Earnings Call Transcript - ORC Q3 FY2025

Operator

Good day and thank you for standing by. Welcome to the Orchid Island Capital Third Quarter 2025 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question and answer session. To ask a question during this session you will need to press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today,

Melissa Alfonzo, Head of Investor Relations

Melissa Alfonso. Please go ahead. Good morning, and welcome to the third quarter 2025 earnings conference call for Orkin Island Capital. This call is being recorded today, October 24, 2025. At this time, the company would like to remind the 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 Security Delegation Reform Act of 1995. Listeners are cautioned that such forward-looking statements are based on information currently available on the management's good faith, believe with respect to future events, and are subject to risk and uncertainty 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,

Robert Cauley, CEO

Mr. Robert Colley. Please go ahead, sir. Thanks, Melissa. Good morning. I hope everybody's doing well, and I hope everybody's had a chance to download our deck. As usual, that's what we'll be focusing on this morning. And also, as usual, on page three, just to give you an outline of what we'll do. The first thing we'll do is have our controller, Jerry Sintez, go over our summary financial results. I'll then walk through the market developments and try to discuss what happened in the quarter and how that affected us as a levered mortgage investor then hunter I will turn over to hunter he'll go through the portfolio characteristics in our hedge positions and trading activity and then we'll kind of go over our outlook going forward and then turn it over to the operator and you for questions so with that turn to slide five Jerry thank you Bob so on

Speaker 5

Slide 5, we'll go over the financial highlights real quickly. For Q3, we reported net income of $0.53 a share compared to $0.29 in law. Book value at $9.30 was $7.033 compared to $7.21 in June 30. Q3 total return was 6.7% compared to negative 4.7% in Q2. and dividend curve ratio at nine quinnity with six deris I'll start on slide nine with market

