Orchid Island Capital, Inc. Q4 FY2021 Earnings Call

Good morning and welcome to the Fourth Quarter 2021 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, February 25, 2022. At this time, the Company would like to remind our 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. Listeners are cautioned that such forward-looking statements are based on information currently available on the 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. 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. 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. 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 sorry for the delayed start. We did have some technical difficulties, but we got those cleared up. I hope everybody's had a chance to download the deck as usual. The deck has not changed materially from quarter to quarter. So hopefully it’s the same. But on our call, you're familiar with the kind of agenda and format. So kicking off, Slide 3, just an outline of what we're going to discuss, as usual, go over the financial highlights for the quarter ended December 31, 2021, and spend some time talking about market developments, which impacted the results for the quarter and talks about what things look like going forward. We'll go through our financial results in greater detail and then do the same with respect to portfolio characteristics, our credit counterparties, and hedge positions. This quarter, given the magnitude of the market developments since the quarter ended, we’ll expand the discussion on each of those points to bring you up to date for the current quarter. Turning to Slide 4, the results for the quarter ended December 31, we had Orchid record a net loss per share of $0.27. This is comprised of net earnings per share of $0.22 excluding realized and unrealized gains and losses on our RMBS and derivative instruments, including net interest expense on our interest rate swaps. We have a loss of $0.49 per share from net realized and unrealized losses and RMBS and derivative instruments including again net interest expense on our interest rate swaps. Book value per share was $4.34 at December 31, versus $4.77 at September 30. That's approximately a 9% decline. In Q4 2021, the company declared and subsequently paid $0.0195 per share in dividends. Since our initial public offering, the company has declared $12.545 in dividends per share, including a dividend declared in January and February of 2022. The total economic loss of $0.24 per share for the quarter equates to 4.93%, and that's not annualized. Turning to Slide 5 and actually Slide 6. Given that there's quite a bit of information to cover in this call, I'll just leave these for readers to peruse at your leisure. I'm not going to spend any time talking about them. They're somewhat backward-looking through this stock price performance at the end of the year. With respect to book value, since we don't have all of our peers' book value numbers for Q4, this is only during the third quarter of last year. So I'll leave you to look at those at your leisure. Now we can talk about market developments. First, I just want to pause briefly to give you the high-level developments during the quarter that shaped what happened both in Q4 and, to a larger extent, in Q1. Three basic things. First of all, inflation has accelerated materially. If you go back to the second quarter of 2021, whether it’s CPI or PCE, either measure of inflation has been rising rapidly. The Fed characterized this acceleration as transitory. They have since abandoned that characterization and changed their outlook materially as well. Even inflation has seemed to level off with five or so percent annual increases year-over-year during the third quarter. But in the fourth quarter and into 2022, it's accelerated. Depending on your measure, whether it's CPI headline, which is well over 7%, or PCE, which is a little under 6% on a headline basis, these numbers are clearly well above the Fed’s target range. The second development was job growth and wage growth. Again, very strong, and this is all in spite of COVID and Omicron. The third development was the byproduct of those two: development by the Fed has pivoted meaningfully. The Fed has a dual mandate, as we all know, which is price stability and full employment. We clearly do not have price stability. If we're not at full employment, we're very close to being there. Starting in early November of last year and in December and January of this year, the Fed has meaningfully pivoted, and their outlook for monetary policy has moved materially. So that's basically what's happened. Turning to Slide 8. As we typically show the yield curve, both nominal treasuries and swaps, I just want to make three points. First of all, if you look at the left-hand side or the right, you basically see that in this fourth quarter, we had a flattening of the curve, whereby shorter-term rates rose more than longer-term rates. The flattening that occurred in Q4 was just a repeat of what happened in Q3 and frankly, in Q2. Throughout the last three quarters of 2021, the curve has flattened. That's point one. Point two, the flattening in the magnitude of the movement in rates year-to-date in 2022 exceeds all of the movement we saw over the last three quarters of 2021. The final point: this is very true in respect to Q4, where the