Orchid Island Capital Inc (ORC) 2018 Q2 法說會逐字稿

Good morning, and welcome to the Second Quarter 2018 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, July 27, 2018.

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 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 further 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 welcome to our earnings call. I hope everybody has had a chance to download our slide deck off of our website. I will be using that exclusively for the call today, try to walk you through our results where we've -- steps we've taken with the portfolio and how we see things going forward.

I'm going to start with Slide 3, which is the table of contents, as I always do, just to kind of give you an outline of the discussion today. As usual, the first thing we'll do is kind of go through the market developments that took place during the quarter, both the rates market and the mortgage market. This gives us a background to then move our discussion on to how these developments impacted our results for the quarter, what steps we've taken with the portfolio to position the portfolio and how we see things going forward.

So with that, I will dive right in to Slide 4, which is just the highlights of our results. I do have to apologize that we did make a last second change to our earnings, which caused 2 of these numbers to round. The second and the third bullet points are the items I'm referring to. One line that did not change is the earnings per share. For the quarter, we generated a GAAP net income per share of $0.03. We incurred $0.34 -- as opposed to the $0.33, I apologize, of net unrealized (sic) [realized] and unrealized gains and losses on MBS and derivatives and including the net interest expense on the interest rate swaps.

Excluding those items, we generated $0.37 of earnings per share. So $0.37 of earnings per share, less the $0.34 of unrealized gains and losses, resulted in a net income per share of $0.03.

Book value at the end of the quarter was $7.86, a decrease of $0.23 or 2.84% from $8.09 at the end of the previous quarter. We paid dividends of $0.27 per share. And during the quarter using our share buyback program, we repurchased approximately 1.07 million shares at a weighted average purchase price of $7.19.

Economic return for the quarter was $0.04 or 50 basis points for the quarter and 2% annualized.

I will now turn to Slide 6. We can start talking about market developments in the quarter. I will proceed through these slides fairly quickly because at the end of the day what we want to talk about is what all this meant for Orchid during the quarter and what we've done with the portfolio, how we see things going forward and how we're positioned.

Starting on Slide 6. What we show here are movements in the U.S. Treasury curve and the U.S. dollar swap curve. We show both Q1 and Q2. And what we saw in Q2 was really a continuation of what took place in Q1. So if you look at the left-hand side, which is the treasury curve, the top part of that shows a blue line, which represents the treasury curve at the end of 2017; the red line shows the curve at the end of the first quarter; and the green line is at the end of the second quarter.

On the right, you see the same thing only for the swap curve. And in both cases, the bottom part shows the change during the quarter. And what is very evident, of course, is that the curve has continued to flatten, rates have moved higher and flattened the curve. So what we call a bear flattener. And this has been the case, as I said, for the entire year.

Turning to the next slide. Now we'll just focus a little bit on the 10-year part of the curve. Primarily, the reason we do that is that, that's the most important part of the curve for mortgage-backed investors. And as you can see on the left side of the page, we show movements in the 10-year treasury during the second quarter of '18. Below that, the 10-year swap. And on the right side of the page, we just give you a broader -- a 2-year look back for both the U.S. Treasury note and the 10-year dollar swap.

I'm not going to spend much time here, just point out a couple of things. As you can see with respect to the 10-year treasury, the first half of the quarter rate sold off, we got north of 3.1%, primarily driven by strong economic data and the announcement of fiscal stimulus.

Second half of the quarter, things turned around. Trade war talk became much more prominent. And we also had the surprise election result in Italy on the Memorial Day weekend, which caused the market to rally below 2.8%; came back from there; ended up the quarter slightly higher in rates on the long end.

If you look to the right-hand side, you can see the big picture. We are now at levels in rates that we last saw at the end of the taper tantrum in late 2013, early 2014. The big difference, of course, is that the Fed has been moving rates much higher over this period.

Turning to Slide 8. Here, we show -- this is something that the market is focused on very much. The spread between the 5-year Treasury note and the 30-year Treasury bond. On the top of the page, we show 2 lines. The blue line represents movements in the 30-year Treasury bond. The red line is the 5-year treasury rate. It's interesting to note, if you look at the end of 2013, the peak in the 30-year Treasury bond was reached at just under 4%.