Robert Cauley, CEO

developments what you see here on the top left and right are basically the cash treasury curve on the left and the silver swap curve on the right there are three lines in each red line just represents the curve at June 30th the green line is as of 930 and then the blue line is that of last Friday and on the bottom we just have the three-month treasury bill versus the 10-year note. So what I want to point out basically the curve is just slightly steeper for the quarter just reflecting the fact that with the deterioration labor market the market's pricing in Fed cuts and so the front end of the curve has moved. If you look at basically the movements on these two lines and it's the same for both from the red to the green line that just reflects and deterioration of the labor market. Hierarchically, when the quarter started, the first event of the quarter was really on the 4th of July when President Trump signed a new law, the One Big Beautiful Bill Act. And initially, the market sold off. Ten years' points slipped, sold off by about 25 basis points. And at the end of July, at the Federal Open Market Committee meeting, the chairman was actually fairly hawkish. That was on July 30th. But then quickly on the 1st of August, the non-farm payroll number came out. It was weak, but also it was very meaningful. Downward revisions, and that kind of started a string of events which started to paint a very clear picture of a deteriorating labor market. The QCEM, which are the revisions to prior payroll numbers through the first quarter of 2025, were much more negative than expected. And then, in fact, ADP the last two months were negative. So that changed the picture. That changed the way the Fed looked at the world. And then the market started to price in, Fed easing, and that's what you've seen here. What you've seen between the green and the blue line, so to speak, is what's happened since the end of the quarter. Basically, the government shutdown. Absent today's data, we basically have had very little data to go on. And basically, you see really what would be described as just a graph for yield. There are few securities that offer a yield north of 4%. and the long end of the Treasury curve has seen pretty good performance quarter to date. The bid continues. In fact, that's even present in the investment-based corporate market where in spite of the fact that credit spreads are very tight, you're still seeing strong demand, and it's probably just because there's a lack of alternative investments that you can buy with that kind of a yield. But I guess if I had to summarize it, from our perspective, it was actually on net a very quiet quarter. Rates were essentially unchanged, and importantly, vol was down, and I'll get to that more in a minute, and then, of course, the Fed's in play. So a steepening curve, low interest rate volatility, always good for mortgage investors. Turning to slide 10, on the top, you see the current coupon mortgage spread to the 10-year, and then on the bottom, we have two charts that just kind of give you some indication of mortgage performance. The 10-year treasury is the typical benchmark people look at when they think of a current coupon mortgage or kind of appraise mortgage attractiveness. And this makes it look like the luster's off the rose to a large extent because, for instance, if you look at where we were in May of 2023, that spread was 200 basis points in its half since then. It's 100. But I think you have to keep in mind that the 10-year treasury is a great benchmark over very long periods of time, but the current coupon mortgage does not have a duration anywhere close to the 10-year. In fact, it's about half. Most street shops use a hedge ratio for the current coupon, somewhere around an area of a five-year or five or half of the 10-year. So a more appropriate benchmark might actually be the five-year treasury and, of course, swaps. We have some charts in the appendix. For instance, if you look on page 27 and you look at the spread of the current coupon mortgage to the seven-year swap in particular and I'm just going to go there now if you don't mind but on slide 27 I just want to give you a more accurate picture what we're looking at the blue line there just represents the spread to the seven year swap that's kind of the center point for our hedges and this is a three years look and I just want to point out that if you look at this chart you see that we're currently at the low end of the range but we're still in the range whereas with respect to the 10-year we've broken through that I think that just reflects the fact that the curve is modestly steep and you're basically benchmarking a you know five-year asset against a 10-year benchmark and so it looks like it's tightening when in fact it really really isn't and the other thing I would point out to and we talked about this in the past as well if you look at slide 28 I think this is important because what this shows are the dollar amount of holdings of mortgages the red line represents the Federal Reserve, and of course they're going through QT. So that number just continues to decline. But the blue line is the holdings by bank, and they are the largest holder of mortgages that there are. You can see this line, how it's increasing, is very, very modest. In fact, what we hear, most of their purchases are just in structured product, floater, and the like. And I think until they get meaningfully involved, mortgages are not going to scream tighter. So There is still some attractiveness, if you will, in the mortgage market, and I suspect that that's going to stay, as I said, until the banks get involved. If you look at the bottom left, you kind of see the performance, and as you saw, we did tighten. And if you look at this chart on the left, what is this one I show every time? It's normalized prices for four select coupons, so all you do is you take the price at the beginning of the period, you set it to 100. And you can see most of the move upward was in early September. And the reason I point this out is if you think of it this way, with the banks absent, the marginal buyer mortgages are basically either money managers or REITs. And what we saw around that period were, in addition to the prolific ATM issuance by REITs, we also saw two preferred offerings by some of our peers and a secondary by another of ours. So those were kind of chunky issuances, and I think that's what drove that kind of spike tighter. If you were to look at the spread of our current coupon mortgage to the five-year treasury, you see a spike down right around that day. It was over about a two-week period. But since then, we've kind of plateaued. And so mortgages have still retained some attractive carry. Hunter's going to get into that in more detail. I don't want to ring on his grade, but I just want to point out that mortgages, while we had a good quarter, they're still reasonably attractive. On the right, you see the dollar roll market. Generally, dollar rolls are impacted by anticipated speeds. with the rally in the market that's become a big issue and I will just point out one of these if you look at that little orange line again this is like a one-year look back that or a lot orange line represents the fanny six roll and you can see towards the end as we entered September with the rally that rules come way off in the markets pricing in extremely high speeds and as a result spec polls which are the beneficiary of their call protection and perform well in a rally have done extremely well the cash window list that would come out every month in October this month they did very very well and suspect they will probably continue to do so going forward on the next chart on page 11 again this is very