Good morning, and welcome to the Third Quarter 2020 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, October 30, 2020. 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 provision 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.

Good morning, everyone and welcome. I hope everyone had a chance to pull our slide deck off our website last night. As usual, I'll be going through the deck, won't necessarily touch on every slide, but they're all there for your reference as needed. As always, I'll start on slide three, which is just the table of contents. Just to give you an outline of the agenda for today. The first thing we'll do is just give you a summary of our financial highlights for the quarter. Then I will spend some time talking about the market developments in the background for the quarter and how that influenced our results. And then I'll go into our financial results, a more detail, and then finally delve into our portfolio credit hedge positions in some detail. With that, I'll get started. With respect to the quarter, we generated net income per share of $0.42 and earnings per share of $0.33, excluding realized and unrealized gains and losses in our RMBS and derivative instruments, including net interest income on our swaps. We had a gain of $0.09 per share from net realized and unrealized gains on our RMBS and derivative instruments, including interest on our swaps. Book value per share at the end of the quarter was $5.44. This is an increase of $0.22 or 4.21% from the value at June 30th. During the quarter, the company declared and subsequently paid $0.19 per share in dividends. Since our initial public offering, the company has declared $11.525 in dividends per share, which includes our most recent $0.065 dividend declared in October, payable in November. Total economic return was $0.41 for the quarter or 7.9%. That is not annualized. Turning to slide five. In this slide, we show our performance on a stock basis. This…

Thank you, sir. [Operator Instructions] So, your first question will come from the line of Jason Stewart from JonesTrading. Your line is on line. Go ahead, please.

Hey, good morning. Thanks.

Hi, Jason.

Good quarter. How are you doing today?

Not too bad.

Good.

Yourself?

Good. Good. Thank you. Thanks for taking the question. I wanted to dig in a little bit more on spec pools and wondering if you could give us some more color on the types of pools you own that you're favoring versus deemphasizing given your comments on primary,secondary in the current rate environment.

Sure. Yeah. This is Hunter, Jason. So, as we alluded to you in that slot towards the end of the deck, we have a high concentration of very high quality specified pools. So, those would be lower loan balance $85,000 maximum balance within a pool 110,000, 125s to lesser extent. The higher loan balance stories have just not really been performing very well. So, 175, 200K Max, they're obviously are better than TBA, but it's just not enough. Not slow enough to -- not put pressure on earnings if we have a lot of those. So, we have 175 or 200Ks have never been much of a poor position for us. And we have actually reduced some of some of that position even further. So, that's predominantly in the up in coupon space. So call it 3s, 3.5s, 4s, 4.5s. We even have a few 5s. It's not a huge position. Then in the lower coupon space, I think Bob alluded to, we've been allocating more towards TBA trades and lower pay up stories. So just sort of by new issue, lower coupons which are just by virtue of the fact that they have relatively low note rates to the borrowers are going to -- tend to prepay a little bit slower. So, we've been transitioning a little bit of the portfolio into that bucket as well. So, I guess to sum it up, I would characterize it as up in coupon, very, very high quality specified pools, got a coupon more generic types, LTV, FICO stories, which are just not going to really have much of an incentive to refi from this point.

I would say I have one brand point to that, Jason, is we probably deemphasized the New York story because of credit forbearance seen those elevated most -- because we haven't been adding those.

Okay. That makes sense. And when you pull that together with -- there's a big allocation of 3.5s and 13 while it's pretty new, but the CPR is quite impressive. When you pull all that together, where do you think CPR is trying to -- assuming constant state, you don't make major changes. I mean, are we talking about a CPR that's going to stay in the teens, do you think, or does it migrate into the 20s over time?

No, I think we would -- I think we're going to manage the portfolio in such a way that we would target those teens. Speeds that were released in October, which are reflected in our presentation materials because they reflect paydowns that would have occurred during the month of September or a little bit on the fast side. I think it caught most of the market off guard. It was a little bit of a surprise to the upside, just in terms of how fast the speeds were. I think going into the end of the year, we'll see speeds remain elevated. And then going into next year, I think, you'll finally start to see a little bit of burnout kicking in. So that coupled with the fact that the GSEs aren't going to be buying out delinquent loans until they're 24 months delinquent, as opposed to 90 days should give us a couple of CPR relief, which doesn't sound like a lot, but for this portfolio, it has a meaningful impact on earnings.