Fast-forward to today, and we've seen the economy continue to be very strong, the unemployment rate has moved below 4%, at least briefly, and the Fed has raised rates 7x over that period. Yet, the yield on the 30-year Treasury bond is actually lower than it was then. However, the 5-year being sensitive to Fed expectations has moved higher, approaching 3% itself in May of this year. And the result of all this is what you see on the bottom. And that is simply the spread between these 2 yields, and it is continuously declined. And at some points, it's gotten below 20 basis points over the course of the last few weeks.

Now given this backdrop, I'll turn to Slide 9. I'm just going to talk briefly about returns in the U.S. fixed income markets. This is basically year-to-date, which I think is appropriate given that the conditions have been relatively the same for the first 2 quarters of the year, that is a flattening of the curve.

Just a few highlights here. We have a table on the left. If you look at the treasury returns, 3-month, 5-year and 10-year, you can see that shorter duration has outpaced longer duration. And then with respect to credit quality, it's interesting that investment-grade corporates substantially underperformed high-yield corporates by over 300 basis points.

With respect to agency mortgages, the year-to-date performance is negative 99 basis points. So generally, agency mortgages have outperformed other high-grade structured products in corporates. And then within the [third] agency space, the results are fairly similar, 15 years have outperformed 30 years slightly.

For Q2 alone, the returns for the mortgage index were positive 24 basis points. So first quarter was clearly the worse of the 2.

Now turning to Slide 10. Mortgages are, obviously, affected by movements in volatility. All mortgage-backed securities have embedded options in them. And volatility has been a driver of performance year-to-date. If you look on the left-hand side, you see a slide. What we're just showing here is at the money, 1 by 10-year volatility, this is kind of a short-dated volatility measured. That's the blue line. The red line is just showing that same number for a 50 basis points out of the money option. And you can see their movements are highly correlated.

Just want to make a few points here. As you can see in the first quarter, volatility spiked. And that had a meaningful impact on our mortgage performance in Q1. However, volatility has come off during Q2. That was a positive development for the mortgage space and has continued to decline into third quarter of 2018. Another benefit or a significant event related to this -- with volatility declining is that with respect to our hedging strategy, declining volatility means that all else equal, premiums on swaptions have come in some, and we've used those as a -- more so as a hedge instrument.

When I get to our discussions of where we see the market going forward, this will become more relevant. But we basically see greater risk to an upside movement in rates and volatility than the opposite. And therefore, these swaptions represent a very attractive hedge instruments for us since they will obviously go in the money with rates moving higher and/or volatility moving higher as well.

Turning to Slide 11. Now we'll get into a little bit more of mortgage performance before we start talking about our specific portfolio. The left-hand side of the page just shows the performance of a 30-year mortgage versus a 10-year hedge ratio. We're using JP Morgan's hedge ratios at the beginning of the period. And each line corresponds to a specific coupon. The blue line is the Fannie 3. These are 30-year fixed rate mortgages. The red line is a 3.5, the green 4; and the purple is a 4.5.

This is somewhat misleading because, as I said, we're using a 10-year hedge ratio. The higher coupon mortgages more or less rest on the front end of the curve. And with the substantial flattening that we saw, their performance was adversely affected. And as a result, their performance versus a 10-year hedge ratio appeared much worse.

With respect to Q2, we did see some modest widening of mortgages. As a result, the price component of total returns for the mortgage universe was a slight negative, but not enough to drive the total return for the quarter negative as coupon income was sufficient to overcome that.

And as I said, previously, the mortgage index generated return of about 24 basis points. And as we'll see in a few moments, that was very consistent with the performance of the Orchid portfolio. A couple of other things to point out here. One of the things with respect to mortgage performance is supply. With rates higher, we've seen the refi index move lower. We've seen refinancing activity much lower. And as a result, supply of mortgages has continued to decline. And this has offset the negative impact of reduced Fed purchases. In fact, with the refi index at about 1,000, in the instance of May, if you look at prepayments across 3.5s, 4s, 4.5s and 5s, they were separated by only 5 CPR. So refinancing activity has definitely come off.

If we turn to Slide 12, here, we show the performance of our previously, actually, 2 largest holdings, still 2 of our biggest holdings, Fannie 4s and 4.5s. But we also show on the right-hand side, these are -- these 2 lines represent pay-ups for various specified pools. In the case of the red line in the top right, that is an 85k Max 4.5 and the blue line is a 4. And what you can see is these pay-ups have come off. And this really reflects the fact that the market has become much more concerned with extension risk and less so with prepayment risk.