relevant for us as a levered mortgage investor since we're short prepayment options and you can see on the top this is just normalized ball this is a proxy for volatility and interest rate market the spike there which was in early April that was Liberation Day and you can see since then it's done nothing but come down I continue to come down in fact if you look at the bottom chart this is the same thing but with a much longer look back period and you can see the spike there around March of 2020 that was the onset of COVID so it's a very volatile event then you need it after that you had extremely strong to be on the part of the Fed buying treasuries and mortgages so it's kind of like a rate suppression environment where they're buying up everything and driving rates down which is the byproduct of that is that they drive volatility down and as you can see on the right we're getting near those levels now not only that means what rates are going to zero but what we are seeing is interest rate fall being pushed down I think part of what's behind us is the fact that we all know that next year the Fed chairman is going to be replaced when this term ends in May in all likelihood that's going to be by someone who's pretty dumbish so the market expects kind of a very dumbish outlook for funds and rates in general and of course to the extent that that happens and who's to say that it will but it would also continue to be supportive for us as a celebrity agency MBS markets because mortgages you would think would continue to dwell in that environment turn to slide 12 this is a relatively important slide because this really is focused on the funding markets and this is what's really become a hot topic if you will so we see on the left are just swap spreads by tenor and if you'll notice in the case of the purple one which is the ten year and the green one which is the seven year they've all kind of turned up and in other words they're less negative so we would say they're widening even though it seems counter to if there's the spread to the cash treasury is actually getting narrower but it is what it is uh what happened here was that the chairman recently in a public his comments mentioned that the end of qt was in the next few months most market participants were expecting that in the first if not the second quarter of 2026 so that was news and more importantly what we've seen since especially this month, is that SOFR has traded outside of the 25 basis point range for Fed funds, which is between 4 and 4.25%. In fact, it's been consistently well outside that range, which points to potential funding issues, and the Fed will in all likelihood address that, and quite possibly at their meeting next week. What that means, if they end 2T, is that the runoff in their portfolio, which we saw in that chart in the appendix, is going to stop. They don't just plateau. What they'll likely do, and I don't know this, of course, with certainty, but I suspect is the case, the Treasury paydowns will be reinvested back into Treasuries and mortgage paydowns, since they don't want to hold mortgages long term, will also be reinvested in the Treasuries, probably more so in bills. And what that means then is going forward, given that the government is running large deficits, is that the Treasurer, the Fed, will become a buyer of Treasuries as a result. The cash treasuries will not continue to cheapen as they have, and swap spreads, which have gotten really negative, have gone the other way. And that just reflects the anticipation by the market that the Fed as a buyer of treasuries is going to keep issuance in check and keep issuance from flooding the market and driving spreads wider and term premium higher. And that is significant for us because if you look at the right-hand chart, this is our hedge positions pie chart, obviously, by DVO1. other words the sensitivity of our hedges to movements and rates and as you can see seventy three point one percent of our hedges are in swaps by DV01 so obviously this movement has been beneficial to us to the extent it continues of course it will continue to be beneficial in fact I just looked at swap spreads before I came in on the call today and if you look at pretty much every ten or outside of three years every one of them on a one three and six-month look back as at their wides, absolutely pegs 100% of the wides. So that's a significant movement. That being said, as we did mention, there has been some issues with the funding market with SOFR being outside of the range and spreads, funding spreads to SOFR have been a little bit elevated. We typically used to be in the mid-teens. It's there to the high-teens now. But the fact that the Fed is very much on top of this is good for us because it means they're going to be attentive to it and keep us from repeating what we saw for instance in 2019 the next slide is 13 refinancing activity and this kind of paints a very benign picture frankly I just want to talk about it if you look at the top left you can see the mortgage rates and the red line and the refi index and all rates have come down some the refi index is popped up it's not much in fact if you look at the left axis you can see you know we were at a 5,000 level in December of 2020 and we're far below that the second chart on the right just shows primary secondary spreads and they've just been very choppy there's really not a story to be told from that but what I want to focus on is the bottom chart and what this shows is the percentage of the mortgage universe that's in the money that's the gray shaded area and then you have the refi next and as you can see on the right hand side of this chart that this is there's some gray area there but it's very modest so again it paints a very benign picture but it's misleading and the reason it is so is because this is the entire mortgage universe most of the mortgages in existence today or a large percentage of them were originated in the immediate years after COVID so they have very low coupons one and a half to two and a half three and they're out of the money but if you were to do the same chart for just 24 and 25 originally mortgages it would be an entirely different picture it would be a much higher percentage of the mortgage universe in the money probably be north of 50 and since we as investors in the space and like our peers we own a fair number of 24 and 25 provisioning mortgages in fact you know to some extent somewhat of a barbell in the sense that most of our discounts are very old and most of our newer mortgages you know the higher coupons are lower wall and so that really means security selection is important and in a moment here I will turn the call over to Hunter and he will talk about what we've done in that regard in great depth but I just want to point out this picture that this chart is somewhat misleading before I turn it over to Hunter as always I like to just say a bit about slide 14 very simple picture there are two lines on this chart, the blue line just represents GDP in dollars, and the red line is the money supply. And what it points out is the continuing fact that the government or fiscal policy, if you will, is still very stintive. The government is running deficits between one and a half and two trillion dollars. That's in excess of five percent of GDP. And the takeaway is that in spite of what might be happening with respect to tariffs or the weakness in the labor market or geopolitical events, the government is supplying a lot of stimulus to the economy, and you can't forget that looking forward. And that's probably why, in spite of the tariffs, among other reasons, obviously, but why the economy really has not weakened materially. And with that, I will turn it over to Hunter. Thanks, Paul.

