Orchid Island Capital Inc (ORC) 2022 Q2 法說會逐字稿

Good morning, and welcome to the Second Quarter 2022 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, August 5th, 2022. 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 risk 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'd like to turn the conference over to company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir.

Thank you, operator, and good morning. Welcome everybody to our call. Glad that you could join us, and if you can't join us live, I hope you're able to do so via recording. We're going to assume that everybody has been able to download the deck that we use every month, and once more we'll be going through the deck as the driver of the agenda for the call.

As always, I'll just give you a quick walkthrough to highlight the agenda. We'll discuss our highlights for the quarter, financial highlights, briefly, and then, as usual, we'll go to the market developments just to show you what shaped our performance, and then we'll go into our financial results in more detail, and then the portfolio characteristics, hedging, and so forth.

So with that, our financial highlights for the quarter, we had a net loss per share of USD 0.34. This included net earnings per share of USD 0.12, excluding realized and unrealized gains and losses on our RMBS assets and derivative instruments, including net interest expense on interest rate swaps. We had a loss of USD 0.46 per share from these realized and unrealized losses on our RMBS and derivative instruments, again, inclusive of net interest expense on our interest rate swaps.

Book value per share is USD 2.87 or was at June 30th, 2022, versus USD 3.34 at March 31st of 2022. In Q2 2022, the company declared and subsequently paid USD 0.135 per share in dividends, and since our initial public offering, the company has declared USD 12.77 in dividends per share, inclusive of the dividends declared in July of 2022. The total economic loss for the quarter was USD 0.335 or 10%.

Now looking to market developments on Slide 6. The one thing that really sticks out here is -- and again, what we show here, the Treasury nominal curve and the swaps curve are both at March 31st and June 30th, but then also as of last Friday, which is June 29th. And one thing that sticks out very clearly here is that the front end of the curve has been moving the most.

So if you look at the either curve on the left or right side, when you move from the blue line to the red line to the green line, which goes through time from March through last Friday, you can see that the front end of the curve continues to move higher and the long end actually, especially through July, is lower than it was in June, and the curve is quite inverted and has inverted even more so today. And this basically just reflects the fact that the Fed is going to continue to raise rates very aggressively because inflation is at very high levels.

That notion probably was reinforced meaningfully this morning with the payroll number and that the market, and more importantly or as importantly, expects that these hikes to be effective at containing inflation ultimately. And therefore, you see the long end of the curve not selling off, and certainly that would not be the case if the market feared that inflation could become fully unanchored.

And also the effect that, especially now, as the Fed's seeing even stronger data than they had as of yesterday, the fact that they're going to have to hike as much as they probably will to contain inflation just increases the chances that those hikes ultimately lead to a recession, and that's another reason that the long-end has rallied. In fact, last week when we did have the Fed meeting, the market's perception was that maybe that the Fed had pivoted, that they saw some early signs of weakening in the economy, and that maybe they wouldn't hike as much as feared. But once they came out of their blackout period, pretty much every single Fed speaker since has pushed back hard on that notion. In essence, the market had to do its own pivot and now reflects the fact that they acknowledge that the Fed is going to have to be very aggressive.

And also data dependent. And as a result of that data dependence, days like today are going to tend to have outsized responses if the data is outside of expectations. So today's nonfarm payroll, CPI numbers that will be coming between now and the next meeting are going to be very important for the market, and you're likely to see reactions as you did today. So that's really what's going on. You just see this meaningful inverting of the curve. 2/10s is getting to extreme levels this morning, the meteoric reaction to the number, I think we got close to 40. We've backed off of that, but very inverted. Just moving through the rest of the slides, Slide 7, we just showed you the 10-year trait in swaps and SOFR swaps, and then longer look back. And as you can see, it's meaningful step up into mid-June and then a subsequent rally when the Fed had to pivot.

Turning now to Slide 8. This is a new slide that's in our opinion very important. And one thing we did here was we changed the period basically to cover, what I would call, the pandemic period. So if you look at this slide on Page 8, the beginning of this slide is the end of 2019, and as you can see with respect to the 10-year, you had the huge rally when the pandemic started. And then, of course, over time it crept higher.

As we entered 2021, rates started to move a little higher, but then in the second quarter, maybe even when the war started in Ukraine in late February, the data started to become even stronger still, especially inflation data. And then also the effect of the war and the effect of lockdowns in China started to really grab the market's attention and focus the Fed on the fact that inflation wasn't transitory. It was becoming ingrained and that they were going to have to react, and in fact they did.