The Fed is clearly in play and will probably remain so for some time. Not many investors see a meaningful rally on the horizon. And even with the long end of the curve fairly muted and being held back by a variety of things, there's still some risk that you could have a sell-off. And therefore, mortgages are very much exposed to extension.

Before we go to our portfolio, I'd just want to mention a few things on Slide 13 just with respect to our funding. We have a charge here, which is -- was very much a topical discussion this year, especially in the first quarter. Two lines here. The first one is the green line, which represents the spread between 3-month LIBOR and 3-month OIS. OIS just refers to overnight index swaps. That's basically the market's proxy for movements in the Fed funds rate or Fed hikes. And what we saw in the first quarter was a large movement in 3-month LIBOR relative to market expectations for the Fed. That spread moved from 25 basis points to 60 on April 1. It has since come off and continues to do so. But what that means for us from a funding and hedging perspective, our predominant hedge vehicles are Eurodollars and swaps. And in both cases, the floating side of that is 3-month LIBOR. So with 3-month LIBOR moving out as it did, it was somewhat of a windfall for us on the hedge side.

On the repo funding side, that spread, which is represented by the blue line, that spread was much more muted, did not blow out nearly as much and basically has remained fairly stable. It has traded in a 10 basis point range year-to-date. And as a result, we did not see that spike in our funding costs.

So in terms of running a levered MBS book, this movement was beneficial for us in the sense that the receive floating leg of our hedges did much better than the pay floating on the actual funding book. So that was a good outcome. As I said, it has come off quite a bit. And those spreads are narrowing as we sit here today.

Now I'll turn to Slide 15 and start to talk about our results. A lot of this information is going to be for information only. I'm not necessarily going to speak to every slide, but I will just highlight the ones I think are the most important.

On Slide 15, this is based -- on the left side, we decomposed our return, I apologize. The bullet points in the front said $0.33 and $0.36. The numbers were actually $0.37 and $0.34 for the net income and the net income attributable to gains and losses.

On the right-hand side, we show our returns across the portfolio, both the pass-through portfolio and the structured portfolio. The bottom right-hand corner of that table shows a return of 100 basis points. What we saw this quarter in our portfolio mirrored what we saw in the mortgage universe as a whole, slightly negative price returns, offset by coupon income, resulting in a net slightly positive return for the quarter. In our case, 100 basis points with a levered portfolio versus the 24 basis points for the index.

Now I'd like to turn to Slide 16. And this is kind of the big picture story of where we see things both in the recent past, but also going forward. What we show here on the top are several lines. There's a blue line, a green line and a red line. The blue line just shows you the yield on our portfolio over the life of the company. The bottom line there is the red line that is our economic funding cost, which basically is just our actual repo expense adjusted for hedges. And then the net of those 2 is the green line.

On the bottom of the page, you show the dividend. What's interesting, as I said previously, the 30-year Treasury bond peaked at the end of the taper tantrum, and has since moved lower. However, yields on our portfolio that do not follow that pattern have continued to move higher, and for the last 4 or 5 quarters, have been generally above 4%.

On the other hand, of course, the Fed has been raising rates, 7 times so far during this cycle, with probably more to come. And as you can see, our funding costs have approached 2%, have somewhat stabilized of late. I'll have more to say about that in a moment. The net of that is our net interest spread. And as you can see for the last 4 quarters, it's been between 218 basis points and 227. So relatively stable. The dividend's been at $0.09 for a few quarters and running. Going forward, what does this mean? Well, the spread is key. The gap between the yield on the assets and our funding costs will drive our dividend going forward, and we'll spend a little more time speaking about how we see that unfolding going forward in a moment.

Turning to Slide 17. This is just our earnings per share. Both the bottom line number, which as I said, was $0.03 for this quarter, but also this item that is not a core number but basically is our net income, excluding mark-to-market gains and losses on our portfolio. And derivatives, as you can see, has been trending lower, reflecting what we just saw on the last page.

Finally, Page 18, with respect to results. We show activity in the portfolio. On the left-hand side, our capital allocation. As you can see, it's been relatively stable. The allocation of capital between the pass-through portfolio and the structured portfolio has not changed meaningfully. And on the right-hand side, we just show a roll forward of purchases, sales, mark-to-market gains and pay downs and so forth. The portfolio size was reduced slightly during the quarter.

Now I'd like to get into the portfolio characteristics and where we position the portfolio and what we see going forward.