Hunter Haas, COO

I'd like to talk to you a little bit about how our portfolio of assets evolved over the course of the quarter our experience in the funding markets our current risk profile our portfolio is impacted by uptick in free payments and give a little bit of an my outlook I suppose going forward so coming out of a volatile second quarter we took advantage of an attractive entry point by raising 152 million equity capital and deploying it fully during the quarter the investing The financing environment allowed us to buy agency MBS at historically widespread levels. During the second half of the quarter, equity raised and slowed, but the assets we purchased in the third quarter were tightened sharply during that second half of the quarter. As discussed on our last earning call, our focus has been 30-year 5.5, 6s, and to a lesser extent 6.5 coupons, and those didn't tighten quite as much as the belly coupons, but we feel like they offer superior carrier potential going forward the portfolio remains a hundred percent agency RMS with the heavy tilt towards call protected specified pools these tools help insulate the portfolio from adverse payment behavior and reinforce the stability of our income stream newly acquired pools this quarter all had some form of free payment protection 70% were backed by credit impaired borrowers like low FICO scores or loans with high GSE mission density scores. 22% were from states experiencing home price depreciation or where refi activity is structurally hindered. Those pools were predominantly Florida and New York geographies. 8% were loan balance pools of some flavor. As a result of these investments, our weighted average coupon increased from 545 to 553. The effective yield rose from 538 to 551, and our net interest spread expanded from 243 to 259. Across the broader portfolio, pool characteristics remain very diverse and defensive towards prepays. Exposure, 20% of the portfolio now is backed by credit-impaired borrowers, 23% Florida pools, 16% New York pools. 13% investor property pools, and 31% have some form of loan bow story, if you will. We had virtually no exposure to generic or worse to deliver mortgage securities, and we were net short TBAs at 930. Overall, we improved the carry and prepayment stability of our portfolio while maintaining conservative leverage posture and staying entirely within the agency MBS universe. Turning to slide 17, you can see a sort of visual representation of what I just discussed. You can clearly see the shift in the graphs, the concentration building in the five and a half and six coupon buckets across the three graphs. These production coupons remain the core of our portfolio and continue to offer the best carry profile in the current environment. Now I'd like to discuss a little bit about the funding markets. The repo lending market continues to function very well, and ORCID maintains capacity well in excess of our needs. That said, we've observed friction building in the funding markets, particularly during the weeks of heavy treasury bill issuance and settlement. These dynamics have led to spikes in overnight SOFR and the tri-party GC rates relative to the interest paid by the Federal Reserve on reserve balances, particularly around settlement dates. This is largely attributable to declining reserve balances and continued heavy bill issuance. ORCID typically funds through the term markets, which has helped insulate us from some of the overnight volatility, but still term pricing has been impacted. We borrowed roughly SOFR plus 16 basis points for most of the year, but in recent weeks that spread has drifted up a couple of basis points, say SOFR plus 8B more recently. Looking ahead, we expect the Fed to end QT potentially as early as next week's meeting and begin buying treasury bills through renewed temporary market operations. If and when this occurs, it should provide positive tailwind for our repo funding costs, especially if it's paired with further rate cuts by the FOMC. This would help with the continued expansion of our net interest margin. Just wanted to make a brief note about this chart on this page. It might seem a little bit counterintuitive. The blue line on the chart represents our economic cost of funds. This metric, as you can see, is slightly higher in spite of the fact that rates are coming down. Then this is really due to the fact that as we've grown, there's a diminishing impact of our legacy hedges on the broader portfolio. So recall that this metric economic cost of funds includes the cumulative mark-to-market effect of legacy hedges. So it's sort of akin to the rate paid on taxable interest expense with the deferred hedge deductions factored in. On the other hand, the red line, which has been moving lower, represents our actual repo borrowing costs with no hedging effects. As the Fed cuts race, any unhedged repo balances will benefit directly from this decline. As of June 30th, 27% of our repo borrowings were unhedged, and that increased to 30% more recently, modestly enhancing our potential benefit to lower funding rates. Turning to slides 19 and 20, speaking of hedges, on September 30th, ORCID's total hedge notional stood, as I said, $5.6 billion, covering about 70% of our repo funding liabilities. Interest rate swaps totaled $3.9 billion, covering roughly half the repo balance, with a weighted average pay fixed rate of 33.31% and an average maturity of 5.4 years. Swap exposure is split between intermediate and longer dated maturities allowing us to maintain protection further out the curve while taking advantage of lower short term for funding costs. Short futures positions totaled $1.4 billion comprised primarily of SOFR five year, seven year and ten year treasury futures as well as a very small position and year swap futures. On a mark-to-market basis, our blended swap and futures hedge rate was 3.63 at 6.30 and 3.56 at 9.30. You think of this metric as the rate we would pay if all of our hedges had a market value of zero at each respective quarter end, a par rate, if you will. Our short TBH positions told 282 million, all of which were, I think, fanny five and a half. A