And so what you see in the rates market is the selloff into the second quarter and that peak there was right around the middle of June. June 10th, you may recall, the CPI number was very, very strong. University of Michigan data implied that inflation expectations had become very high, and then the market sold off very meaningfully. July has been a recovery month, but we've come off those peaks. But that was driven by the Fed's very strong response to those numbers and the fact that they hiked as much as they did. Remember 75 in June, raised it 75 again in July, and it looks like they may do 75 in September.

But more importantly for us, since we're mortgage investors, on the right-hand side, what we're showing here is the spread of the current coupon mortgage to the 10-year Treasury. Now there's a lot of different ways you can look at mortgages versus swaps versus a 5/10 blend, you can look at OAS, but I like to look at this just because it seems to work better over long periods of time.

And what we don't show here, since this data really only goes back to the beginning of 2020, is where these numbers were. This is the spread again to the 10-year Treasury. Where that spread was in the years prior to that? And if you do look at that data, you can go back 5, 6, 7 years, and mortgages traded at an extremely well-defined range between 60 and 80 basis points for years. And so then you had this spike in March and then rally, because, of course, the Fed was buying, you had QE, and you got to a very, very tight level, and then we started to see the selloff.

And as you can see on the right-hand side of the page, that spike up, that was June, right after the CPI number that day and the next 2 days mortgages did horribly. Just to give you some numbers. I think the 10-year Treasury over that 3-day period was down something like 1 point -- not even 1.5 point. And, for instance, Fannie 3s were down multiple points. So meaningful underperformance. They've since rallied in July.

But the point I want to make here is if you look at where mortgages are trading at around 120 basis points for Fed, even though that's off the extremes, it's still very attractive versus long-term range of 60 to 80 basis points. And that's why we're very comfortable where we are as the managers of the mortgage portfolio, because we really like the look of the market going forward.

And data like today, which implies the Fed is going to have to hike even more probably just increases the chances that, that hiking leads to recession, which is going to get the long end of the curve ultimately to rally. And being the owners of mortgages, I think mortgages are poised to do very well. As I just mentioned, they are trading at attractive levels versus the long-term norms. They don't have any credit components.

So to the extent we do enter into a recession, unlike investment-grade corporates or high yield which could widen even further in the event of a recession, mortgages should do well. And I don't think that the Fed is likely to be selling mortgages certainly next year if it looks like the economy is about to move into a recession. So we think the mortgage market is poised to do well for the balance of this year and into next.

And then more specifically, with respect to Orchid, and we'll get into this more a little bit further in the call, Orchid has retained a high concentration in 30-year fixed rates, what we would call belly coupons, 3s and 3.5s as in contrast to say 2s and 1.5s or 2.5s or higher coupons, current production coupons. And we think they'll do well in a rally. And we also like the securities.

Again, I'll say more about that in a moment. But the takeaway from this slide is that mortgages look attractive and given the way we see things playing out over the next year, 1.5 year, we think mortgages as an asset class could do quite well, and we like the way Orchid in particular is positioned for that outcome to the extent it happens. Just moving through the balance of the slides. We've shown this slide for a long time. It just gives you a proxy for the shape of the curve. As you can see, we did get inverted. As we speak, we're much lower than 33 basis points on the 5/10 spread, and they're likely to stay this way for the time being.

Slide 10 is another slide that's new, and the reason we just threw this in here, what we're trying to show is the holdings of agency mortgages by, in the case of the red line, the Fed, and in the case of the blue line, that's your commercial banks. This is predominantly the 25 largest banks -- commercial banks in the U.S. And as the Fed went through QE and added that, they, of course, were depositing or putting reserves into the system, system means that the banks that hold these reserves were investing those reserves in mortgages. And so these were the 2 largest buyers of mortgages by far up until not long ago.

Obviously with the Fed entering into QT, they're going to be draining -- they're going to only be not buying as many mortgages, but they're going to be draining reserves from the system, which means that the banks will probably be relatively not necessarily selling but buying a lot less. And this means that the onus to support the mortgage market is going to shift to money managers and REITs. And we expect that to be the case as we move into 2023. But, again, we very much like the market in spite of this and are expecting the mortgage market to perform well.