And by the way, I did mention, Jason, that we had done a fair amount of trading since quarter end. And most of that has been focused on bringing the wall of the portfolio, the average wall, but bringing that down. So, our wall is probably lower than that number in those slide today.

Okay. Okay. Fair enough. One more, and then I'll jump in and let other people ask questions. When you think about more broadly, TBAs where they're trading in terms of specialness [ph], how high of an allocation of the portfolio could that get to given how special they are today?

We're probably nine or 10 to one specs to TBA. I could see it getting higher. I mean, they do carry extremely well, but there's a lot of duration with those. Of course there's duration with specs as well. And I would say in a stable rate environment, they're probably a little more efficient from a cash management perspective, because you don't get paid downs. Of course, you can get margin calls, rates move higher or lower this case may be. But I could see higher. I know some of our peers -- those allocations are quite high, probably more like a two to one ratio of specs to TBA. I don't know that we would get that high, but I could see it going higher. I mean, my -- I don't have a set number in mind. It's more -- we go through the month and see how the load is performing and what we're looking to -- maybe on load and where do we go into it. How the options go? I think the markets kind of dictate to us kind of how we do that.

Yeah.

Own pools if we can, but to the extent that the specialness in the roll markets is just so great then we're obviously going to shift the allocation of capital towards that portfolio. I think it's around one and a half turns of leverage now. And yeah, I could certainly see that becoming double the position that it is now, if not more.

Thank you. [Operator Instructions] Your next question will come from the line as Christopher Nolan from Ladenburg Thalmann. Your line is now live. Go ahead please.

Hey, guys. Bob, did you -- in your latest comment, did you indicate that TBAs could double from the current level or just clarification?

Yes.

Okay. Also, I mean, the EPS, the core EPS is very strong, much stronger than expected. It’s well above the mid-teen ROE target that you guys were discussing earlier. Given your outlook for continued stable rates and everything else, should there be any sort of update in terms of what your core ROE target would be?

It’s certainly stable. I don't see it dropping. I did try to mention that on the one slide. We expect it to be stable. I know a number of our peers have had strong numbers. It just reflects the environment we're in. Like as I mentioned, the TBA roll market and all-in NIMs are north of 200 bips in the specs pool space. They're maybe not quite that high, but also very strong. I wouldn't want to guide it much higher, but I would say that I see high level of competence in staying where it is.

Okay. And then what does that mean for the dividend outlook?

Well, we've been raising it. Speeds are the biggest driver. Hunter mentioned that we did get a bit of a surprise this month. I think that was probably a combination of things that caused that. We did have, for instance, the first six month forbearance period, and there may have been some buyout activity related to that. Otherwise, the fundamentals -- if you look at the refinance index, those kinds of things, those have been very stable. They wouldn't have implied an increase in the speed. So, I would expect them to normalize back to where they were. And I guess the other indicator would be origination. We have -- the third quarter, especially in that early fourth, origination was picking up, which is an indication that mortgages are being originated because of speeds, presumably. So, they are still elevated. It's not going to change. But I guess that's all I can say.

And final question. Do you have any sort of update to the book value since September 30th?

It's modestly higher, but it's not materially higher. I want to say a nickel, something like that, if that.

Great. That’s it for me. Thank you.

All right, Chris.

Thank you. [Operator Instructions] Presenters, I'm seeing no questions on the phone line. Please continue.

Thank you, operator and thank everyone. Once again, we appreciate your time. To the extent you come up with a question later, or you didn't catch, I have a chance to catch the call live. Please feel free to reach us in our office. Our number is (772) 231-1400. Always look forward to your questions and otherwise look forward to speaking with you at the end of the year. Everybody, please stay safe and talk to you again. Thank you. Bye.

Thank you so much, presenters. And again, thank you everyone for participating. This concludes today's conference. You may now disconnect. Thanks again and have a lovely day.