portion of this short is really part of a bigger trade where we're long 15-year fives and short 30-year five and a half. So a 15-30 swap structured to provide production against rising rates in a spread-widening environment. The remainder of the short position was just executed in conjunction with some pool purchases late in the quarter following a period where spreads had tightened materially. So we didn't want to take the basis exposure. Orkin held no swaptions during the quarter, which was fortuitous because there was a sharp decline in volatility. At June 30th, approximately, as I mentioned, approximately 27% of our repo borrowings were unhedged. That figure they increased to 30% by September 30th. This increase reflects the impact of the market rally and the corresponding shorter asset durations, which allowed ORCID to carry a higher unhedged balance while maintaining minimal interest rate exposure. In other words, this shift does not indicate that the portfolio is less hedged. In fact, at June 30th, our duration gap was negative 0.26 years, and by September 30th, it had grown to negative 0.07 years. So it still highlights a very flat interest rate profile. Speaking of which, slides 21 and 22 get a real pitch sense of our interest rate sensitivity. ORCID's agency RMBS portfolio remains well balanced from a duration standpoint with the overall rate exposure very tightly managed. Our model rate shock shows that a plus 50 basis point increase in rates we estimate would result in a 1.7% decline in equity, while a 50 basis point decrease would reduce equity by 1.2%. So again, it's very low interest rate sensitivity, at least on a model basis. The combination of higher coupon assets and intermediate to long-term, longer-dated hedges reflect our continued positioning that guards against rising rates and a steepening curve. This positioning is grounded in our view that a weakening economy and lower rates across the curve while potentially introducing short-term volatility should be positive for agency MBS and the broader sector in general, as such environments are often accompanied by stress in equity and credit markets, and investors often seek safety in fixed income and REIT stocks. Conversely, if the economy remains strong or inflation proves sticky, we would expect a corresponding rise in rates and a basis widening in the belly of the coupon stack without performance shifting to shorter duration high coupon assets, which are currently lagging due to prepayment exposure. And that's a perfect segue to slide 23, where we talk about our prepayment experience. This has been something that we've largely glossed over for the past couple of years, other than a brief period of time following a 10-year brief run at 360 last September. In the third quarter, speeds released, in the third quarter, including the September speeds released in early October, Orbit experienced a very favorable prepayment outcome across the portfolio. Lower coupons continue to perform exceptionally well. 3s, 3.5s, and 4s paid at 7.2, 8.3, and 8.1 CPR compared to the TBA deliverables significantly slower at 4.5, 2.9, and 0.7. 4.5s and 5s paid 11 and 7.5 CPR for the quarter versus 2.3 and 1.9 on comparable deliverables. Among our low premium assets, which are 5.5s largely throughout most of the quarter, these were largely in line with the deliverables. 6.2 was our experience, 6.2 CPR versus 5.9. However, in the most recent month, generic 5.5 jumped up to 9 CPR while our portfolio held steady at 6.3, really underscoring the benefit of pool selection and the relatively low wall of the portfolio. In premium space, sixes and six and halves paid 9.5 and 12.2 CPR for the quarter compared to 13.8 and 29.5 on TBA deliverables. As refi activity spiked in September, the various forms of call protection embedded in our portfolio produced very sharp divide though. In the most recent month, our six has paid 9.7 versus 27.8 percent for the generics and our six and a half is paid 13.9 versus a 42.8 CPR on the generics. So you can really see the benefit and potential carry above and beyond TBA for those coupons. Overall, the quarter's results highlight our discipline pool selection where call protected specified collateral continues to deliver materially better prepaid behavior than the TBA deliverable, as I mentioned. Just a few concluding remarks from me. Summary, we experienced sharp rebound in the third quarter, more than offsetting the mark-to-market damage done during the volatile Liberation Day widening in the second quarter. Orchid successfully raised 152 million during the quarter and deployed the proceeds into approximately 1.5 billion of high-quality specified pools. The pools were acquired at historically widespread levels and will serve a meaningful driver of increased earning power for the portfolio in the coming quarters. While our skew towards high-coupon specified pools and bear steepening bias resulted in slight underperformance relative to our peers with more exposure to belly coupons, we remain highly constructive on our current asset and hedge blend. We believe our positioning will continue to deliver great carry and be more resilient and a sell-off, particularly given our call protection and limited convexity exposure. Looking ahead, we're very positive on the investment strategy. As I mentioned, several factors that could provide significant tailwinds to the agency RMBS market and our portfolio for the quarters ahead are continued Fed rate cuts, the anticipated end of QT, a renewed treasury open market operations to help stabilize the repo and bill markets, potential expansion of GSE retained portfolios, a lighthouse and treasury department that are openly supportive of tighter mortgage spreads. We also continue to see strong participation from money managers and the REITs, as Bob alluded to. There's potential for banks to reenter the markets more meaningfully as funding and regulatory capital conditions improve. Taken together, we believe the current opportunity in agency RMBS is still among the most attractive in recent memory, and we're well positioned to capitalize on that. With that, turn it over to Bob.

