five. But now we're running our current run rate as of the 2025 is 1.7%. I'm not gonna name names, but we all know that there are two other agency REITs out there that are substantially larger than us and their expense ratios are not meaningfully below that.
So when you get our 10-K next month, you will see, for instance, that our management fee did go up in fact, over the course of the year. The rest of our G and A expenses only increased very marginally. So we have been controlling expenses and allowing the company to grow obviously, and this is the byproduct. This is the benefit of that is bringing the expense ratio down so that just makes the company more profitable on a go forward basis, all else equal. And then the final thing I wanna bring your attention is, given that it's year-end, on slide 42, this information has been lifted right off of our website.
And on the bottom of the page, or on the top of page, you see the dividends for 2024. And 2025. As you can see, for every month, the dividend was 12¢. The next column, tax total ordinary dividends. That's basically taxable income derived dividends and then the nondividend distribution in the second to last column, that is just the return of capital. So that basically tells you that in the case of nine 2024, that 95.2% of our dividends were derived from taxable income, and in the case of 2025, 95% were derived from taxable income. The dividend was 12¢ per month for the year. Basically, we were distributing all of our taxable income.
Had the dividend been, say, for instance, 11¢ instead of 12 we would have slightly under distributed our taxable income and either had to make a special dividend at the end of the year or opted to potentially pay tax on the undistributed earnings. So wanna, you know, bring this to your attention, show you that the dividend policy does reflect current taxable income. Both for the 2025 and 2024. And that our dividend in relation to the taxable income is very slightly over distributed, less than five last year and 5% this year. So with that, I will turn the call over to questions, operator.
Operator: Thank you. As a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press. And our first question comes from Mikhail Goberman of Citizens. Your line is open.
Mikhail Goberman: Is doing well. Hi. How are you, Joe? Well. Thank you. A little cold here, but it's alright. Couple of questions. I guess we could start and forgive me if I missed this. I dialed in maybe three or four minutes after ten. Any update on current book value? I will not give that. We have accrued and reflected the dividend in our current book. So our book is up just ever so slightly reflective of the dividend. After the dividend accrual, we'd be up I think, 1.6%.
Robert Cauley: Okay. So we're basically up just slightly. Inclusive of the accrual of the dividend.
Mikhail Goberman: Inclusive of the dividend. Okay. I was wondering if you could get your thoughts on prepays. Going forward, obviously, the CPR went up quarter over quarter given the portfolio construction. But also, prepays with respect to your prepaid protected portfolio. And what kind of what kind of premiums you guys are paying on those on those prepaid protected pools. Especially.
Robert Cauley: I'll say a few words, and then I'll turn it over to Hunter. I would say that this the securities in the portfolio, targeted par to slight premiums. As you can see on the charts, five and five and a half six, and lesser extent, six and a but it's mostly five and a halfs and sixes. And those are modest prepays. We're not paying up for the highest forms of protection. So the premiums have been tried, you know, mindful to keep the premiums kind of from too being too high. I'll turn it over to Hunter, and I wanna say a few words about the prepay outlook beyond the next few months.
Hunter Haas: Yeah. So over the last couple of years, we've really tried to focus on I'd say the bulk of our acquisitions have been in just sort of, like, the first premium coupon or the first discount coupon. And we were you know, at times, able to you know, even add sevens with, you know, using that strategy. So from a historic cost perspective, we've always been very tight, not getting too far out in the premium land. And we focused really more on kind of the mid-tier call protection. We think that the old low load balance you know, eighty five one ten k's, you know, those are really expensive stories. New York's have gotten pretty expensive.
We really focused a lot more on, sort of leaning into this so-called k-shaped recovery by focusing on more credit-sensitive borrowers. You think that they have a hard time refinancing, doing buying things like high LTV, first-time homebuyer, type of pools. You know, we've focused on geos like state of Florida is great. There's it is an there's a tax that's punitive for refinancing, but also home price depreciation is really sort of, helping out with the portfolio there. So we've seen very good performance, especially after the Trump announcement about the GSEs. The sort of the knee jerk reaction was that the higher coupon MBS TBAs didn't perform very well at all.
But you know, once things kind of stabilize, we've really seen good appreciation in all of those specified pool stories underlying those coupons. And as I alluded to in my prepared remarks, we've taken advantage of the fact that roles have weakened in order to shed a little bit of basis exposure because those roles are so cheap now, it actually makes a little bit of sense to be short the TBA and long the specified pool. So kinda how we're thinking about things.