longer-end rates, the tenor did not move in the case of nominal treasuries and moved slightly with respect to swaps. Even year-to-date 2022, if you look at the yield curve, we've seen the tenor rise by about 50 basis points; the five years moved by over 80. So I don’t have the exact number, but it was 86 basis points, so we've seen a meaningful flattening of the curve. This is all in response to expectations on the part of the market for a meaningful Fed interest rate hike. Slide 9 again shows both the tenor treasury and tenor swap, focusing only on Q4 in the last few years. As you can see, rates were fairly stable. In Q4, since then tenor rates have moved higher, basically into a new range. But again, it seems to have stabilized somewhere in the 2% range. We'll talk about that a little more later in the call. Slide 10 is kind of our proxy for our earnings power. This just shows you the slope of the curve between the five-year treasury and the 30-year bond. You can see this goes back to our inception. Most recently, starting last year, we've seen curve flattening, which is a trend that is not favorable to us. This foretells earnings pressure. So we got to about 40 basis points at the end. Most recently, this week it was a little under 62 at the end of the year. If you look at the forward curve, even six months, it's basically flat or almost zero. Now turning to the performance of the mortgage market. A couple of things we need to stress here, and this is really relevant for Orchid. As you can see on the top left-hand side, we're showing the performance of all these five 30-year fixed rate coupons and we normalize the state effects at the beginning of the quarter, so we can show in our minds just a clearer picture of relative performance. It's very notable; remember we had the Fed announce tapering in November, and we accelerated tapering in December. The markets have been expecting this, but the Fed is clearly responding to these economic developments and they're going to rapidly slow their asset purchases. You might have thought that the production coupons—the coupons that were most purchased by the Fed—would have suffered, especially late in Q4, and if you look at this line closely, you can see that Fannie 2.5 were the worst performing coupon. The Fannie 2s did better than Fannie 4s. That's quite counter-intuitive in our minds. Fannie 3s did fairly poorly, almost as bad as 2.5s. The reason lies in what you see in the bottom left, which is withdrawals. Even though the Fed has announced the tapering of their asset purchases, rules have been persistently high even into 2022. Notably here, and at least in the fourth quarter and more so in the current quarter, as you can see, 2.5 remain strong. The 3 role, which really didn't make much sense to us throughout the entire quarter, was one premium mortgage; the underlying cheapest deliver collateral was paying very fast, and the Fed was not buying them. That role has been strong, and even more so—we’ve had a head-scratcher, so to speak, where the 3.5 role over the course of the fourth quarter improved and continues to improve more so in the first quarter of 2022. Unfortunately, if you're an owner of spec securities as we are, developments in the role market tend to be inversely related to the payoffs for specs. In the top-right section, you can see that spec paths have been soft at the end of 2021. And on the bottom right, this is a very useful picture. This basically shows the payout for what we would call lower quality collateral, higher loan balance, still outperforming cheapest to deliver. But it's most sensitive to developments in the role market. The role market is the red line; as you can see towards the end of the year, the role was trading—this is the Fannie 3 coupon—around five ticks, and the payout, this is on the left-hand side, was a little over 40. This divergence is in favor of roles and against specs, which was unfortunately not the way we were positioned. Today, in 2022, the red line, which is the role for Fannie 3s, is now like 8.5 ticks, and the pay up for 225K3 is well under 20 ticks. This divergence has increased materially. Turning to Slide 12. This is just a picture on the wall. Two points I'll make here: one, really since the end of the first quarter, the wall traded in a fairly well-defined range for most of 2021, ending the year around 80 normal walls. This is three month by tenure. Since your rent has increased, it certainly was higher than where it was, but not meaningfully. So it's really only around 90, sitting here at the end of this week. Slide 13 displays a couple of charts we like to use every quarter. On the left-hand side, these are just LIBOR OAS for the 30-year coupon stack. As you can see, the lowest two lines there are 30 or choosing two and a half. They've been the coupons most favored by the Fed. They've been very tight and consistently tight even really through the end of the year, despite the tapering that was announced. Regarding the higher coupon, they were fairly stable at higher levels. Unfortunately for us, if you look on the right-hand side, the pay-ups for various loan balance threes were pretty stable even into the fourth quarter. That has changed. All of these numbers that you see on the right-hand side are down between 30 and 40 ticks. Obviously, these are threes, so whereas a 30% coupon