Robert Cauley, CEO

Thanks, Henry. Great job. Just a couple concluding remarks, and then we'll turn it over to questions. Basically, just to reiterate kind of our outlook, So I think that it's kind of hard to say where we go from here in terms of the market and the economy. I think that we're possibly at a crossroads. On the one hand, we've seen a lot of labor market weakness, and it's gotten the Fed's attention, and they appear ready to cut rates, which could lead to a prolonged low-rate environment. We also see a lot of resiliency in the economy, very strong growth. Consumer seems to be in decent shape. And as I mentioned, the government's running large deficits. Plus, you have the benefits of AI and the CapEx build-out, all that tied into the one big beautiful bill and the very favorable tax components of that. So I think the market and the economy go either way, but the important thing is, as Hunter alluded to, is that the way the portfolio is constructed with the high coupon bias, with hedges that are a little further off the curve, and the call-protected nature of the securities we own, I think that we can do well in either. So, for instance, if we do stay in a low rate environment and speeds stay high, we have very adequate call protection. And to the extent that the opposite occurs and the economy restrengthens and we start going into a higher rate environment, we have most of our hedges further off the curve and we have higher coupon securities that would do well in the sense they would have enhanced carry in that environment. So I guess one final comment is that we do expect now, especially after the day of today, that the Fed will likely cut a few times. And over the course of the next few months, we're probably going to potentially adjust our hedges to try to lock in some of that lower funding and maybe add a little uprate protection because we think if the Fed does ease a few times, then I'll likely move after that to hike. So with all that said, we will now turn the call over to questions.

Operator

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment while we compile our Q&A roster. Our first question is going to come from the line of Jason Weaver with Jones Trading. Your line is open. Please go ahead.

Hunter Haas, COO

Hi, guys. Good morning. Congrats on the results you've seen this quarter and the growth. So I guess first, given the relatively consistent leverage and even greater liquidity now, as well as sort of the positive result that you mentioned, the preparator marks, especially lower vol, is there anything particular on the horizon macro-wise that you'd be looking for to change overall risk positioning, notably like maybe leaning more into leverage?

Robert Cauley, CEO

Well, as I kind of said at the end, we could with leverage. I mean, like I said, there's two paths I see the market following. You know, one is where we kind of stay where we are. The Fed continues to cut. Rates stay low. In that environment, you know, we're going to benefit, obviously, from the first few rate cuts because the percentage of our funding that is hedges on the low side. I think in the event that we do see that, as I mentioned, I think we'll probably look to lock that in. And if we do so, we probably would be comfortable taking the leverage up some to the extent the market and the economy's rebounds and we see a strengthening, which I think is very possible. Frankly, I would say I would take the under on the number of rate cuts between now and the next year. Then I would say we would not be taking leverage up. We would be looking to kind of protect ourselves, one lock-in funding, and then look to protect ourselves on the asset side from extension and, you know, rate sell-off impact on mortgage prices. Got it. Thanks. That's helpful. And then second, referencing the remarks on the high coupon spec pools you purchased just as of late, do you have any view on payups

Hunter Haas, COO

upside potential here, especially if we see more refi momentum growing? We've really seen payups ratchet and higher in the beginning part of this quarter. This most recent cycle of the GSEs, we saw payups increase sharply. A lot of that is attributable to the fact that there were people who were long TBAs as kind of strategy when the roll markets were more healthy, and that carry from those rolls was just completely evaporated. And so you've seen people who might have had heavier concentrations in TBAs really be forced to dive in and just start buying everything they could find to supplement that income. We fortunately didn't have that problem, and most of the spec pools we bought really were kind of the first half of the quarter.