On Slide 20, we show the composition of the portfolio. But before I get into the details of this, I just want to highlight an overview kind of what we said. So we've seen this flattening of the curve throughout the entirety of the year. The long end of the curve has stayed generally below 3% and our funding costs have continued to go higher. As I said, we expect going forward the economy to remain fairly strong for a time being, and the Fed to continue to raise rates. We did not see a meaningful rally in the long end of the curve. And in fact, we see the risk going forward as asymmetric. By that, I mean, I think the risk that longer rates would have moved higher is higher probability than a long-end rally. And as a result, we are positioning the portfolio with that in mind; we're trying to remove as much extension risk as we can from the portfolio in anticipation of that potential outcome. And as we'll see here, the portfolio has changed now. We show far more detail here than we have in the past. And I think it's important because we want to delve into the details of what we've been doing with the portfolio to address these risks that we see moving forward.

As you can see, we show you on the left-hand column, the various securities that are owned, whether they be ARMs or fixed-rate CMOs and the various fixed-rate securities, down to interest IOs and inverse IOs. And then the subsequent columns show you the par amount, the market value, the percent of the portfolio, average price and so on.

I want to point out a few things that reflect this movement that we've -- the steps we've taken to remove extension risk. We've added fixed-rate CMOs. As of the end of the most recent quarter, that market value of those was almost $550 million. At the end of last year, we had none of those. These are generally securities that were of structured format. They are more or less plain vanilla sequentials. But these securities are front sequentials, and therefore, don't have much extension risk. We've added 15-year 4s, 710 -- or $34 million, excuse me, as of the end of the quarter. We have not owned any of those previously. Again, this is a higher coupon, 15-year mortgage versus a 30-year offers good income, but has much less extension risk.

With respect to 20 years, we have 20-year 4s, little under $200 million at the end of the quarter. That number was almost $400 million at the end of the prior year. And then with respect to the 30-year portfolio, 30-year 4s, we have approximately $450 million market value at the end of the current quarter. At the end of the prior year, that was $1.3 billion. 30-year 4.5s, we have a little under $1.4 billion. That number was almost [$1.8 billion]. And we've added slightly to our 30-year 5s.

So in other words, the theme here obviously is reducing extension risk in the portfolio while also maintaining, generally speaking, a higher-coupon bias, taking on prepayment risk, if you will. Given where we see rates and the market and the level of refinancing activity, we're very comfortable taking that risk. We think we get paid to do so. And we're trying to mitigate our extension risk. With respect to the structured securities portfolio, the bias is much more towards IIO securities versus interest-only. And we continue to move that allocation more towards IIOs.

Finally, with respect to speeds in the far 2 right-hand columns, just one general comment basically that speeds, as I've said before, remained very well contained, mid- to high single digits.

Slide 21 just shows you some tables with all of our allocations. This is, basically, reference material. I'm not really going to dwell on it.

Slide 22 shows you both our -- the details of our credit counterparties and our leverage ratio. The leverage ratio continues to drift lower. But I think, because of the amount of extension risk we've removed from the portfolio, it may not drop as much as it would have otherwise.

Now I'm going to turn to Slide 23, and this is a quite important slide. I want to spend a fair amount of time talking about this slide. This shows our hedge positions. And it shows our hedges by different product types. So the top left is our Eurodollar positions. Below that, we have our treasury futures, which is $165 million notional 5-year note futures. On the right-hand side, we show our swaptions. I've mentioned that we've added to those or continue -- we plan to add to those, TBA shorts and then on the bottom right are swaps. I want to make -- stress a couple points. If you look at the Eurodollars, you see a couple of things. One, the notional amount outside of the September quarter is $1.5 billion. And we have the entry rates there. And as you can see, these rates are in the low 2s until you get into 2020. Currently, 3-month LIBOR, which is the fixed component of this, is at 2.34%. So these are in the money, 2020 not so much, but then if the Fed continues to hike, they likely will become so.

With respects to our swaps, on the bottom right, we have a little over $1 billion notional and a pay fixed rate of only 143 basis points. So if you look at these 2 in conjunction with one and other, little over $1 billion on the swaps and $1.5 billion on the Eurodollars, that represents about 70% of our funding, which is basically in the money. So what that means is to the extent that Fed continues to raise rates, this kind of caps our funding on this component of our liabilities, which little under $3.5 billion at the end of last quarter at rates that we see today so that they should not move higher. That also means that 30% of our book is either not hedged or less so. The balance of our funding book is hedged with a combination of 5-year futures; TBA shorts, which are not a true funding hedge, of course; and then swaptions. So these may not be as quite an effective a hedge, but it does only represent 30% of the portfolio.