traded with a $1 or $3 price at the end of the year, now they're more or less at coupon. So those have dropped significantly since year-end. Just a picture of various components of the aggregate indices, fixed rate indices in equities as well. This is pretty much the same for both Q4 and the year; higher risk assets performed better. The S&P, emerging market high yield, and domestic high yield performed well. TIPS performed very well given the increasing inflation, not surprising. Unfortunately, mortgages lagged, and with respect to Q4, if you were to look at one of the tendencies we have on page 33, we provide the results for just December. Unfortunately, agency mortgages are on the bottom of the stack, so a rough quarter for mortgages. Turning to the refinancing outlook, these three charts we like to use quite frequently again. Top left, we show you the Refi Index, which has been trending down in the latter half of 2021, ending the year around 2,500. Since year-end, that number, most recently this week is about 1,666 or so. So it's dropped even more. The red line here is the mortgage rate. Well, we ended the year under 3.4%. Today, that number is appreciably higher. In the case of the Freddie Mac survey, it's right about 3.9%, and as a trace of the bank rate, it's around a little over four. So that's going to mean a significant change. It does appear that you might see some burnout in this slide just because of how the Refi Index has been dropping. But really, that's not what's going on. If you look at the bottom, you see this shaded area representing the percentage of the mortgage universe that's refinanced by at least 50 basis points. Ended the year, north of 30 was around 40% at the end of the third quarter. Today, it's under 15%. So really what's happened is just that everybody that could refinance pretty much has done so, and most of the markets have more coupons. Therefore, the Refi Index is quite low and the percentage of the market that's refinanced is also very low. Turning to our results of operations on slide 17. I just want to make a couple of points here. On the left-hand side, we typically disaggregate our earnings per share by our proxy for core, although it's not the same number we get from our peers, and then the realized and unrealized gains and losses. You can see a rather large number there for unrealized gains and losses. I want to talk about this more in a moment, but most of the losses incurred were unrealized—the securities we still own. So even though they took mark-to-market losses, our realized gains were quite small. The portfolio that existed at the beginning of the quarter, for the most part, was still there at the end of the quarter. With respect to the right side returns by sector, we aggregate our capital into either a pass-through strategy or structured securities, predominantly IOs, and to a lesser extent inverse IOs. Pass-throughs did quite poorly, while IOs did okay. But given that longer rates, especially in Q4, really didn’t move, IOs tend to be sensitive to both longer rates, mortgage rates, and prepayment expectations. While they did okay, they weren't enough to overcome what we saw with respect to pass-throughs. Slide 18 just provides a picture of our net interest margin going back; at this juncture, if you look at the green line that's kind of where we've been in a pretty stable pattern, a slight uptrend actually into the end of the year. However, the blue line, the yields on our assets, even though they were up slightly this quarter, based on where we sit today with the long end being fairly stable, we're just not sure how much that's going to increase because we're pretty sure the red line is going to move down. So from an earnings perspective, all eyes are on the Fed. The meeting in March will be critical. Earlier in this quarter, there was a high probability priced in by the market for a 50 basis point hike. I think that's less so now, but it will be important for setting the trend. Of course, the general will speak at a press conference and have a lot more to say about their anticipated path. The dot plot will also provide critical insights. March will be very, very critical for setting expectations for the balance of the year, for funding rates, but also we have to be watchful and mindful of the long-term rates. At the end of the day, that's what controls our net interest margin. So at this point, there’s considerable uncertainty in terms of the outlook for monetary policy, which hopefully will diminish over the course of the year. Slide 19 is more of the same, which we just reviewed. Slide 20 is just kind of our dividend versus our peers. This is historical information, and I don't need to dwell on that now. Turning to Slide 21, there's not much written on this page, but here I take the chance to pause and spend quite a few moments talking about our positioning, the impact of our positioning on our results both for Q4 and Q1, and kind of our outlook going forward. After that, we’ll continue through the slide deck and I can give you more detail on our portfolio positioning, our activity in Q4, our positioning at the end of the year, activity this year, and our outlook going forward. So with that, I want to say that I think our outlook for the rate markets and the Fed was pretty much correct coming into the end of the