Robert Cauley, CEO

So, yeah, let's just reiterate that point. I mentioned we had the spike tighter in mortgages like in early September. I forgive you if you mentioned this, I'd miss it, but of the capital we raised in the quarter, 70% of that was deployed before then. So we benefited from that. and then also I just you know we talked about this at the end of the second quarter at that time the average price of the portfolio was basically par it was like 99.98 and most of what we added all of what we added were to higher coupons but that being said the average price of this portfolio now is a little over 101 101 and seven and our average payoff is 33 ticks so while we've been adding call protection we're not paying up for the highest quality frankly we don't think that it's been warranted not get too into the weeds of what we've done but we've gotten as you saw in our realized prepayment speeds very good performance out of those securities without having to pay you know extremely exorbitant payups I don't know that we're ever going to get back to where we were looking 20 or 21 just by comparison you know back then our higher coupon New York whatever you know coupon they were the payups were multiple four and five points. I don't know that we're going to see that anytime soon, but it's, you know, we've done quite well without having to go anywhere near those kind of levels. Thanks for that. I appreciate the time,

Operator

guys. Yeah. Thank you. And one moment for our next question. Our next question will come from the line of Eric Hagan with BTIG. Your line is open. Please go ahead. Hey, thanks. Good morning,

Speaker 1

guys. Eric, how are you? Hey, good morning. I think you guys have kind of talked a little bit around it but you know are there scenarios where dollar roll specialness would return to the market in a more meaningful way how do you how do you feel like specialness would affect like trading volume and kind of market dynamics over overall um going forward sorry about that uh i don't know

Robert Cauley, CEO

that i mean we saw that in really in spades back in the early days of qe when the fed was buying everything i don't think we're going to see qe in fact it's been made pretty clear by the fed that when they reinvest pay-downs with respect to mortgages, they're only going to be buying treasuries and probably bills. So I don't know. I don't really see the specialists of the rural market coming back in a big way. You know, we've historically not been big players in that regard, as you probably know. So I don't see it as a core – one, I don't think it's likely to happen, and two, it's never been a core element of our strategy.

Hunter Haas, COO

Yeah, it's looking as long as, you know, especially in the upper coupon, that's really being driven by fear of prepayments. And the speeds that are being delivered into these, the worst to deliver rules that are being delivered in the PBAs are pretty bad here. So, I mean, I don't expect them to continue to be so for the next couple of months. So I think it's going to stay depressed, at least in that space, until we pop out of this. It'll either pop out of this rate environment that we're in now, so trend back towards the top or middle of the recent rate range, or until rates move meaningfully lower. But I think we're kind of at a spot here where you're not going to see too much in the roll space.

Speaker 1

Yeah, that's interesting. Can you talk through some of the, you know, what the supply and availability for longer-dated repo looks like right now? I mean, do you see that as like an effective hedge for the Fed not cutting as much as what's currently anticipated?

Robert Cauley, CEO

We like to be doing so. We've looked into it a lot. Unfortunately, the spreads are just too wide. We've done some, and we will continue to do so. But as Hunter mentioned, you know, we were historically in the mid-teens. We're approaching the higher teens. But you're getting above that when you start going out in terms. So we have done some just to try to lock in as much as we can. And we do it opportunistically. So, for instance, if we were to see, let's say, the government reopens and you get some heinous non-farm payroll number in the market, prices in seven or eight cuts, that's when we try to do those things. So I would opportunistically.

Hunter Haas, COO

Yeah, Eric, it's been more effective to do in future space for us, and we do so from time to time. I think I alluded to the fact that we have a pretty good chunk of the portfolio that is unhedged right now. So we can certainly have room to move in and do some shorter-dated futures in the first year or two of the first couple years of the curve or some kind of a swap or something like that with a relatively low duration. But we joke around that the repo lenders are always, you know, very quick to price in hikes and very reluctant to price in cuts. So that's been kind of the experience that's kept us from – and you just think about it, you know, the dynamics of what usually happens when the Fed gets involved and, you know, has to cut five or six times. It usually coincides with a credit market rolling over or a weakening economy. And, you know, those are not particularly comfortable environments for repo lenders.