So what does this all mean going forward? I mentioned previously on the slide where we showed the yield on the portfolio that it moved above 3%, our funding cost is to some extent contained by what I just said. So we have about 70% of our funding locked in at rates in the low 2s. The balance is hedged not quite as effectively using predominantly swaptions and Eurodollar futures. And then we've had a portfolio that has continued to generate a nice yield. So what does this mean going forward? It really gets down to the interplay of what happens with respect to our net funding cost, the 30% that is not hedged explicitly as the balance, and how effective those hedges will be at containing our hedge -- our funding cost versus the yield on our assets. To the extent the yield on our assets continues to move higher, it will probably offset the incremental increase in our funding costs on the 30% that is not as purely hedged. And if then it does not do so, then it has potential to put dollar pressure on our earnings.

The dividend, as I mentioned, has been stable at $0.09. The outcome going forward will really hinge on the interplay between the yield on the portfolio versus the performance of the unhedged component of the book. And so that's really -- I wanted to draw everybody's attention to that and show you that's -- that in conjunction with the removal of extension risk in the portfolio has been the big driver of what we've done in these 2 quarters. And we think we're pretty well positioned going forward for what we see is the most likely outcome, which is continued Fed increases and a potential for a spike higher in longer-term rates.

With that, that's pretty much it. I think we're ready to turn the call over to questions, operator.

(Operator Instructions) Our first question comes from the line of Christopher Nolan with Ladenburg.

Bob, thanks for the highlight. Just back to the hedges for one second. Thank you for highlighting that 70% of the funding is locked in, in the low 2s. The variable, that 30%, is that hedged using the Eurodollar or other things or that's just sort of unhedged?

Well, at this point, putting on additional Eurodollar and swaps, you're going to be at much higher levels. So we've been using swaptions more. We also use treasury futures. And we have TBA shorts, although not really an explicit funding hedge, but it's basically swaptions. Volatility is low. And it's an effective instrument to use to hedge that, although it's just not as pure a hedge as a Eurodollar as a swap. So that 30% of our funding will drift higher as the Fed continues to raise rates. And we have these hedges in place, which, as I said, are not a perfect hedge, but they show it offset the increase in funding to the extent we see movement in the curve. And then the other side of that is what happens on the asset side, our yields have been moving higher. But if we don't get any more movement on the long end of the curve, they may not move any higher. And that would leave us with -- the net of that would probably be compression on our earnings. So that's kind of the -- how we see things going forward.

All right. And then on the asset side, touching on the investment yields potentially going up. What do you see to be the driver of that because looking at your portfolio, it looks overwhelmingly fixed rate?

Yes. I mean, it's just the spreads to where these assets trade, the yields that are available. The CMOs that we have acquired have yields of 3.5% to 3.7% or 8%. Fixed-rate mortgages -- the prices of these have come down an awful lot and they prepay slower. So the yields are comfortably in the 3s. It really gets down to whether the long end of the curve stays stable, does it move any higher and mortgages spreads stay stable. In that case, those yields would themselves, of course, be stable. If we see long-end rates move higher and/or spreads that these assets trade at move wider, then we have the opportunity to increase the yield on the portfolio. That's kind of the big wildcard here going forward. Everybody is aware of the fact that the curve has been flattening and is putting compression -- downward pressure on earnings. But what happens on the long end of the curve is going to be the key driver, whether we can still continue to see more earnings compression or we get some relief in the -- as a result of movement higher either in rates or spreads.

Final question. How does this -- where is your threshold for deciding whether or not to grow the portfolio or to buy back stock? What sort of discount are you looking for in the stock price to initiate a buyback?

Well, we had a buyback in place. So we -- generally, about 90% of book is kind of an unofficial threshold. The stock yesterday traded briefly more than 5% above book, although that's since gone away, I believe. Same kind of threshold. I mean, these are not hard and fast numbers, but we like to see at least pushing 10% premium or discount before we do either. But as I said, that's not a hard and fast rule. That is just kind of rule of thumb, if you will.

(Operator Instructions) Our next question comes from the line of David Walrod with JonesTrading.

Just wanted to get a feel, you've got -- you've talked about your exposure in the CMOs and the 15s. Should we expect you to keep them at these levels as far as percentage of the portfolio? Or will you continue to have increase?

I'm going to let Hunter take that one.