year. We have been positioning, really, since the end of Q1, we would consider it defensive in nature. We expected higher rates—not quite the way it played out in terms of the flattening of the curve, but we did expect higher rates. We expected the Fed to taper, and in response, we avoided production coupons in anticipation of the taper. We expected role softness, and we overweighted higher coupon specs; that was the way we could generate our income without exposing ourselves to the Fed taper. We did increase our capital allocation to IOs and kept our leverage ratio on the lower end of our typical range. However, in Q4, especially in 2022, spec performance has been poor. Even with the taper and the acceleration of the taper announced in December and January, roles have remained quite strong. We've also seen a great increase in rates, and we also happen to have the seasonal—at the point in the year when speeds tend to be slower, and Fed buying, even though it's diminished with production lower until at least the last few weeks, Fed purchases are still above production. So all of that has combined to keep roll strong. As we've stated before and I'll say it again, roll strength impacts payoffs for specs. Some of the other nuances, which are not as high profile, but still matter, is that the dealer community—typically large players in the spec market—position themselves either to sell to customers or more often to position for a few months, collecting very attractive carry and selling them into the market. They almost exclusively hedge those positions through the TBA market. With roles as high as they are, effectively, the hedging costs are quite high, making them less of a participant in the market. So again, it's been negative for specs. Frankly, what's going on in the market and the extent of uncertainty that surrounds the mortgage market with tapering, balance sheet runoff, and potential quantitative tightening on the horizon, puts us very much in a risk-off market. Mortgages generally have done quite poorly. So, where does that leave us? And how do we look at the world from this point forward? The answer from our perspective is we still prefer the specified pool market over the TBA market, and I’ll explain why we do that. Few points to make: one, the fact that the long end of the curve has remained fairly stable tells us that the market expects the Fed to be successful in continuing to manage inflation. So, we expect long-end rates to probably remain very stable for the balance of the year. Secondly, mortgages have widened quite a bit, especially this year. One index that we look at is the spread of a current coupon mortgage to the 10-year; that was trading in the low to mid-50s last summer, and as of January this year, it was only increased to 78 or 79 basis points. As of yesterday and the day before, it was around 100, a little higher. Mortgages have widened quite a bit and may widen more—that’s undeniable, particularly with what’s going on in the market that's generally negative. We could see more widening in the short term. Long-term, however, I think 100 over the curve is cheap. I believe that mortgages will by the end of the year or next, return to trading in their more historical range, which is kind of a low 80 to mid-80 spreads. For that reason, long-term we like mortgages; short term, they're going to be challenged. If you think about it in terms of where we sit in the market today, we're at a point of what I would call maximum uncertainty. We have a very high degree of range in potential outcomes with respect to the Fed over the year. How fast is the Fed going to run their balance sheet off? Over what time frame? How much are they going to allow it to shrink? Will they do quantitative tightening? We’ve also had what happened this week regarding Ukraine. So, we're at a point of very high uncertainty in the market, especially the mortgage market. And when that's the case, the market always prices in a very high risk premium, and I think that's reflected in the spread at which mortgages trade. In that sense, you could say that with respect to mortgages, we’re kind of at an absolute bottom. We have all this uncertainty and really no players in the market—the Fed buys, but they're diminishing their purchases rapidly. Banks have no buyers nor do money managers. So, we really have maximum uncertainty or risk premium priced into the mortgage market with no players. But we think this will abate. That's important. We think that over time, as the data comes in and the Fed takes actions, the range of outcomes will narrow, and the market will focus on what they view like the terminal rate will be. At that point, we think this risk premium will be able to come off, and we also think that roles will be hard-pressed to maintain these levels without Fed sponsorship. As roles come off, this will be positive for specs. There are other factors that contribute to our desire to continue owning specs on the horizon, kind of secondary factors, but one example is that in the fourth quarter of this year, the indices will include specs. To the extent that our benchmark money managers are out there, they will be buyers of specs if softness abates. The dealer community can be re-engaged and start owning them. Finally, the fact that the conforming loan limit increased significantly this year—where