Speaker 1

Got you, guys. Thank you so much. Thank you, Eric.

Operator

Thank you. And one moment for our next question. Our next question will come from the line of Mikhail Goberman with Citizens JMP. Your line is open. Please go ahead.

Mikhail Goberman, Analyst — Citizens JMP

Hey, good morning, guys. Hope everybody's doing well.

Hunter Haas, COO

Hey, Mikhail.

Mikhail Goberman, Analyst — Citizens JMP

You guys talk about call protection. About what percentage would you say your portfolio is covered with call protection if rates were to go down, say, 50 basis points in a sharp manner?

Hunter Haas, COO

Almost 100% of the portfolio has some form of call protection. We have little pockets of what we call kind of lower pay-up stories, like LTV, that sort of thing. We're still constructive on those in spite of the fact that they're relatively low pay it low in terms of pay-up, but we have a housing market that's under pressure and it's difficult for borrowers for high LTVs to turn around and re-fried every opportunity. They will ultimately be able to do so, but it's not very cost effective for them. It's not the lowest hanging fruit, I guess, the more generic stuff is. So, yeah, almost all of it is. We have some stuff that we keep around just in case we have a dramatic spread whiteness and really low pay-ups pools that we use, you know, if we ever have a situation where we need to quickly reduce leverage by just delivering something in the TBA. But the rest of the portfolio has got some form. And most of it has been working out really well for us.

Robert Cauley, CEO

And as far as the rally, as I mentioned, our weighted average price at the end of the quarter was a little over 101 I think the average coupon is is still high five so we're it's premium it's in the money but it's not it's not so extreme so another 50 basis points rally gets you you know obviously like a north of the six which is like a 102 or three price so they're going to be faster but with the call protection we have I don't think the premium amortization is going to be so detrimental in fact I think our premium memorization for this quarter was very very modest so it would uptick obviously from there but it's nothing like for instance what we saw in the immediate aftermath of covid when you know

Hunter Haas, COO

those numbers were very very large yeah as we bounced around kind of this rate range where we have you know bought the more expensive i guess or the higher quality stories has been kind of in that first discount space and uh the rationale there is just they're relatively cheap at that point in time so like when rates were a little bit higher fives were you know 98 99 handle we bought a lot of new york fives uh in the very beginning part of the quarter uh where rates were a little bit higher and so those will do very well as uh if we continue to rally that's helpful

Mikhail Goberman, Analyst — Citizens JMP

thank you very much and um if i can ask one about the um flesh out your comments a bit about the hedge portfolio if swap spreads were to widen back out how much benefit do you

Robert Cauley, CEO

guys see to the portfolio he said why now they've been widening right I know it's unusual continue to wipe it yes continue to benefit from that yeah I mean it's so I don't know if we have a dollar amount on it but it was you know

Hunter Haas, COO

If you look at around 2 million DV01, so you can think of it in those terms, yeah.

Robert Cauley, CEO

So, like for instance, it's like the long end is like at negative 50, so let's say you went to 40, obviously, you know, something like that. I don't know how much further you can go, though, because you could argue that the market's really priced in the end of QT and the Fed stepping in to reinvest paydowns in the treasuries. I think in order for that to happen, you'd almost have to see QE. Meaningful, not just reinvesting paydowns, but what Hunter said. So $2 million BBO wants it to get like another 10 bips. You know, what is that? It's something like 15 cents or something like that or 12 cents. A book.

Mikhail Goberman, Analyst — Citizens JMP

Fair enough. And if I could just squeeze in any update on current book value, month to date.

Robert Cauley, CEO

It is up a hair, basically. You know, we don't audit that number every day, just we get a dollar, an amount every day. It's up very, very modestly for the quarter end.

Mikhail Goberman, Analyst — Citizens JMP

Gotcha. Thanks so much, guys, as always. Take care. Yep. Yes, we go.

Operator

Thank you, and I would now like to hand the conference back over to Robert Colley for any further remarks.

Robert Cauley, CEO

Thank you, operator. Thank you, everybody, for taking the time. As always, to the extent anybody has any questions that come up after the call or you don't get a chance to listen to the call live and you wish to reach out to us, we are always available. The number here is 772-231-1400. Otherwise, we look forward to speaking to you at the end of the fourth quarter, and have a great weekend.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.