We have continued to increase a little bit on the 15 years side. I think we'd like to see an increase in the CMO space. We really have to be opportunistic about when we add those. There's been a lot of demand for them of late. So they've tightened up quite nicely. I've kind of taken them out of the range where we would be net adding. We haven't sold any into that either though. So we've kind of a hold right now on that sector. The curve flattening really limits what we can do. The back-end cash flows are -- the demand for those is very weak when we see a curve this flat because the incremental yield pickup in a flat curve environment for a very long duration bond is just not compelling to those investor -- those who invest in those back-end cash flows. So we'll opportunistically continue to add. I think I'd like to see that balance get to be around 20% to 23% of the portfolio. And then we'll see what the curve gives us. I mean, that's really been the strategy is -- in our view, why take the additional duration and extension risk when the front-end belly of the curve offers as much yield as the longer end does. So that's been kind of the strategy is derisking the portfolio, while still being able to take advantage of the fact that the front end of the curve in just sort of the 3- to 5-year point is really compelling from a yield perspective.

That's very helpful. Next, would you say that this quarter with all the trading activity that you did that maybe had a minor drag on your earnings?

Yes. We had some -- we had a lot of our CMOs that we added were June 30 settled. And some of the bonds that we sold were reg June settled. So we had about 15 days of interest that we didn't receive on a few hundred million dollars. And there were small gaps like that throughout the quarter. I wouldn't say if this is material, but it definitely had a little bit drag on earnings. The other thing that -- of note was the LIBOR and funding spike that occurred in late first quarter had a little bit of a lingering effect into April and May. So while the rates started trending back down, if we had on a 1- or 2-month repo that we executed in March, and we didn't do a lot of longer-term stuff because of the little -- the small spike in funding, it -- that stayed on the books through April and into May. So those were kind of the 2 components. And I would say we're out of the ordinary that affect -- that might have affected earnings a little bit.

I know you talked a little bit about yield, but can you talk about the spread opportunities? And how the 15s and the CMOs, the spread opportunities there relative to 30s and to your existing portfolio?

Yes. Sure. Go ahead, Bob.

No. Go ahead, Hunter. You can take that one.

Really, I mean, back to what I said a moment ago. There's definitely a yield give between 30s and 15s, but when we look at what it takes to hedge the 30 years versus these 15s and CMOs on a risk-adjusted basis, we feel like it's a pretty easy trade. So while there might be a 20 or 30 basis point give on nominal yields, we would quickly absorb most, if not all, of that in adding hedge cost, buying options to guard against our extension risk. And I think if you followed us for the last few quarters, we are -- we were just taking the view that it's okay to have in this period in time, this point of the Fed hiking cycle, we'd rather give up a little bit on the earnings front and guard against sort of an inflation type of surprise that gets long-end rates moving quickly. That's the kind of move that can be just devastating to portfolios like ours. And we'd rather guard against that and maybe suffer a little bit on the earnings side for a few quarters than be exposed to a windfall decline in the value of our assets.

Great. And then, my last question. Bob, you mentioned in your prepared remarks that leverage had been kind of drifting down. Any thoughts about how you want to take leverage? Do you, given the current environment, maybe want to take leverage up a little bit or are you comfortable where it is?

Well, at the end of last year, when it was higher, we also had a much higher allocation to 30-year mortgages, much higher. And therefore, we kind of viewed it differently than we do now. Now as Hunter alluded, we have a lot less extension risk. We have CMOs. We have 15 years. We have far fewer 30-year coupons. And therefore, that in conjunction with the added use of the swaptions makes us a little more comfortable with the leverage there. So it's come down, but it's -- I would say, it's not likely to move meaningfully lower than where it is now. That -- we did not feel that way until the end of last year. We felt either we have to meaningfully reposition the portfolio in terms of the asset mix or take the leverage ratio down. We've changed the asset mix. We're continuing to let the leverage drift down a little lower, but that target is not nearly as low as it was then. And frankly, net of TBA hedges were in the mid-7s. I don't know that it's going to materially below that based on the way the world looks today.

And I'm not showing any further questions at this time.

Thank you, operator. And thank you, everybody, for taking the time to listen to our call. To the extent that you didn't have a chance to listen to the call and you want to listen to the replay and then have questions, we always are welcoming of those. Please call the office. The number is (772) 231-1400. Otherwise, we look forward to talking to you next quarter. Thank you, everybody.

Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great weekend.