the convexity of the cheapest collateral, PVA collateral is quite poor—is another reason to own specs. Where does that leave us? It's been a rough quarter; we've incurred some mark-to-market losses, as you probably inferred based on what I've said, but we are not inclined to sell. We have no compelling reason to lock in losses. The carry on these assets is excellent. We have had to reduce our balance sheet somewhat. We will continue to maintain levels of leverage, but we are very good at managing our liquidity and have been able to do that throughout this period. We have minimized the realized losses we've incurred both in Q4 and Q1 to date. We've been able to retain a large chunk of this portfolio, and we think one that is going to provide excellent carry over the balance of the year. And two, longer-term, the performance outlook is very favorable. So, with that, I'll move through the balance of the slide deck. I won't spend as much time on some of these slides. Slide 22 shows that with respect to our IO book, it has moved fairly sizably in percentage terms, roughly from 20% to 30%. Some of that is due to purchases of IOs; otherwise, it’s just market changes—specifically, IOs went up in price while cash is down. Year-to-date, that percentage is even higher towards paths, a few IOs, for the same reason. We show our activity for the quarter on the right-hand side and I need not dwell on that at this moment. Let's turn to slide 24, and I can talk about the portfolio in a little more detail. If you look at this snapshot of the portfolio on December 31, it looks very similar to the way it was at the end of the third quarter, just larger. We were raising a lot of capital last year, and our total mortgage assets increased by about 16% over the quarter. However, the composition—the breakdown—was very stable. The hedge positions I'll talk about in a moment here. Since year-end, as I mentioned, we've experienced a very adverse market, and we reduced the portfolio by about 20%. The way that we did that is through the combination of and two and a halves and threes, roughly even a little more under selling two and a half versus 30s. We’ve recorded realized losses quarter-to-date of about $35 million. If you look at this, just one final point—our interest rate shocks went as of the end of the year, and the profile is relatively flat. That's typically what we strive for, that $31 million negative number, even though that's model-based. That represents a fairly low percentage of both assets and equities. Just quickly going through the balance of the slides—slide 25. The Refi Index, as I mentioned, is much lower, well under 2000. Our spec allocation is probably up slightly since year-end. It has been declining for the second half of last year, most of last year, but up slightly this year just because of the relative allocation of sales concerning the quality of the specs. Regarding our speeds, our portfolio continues to pay very, very slowly. Our passes prepaid at nine CPR in the fourth quarter; structured were under 25. So far in 2022, January was even lower than the 9% it was previously; February has been a little higher. Q1 is basically on track to match the prior quarter, possibly be slightly lower. Slide 27 shows a couple of points here. This orange line is the 10-year treasury, and I think what's notable is that we ended the year about 151 basis points, and as of today, it's about 200. That's still well below levels observed in 2014, 2017, 2018, and even early 2019. Yet refinancing activity is lower. The real reason is just that we got everybody into a lower coupon and has very few participants in the mortgage universe to refinance. So in terms of our speeds, what we could observe over the year, I'm not so sure if we get to the low levels we saw back in 2013 and 2014, but we'd expect them to be below that dotted line this year. Slide 28 just discusses our leverage; we're targeting somewhere from 7.5 to 8. That’s where we are today. It looked like we took a dip in the end of the second quarter. That's really misleading; we were raising capital back then, and we raised a slug right before the quarter. Early in Q3, that number was back up around 8. It will be down slightly from there kind of going forward. Finally, regarding our hedges, I'll discuss this from two perspectives: one, what we did in Q4, and then what we've done in Q1. Starting on the top left regarding our futures, the future position grew quite a bit in Q4, with more focus on the five-year point of the curve. As I mentioned, we’ve seen tremendous flattening. We repositioned defensively coming into Q4, that was more of a bias towards the long end in terms of hedges. We’ve shifted that, added to the fives, and we also did some Alturas. Regarding TBAs, we added some threes as of the end of the year. That was at the end of Q3, and then that actually was basically gone. With respect to our swaps, there were really no material changes. We did have a contingent care flow unwound because we kind of gotten out of that trade that we could. One trade was executed since year-end, which isn't really relevant for this discussion. We can talk about that at the end of the quarter. That’s about it; those were the extent of our prepared remarks. Operator, we can turn the call over to questions and field any questions anybody might have.