Robert Cauley: Yep. Just to add some one number to that, if you go on slide 34, and you can do this. I'll just try the numbers. You don't have to do it right now. But the weighted average current price at year-end was basically one of two and a half. So that would be all in price. Yep. By comparison, the price at the September was, you know, a little over $1.00 1. Call it $1.00 1 and two ticks. So we shifted the portfolio up in couponing the weighted average coupon at the end of the third quarter was $5.50. It's now $5.64. So slightly higher. But, of course, the market has moved.
So the price is at one of basically, $1.00 2 and eighteen. Is the is the price. Yeah, it's a premium, but we've tried to avoid real high premiums. Just not that kind of market. I mean, we going back to post-COVID, you know, we were buying New York's threes with, like, dollar prices of $1.10 and change. Right? So you know, we just don't have the kind of premium in the marketplace now that owing to the kind of the relatively high nature of interest rates. So it will compress earnings to the extent that we see an acceleration in speeds.
And, but we could think the combination of the call protection we have in the portfolio and the fact that we just don't have huge premiums on is not gonna remove the needle too much.
Hunter Haas: Yeah. I would just add that look at the roll market, you know, five and a half, sixes, and six and a halfs, the speeds implied in those rolls for the next few months are extremely high, 55, 60 CPR. That's fine for the next few months. But if you kinda step back and look at the balance of the year, I think a number of market participants, ourselves included, don't really think we're gonna see a lot more Fed cuts. I think the economy is quite strong. The inflation's good sell ups. Now let's think about that. So the current Fed funds rate is three four and the two-year yields, like, three fifty four.
So if you don't think the Fed's gonna cut rates much over the next two years, you really think the two-year should be yielding loaded Fed funds? Second question you might ask is, given that, do you think that for instance, twos tens is going to invert? I don't think so. So the current ten years at four and a quarter, if the two-year moves higher, unless that curve flattens, the ten years should also move higher. So now you've gone to till your tenure's going from four and a quarter to whatever, four fifty. The current mortgage rate available to borrowers is six or low sixes. Right?
And so if rates are gonna go higher over the next year, I don't that rate's not going down unless mortgage rates to borrowers tighten substantially. I don't know how likely that is. So if you have to available borrowing rate at six, six and a half pushing up to 7%, know, a 6% mortgage-backed security implies basically a 7% gross WACC. Know, that's not that in the money. Especially if mortgage rates push to six fifty and higher. So are they gonna sustain fifty and sixty CPR? Don't know. But I think there's kind of an inconsistency in market pricing between the mortgage dollar roll market and the, say, for instance, market pricing of Fed cuts.
There's they don't seem to jive. Anyway, that's my 2¢.
Mikhail Goberman: Thank you. That's very helpful. If I can squeeze in one more, I appreciate the good work done on getting expenses down. How much more do you, you know, available capacity you guys have for driving that down further going forward? Do you think?
Robert Cauley: Well, it's the I don't I get you the numbers. Maybe we'll try to work on it for next quarter, but almost all of the increase in our expenses was management fee. Unfortunately, we don't have detailed line item expenses here, but I know, from memory, like, reading through you know, drafts, nonmanagement fee expenses were only up in the few $100,000. So it's gotten to the point that pretty much it's the management fee, and our and our marginal management fee is a 100 basis points. Yeah. Right? And, you know, our management fee is $2.50 to first layer is up to $250 million, and there's a lay that's a 150 basis points.
Then from $2.50 to $500 is a 100 and a quarter, and everything over $500 million is a So now every dollar of capital we raise, the manage marginal management fee is a 100 basis points. And the nonmanagement fee expenses are going up very modestly and low percentage points. So know, just as we if we double from here, don't I don't have I have to run the numbers, but it's that trend would continue. I don't know how much lower it goes, but it should be asymptotic towards 1%. Right?
Mikhail Goberman: Gotcha. If the capital were $500 billion, our math deal that we have. Pay ourselves something. But, I mean, management fee would be basically a 100 basis points plus whatever your, you know, audit fee and your legal fee and whatever. So that's that's kind of where it could go.
Robert Cauley: That makes sense. Thank you, guys. Appreciate it.
Operator: Thank you. I'm showing no further questions at this time. I'd like to turn it back to Robert Cauley for closing remarks.
Robert Cauley: Thank you, operator. I hope we didn't scare everybody off the call with the length of that answer. But to the extent anybody has call or questions that come up either because you didn't have time to answer them, ask them now, or you didn't listen to the call and you wanna catch us later. Please feel free to do so. The number in the office is (772) 231-1400. Otherwise, we look forward to talking to you again in next quarter. Thank you.
Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.