Thank you. We will take our first question from Jason Stewart with Jones Trading. Your line is open.

Great, thanks. Good morning. Thanks for taking the question. How are you? I wanted to start with just two quick things. One, if I missed year-to-date book value, if you could give me that? And then two, maybe a quick update on how you're thinking about share repurchase activity and in light of where the stock is relative to book?

Well, I did not say, it's done close to 20% owned in fact, especially in February, with the move in TBAs and specs. Regarding share activity, we've not been able to do that in our blackout period and, given the magnitude of developments in the market during the quarter, we certainly feel comfortable doing anything until that news was fully in the market. Now that it is, we are positioned to continue to use our share repurchase plan. It was increased materially in December up to 10% of our outstanding, and to the extent the stock is trading below, we have every intention to use that.

Got you. Okay. And then thinking about the dividends based on the current book, the current $0.055 run rate is a fairly high ROE or implied ROE payout. How do you sort of foot that with the current economics? And do you feel like you're getting credit for it? Any thoughts on leaving it at $0.055?

I would say the outlook is not favorable for the dividend. We really want to see what happens in March. That's a pretty pivotal month for decisions. As I said, not even two weeks ago, the market was pricing at a pretty high probability for a 50 basis point hike. That's come off, especially with developments in Ukraine. We want to see what they do and what the product looks like. It's quite possible there may be an adjustment, but we want to ensure we have a better feel for what we’re looking at before we do so. Obviously, I mentioned on the call that the forward curve, even six months out, is inverted. This is not a favorable environment for leveraged bond investors or any limited investors. So I hope that you can extract from that what you will.

Right. Right. Got it. Okay. Last one, and then I'll jump out. If we just take a bigger picture view of pay-ups, and sort of CPR is moving to a natural rate of turnover at some point, there's little risk left in owning specified pools. How much risk do you think is left in the portfolio in terms of pay-ups premium, or do you feel like we're already sort of at that point where it's an even economic trade, and there's only upside?

Yes, I think we're close. I think we’re there. I don’t know if you can make much out of what happened late yesterday and today where mortgages have rebounded, but it seems like in the near term, we've gone through a lot of widening, and specs have really suffered with the rolls. But we predominantly own threes, and in the third quarter and fourth quarter, those saw prices around $3. Not their current coupon. Depending on the story, those pay-ups are very low. Could they get a little lower? Probably. The outlook going forward, I think is very asymmetric. The long end has stayed where it is, and the market seems comfortable with the Fed's ability to contain inflation. I think as we go through the year, the Fed does hike; they often overshoot as we all know. It could be that not long from now, a year or so from now, we’re looking at a market that starts pricing in the next recession. So we're very keen on trying to maintain that optionality. That’s why we're not going to sell all these specs, even if there’s a little near-term pain, because we believe there’s long-term value. Our earnings outlook isn’t great specifically because of the Fed, but from an asset perspective, they look very attractive. We’re trying to maintain that optionality. We’re doing our best with respect to managing our liquidity, trying to keep our leverage ratio prudent while maximizing how many of these we can hold onto because we believe they have good short-term carry and long-term upside.

Got it. Thanks, Bob. I appreciate it.

Okay, next, we'll go to Christopher Nolan with Ladenburg Thalmann. Your line is open.

Hey, Bob. Given that it's an election year, have you historically seen how the mortgage market responded to it?

I know that they have—there is much, it's not a presidential year. So the focus will only be on the congressional and Senate races. I don't expect that. I mean, historically, we've only really seen elections affect markets through the Fed, maybe the perceived reluctance on the part of the Fed to do a lot to disturb the economy in the run-up to a presidential election. I wouldn't expect that to be the case with respect to other races.

I don't think I would add to that. It's just to the extent that it’s either going to stoke the fires of inflation or cool off a little bit in a reversal of some of the energy policies perhaps. Or if you go the other way, if there is a strong push and a willing Congress to push through some infrastructure project on top of hyperinflation, that could hurt us. But other than that, I wouldn’t expect it to be material.

Great. And I guess, just a follow-up in terms of the portfolio declines. Are you anticipating any further reduction in the portfolio size for the rest of the quarter?

We call it yes, if the market continues to move against us. We're doing everything we can to maximize our retention, subject to the constraint that we're not going to let our leverage ratio get out of control, because we need to maintain lots of liquidity. To the extent the market goes more against us and our book value comes down, our leverage should go up, and we've been clean as needed. The last few months have experienced a slower evolving version of the taper tantrum we saw in 2013. When the dust settled then, as well as now, there were opportunities to be had, and I think that continues to be the case. So for us, we're taking it day by day, making sure that we have ample liquidity to deal with continued weakness in the mortgage market, so we can meet all of our margin calls and maintain reasonable leverage. That’s how we’re going about this. When things start to calm down a bit, I think we can reassess and review what our longer-term vision will be.

Got it. Thanks, guys.

Next, we'll go to Mikhail Goberman with JMP Securities. Your line is open.

Hi, good morning. I just have a quick follow up on that portfolio reduction question. You said you've reduced it by about 20% since year-end, mostly in two and a half threes to reduce the IO percentage.

So that percentage would be higher.

Right. IO's are now a bigger percentage of the portfolio. And I think I remember you saying that the TBA shorts you had on as of the end of the year are gone, is that right?

As of the end of the year, yes. What we will do sometimes when we sell assets will sell TBA and then fill with pools. So that's really not a hedge trade so much. It's just a means to facilitate a trade or sale, or we buy the same way as we buy on swap as well.

All right. That's it for me. It sounds like a pretty difficult environment right now. Wishing you guys the best of luck going forward.

Yeah, it's been a brutal quarter to be a mortgage investor, and it's like we've been abandoned by everybody. Nobody wants to own them. So nobody wants to buy a few billion. Let us know.

I'll keep my eyes peeled.

Okay.

Thanks.

I show we have no further questions. I'll now turn it back over to Bob Cauley for any additional or closing remarks.

Thank you, operator. Thank you, everybody. Appreciate your interest. As always, to the extent you have further calls or questions you want to contact us directly, feel free to reach out to us at the office. Our number is 772-231-1400. Otherwise, we look forward to talking to you next quarter. Thank you.

That does conclude today's conference call. You may now disconnect.