Just to give you a little more history on Slide 11, the top left just shows you the performance of certain mortgages, and these are all 30-year fixed rate mortgages, 3.5s, 4s, and 4.5s. Over the course of the second quarter and into July, and let me make sure you notice that the scale on the left, we normalize these things to 100. But when you look at that trough, that's right on June 14th. That's in the days immediately after that CPI number in mid-June.

Notice that in the case of 3.5s, they're down over 6 points. That's a big move in a short period of time. They've since recovered quite a bit, but still a big, big move for the mortgage markets in June. Below that are the roll markets, the blue line, the 3.5 coupon. That roll has been special on an on now for several weeks. Other than that, these roll levels are not necessarily exceptional. Nothing like we saw when the Fed was doing QE. And I think that's the takeaway. Lower coupon rolls there are essentially 0.

So the roll market, while it's still reasonably attractive, it's not as attractive as it was back in the days -- the heydays of QE. And such is the case with the specified market where those levels still remain quite subdued. On the top right, we show what we would call probably the highest quality spec pool and $85,000 loan pool, and we show it for 3 coupons and you can see those pay offs are fairly subdued, although this week we did have our origination cycles that happened to occur on Tuesday, which was a very volatile day for the market, a big sell off and there were approximately 10 billion in spec pools auctions and they actually did fairly well, so that's a good sign for the spec market.

I think there's a shift underway away from the roll market more towards specs, and maybe not playing out to the extent we would like in the next few months. But as we think, going forward in the next year, especially if the economy were to enter into a recession, that, that trend would continue.

Slide 12 the vol market. We're using 3-month by 10-year normalized vol as a proxy here. As you can see, it's elevated; it still is. This ends on the end of June. Vol today is high. And given where we are with respect to the Fed, and the Chairman's statement that they're going to be data dependent, just really means that the market will be hyper-focused on the meaningful data points such as today, next month's nonfarm payroll number, CPI.

And so any time any of those data prints come outside of the expected range, you're going to see big vol bid. And I would be surprised if vol were to decline meaningfully, at least through the end of September, but it could stay elevated for the balance of the year. Beyond that, who knows. It's too hard of a call. But I would expect vol to remain like this.

Slide 13, I'm not going to spend a lot of time on this. This is just historical information. OAS levels are, at least for production coupons I guess would be the takeaway here, are much more attractive than they were when the Fed was conducting QE. That would have been, for instance, 2021 when Fannie 2s and 2.5s were the production coupons and you can see those OAS levels were negative. Now we're producing 4rs and 4.5s, and they're at least positive. So the market looks that much better in that regard, and then just more on spec pools there.

Moving on to Slide 14. Don't need to say a lot. Obviously, the second quarter was a very bad quarter for risk assets, well, for the quarter and the year. I think the one thing that's very noteworthy, and this has been talked about quite a bit, it's very unusual, if you look at the bottom side of this page, if you look at the year-to-date returns through the end of the second quarter, you see the Treasuries had a very negative return as did stocks. Those 2 things are normally negatively correlated, at least to some extent. It's very unusual that they would move in the -- not move in the opposite direction, but they did and meaningfully so.

And that just goes to show you that we have this odd combination of high inflation, probably a byproduct of something that is likewise unusual, the pandemic, which required an outsized and irregular response both from the Fed and the government, which eventually led to outsized inflation, something we haven't seen in decades, which then led to a very aggressive Fed and probably a slowing of the economy. And I think that's the only way you really can explain how both of that asset classes would do so poorly.

With respect to mortgages, obviously, they're on the low end of the risk spectrum. They did poor. They were negative, especially on a year-to-date basis relatively well compared to other asset classes. It's also notable that in July there was a big turnaround with respect to risk. I don't have those numbers in the slide deck, but pretty much every asset class across all of the financial markets, inclusive of commodities, had a very, very good July. August obviously remains to be seen, but July was a recovery month in a big way, especially in the higher risk asset category, so we'll see what happens beyond that.

Turning to Slide 15. Again, we're showing you kind of what I call the pandemic period, trying to grab this data over the period that more or less coincides with the onset of the pandemic through today. And as you can see in the top left, for instance, mortgage rates are high. The most recent data point was 4.99% on a 30-year fixed rate mortgage, so it's come well off the highs of 6, but still well above where it was prior to 2022. And in the percent of the mortgage market or the refi index is very, very low. One thing I would say on the bottom chart there where it shows a percent of mortgage universe that's in the money, essentially 0.

There hasn't been high production so far in 2022, but what we have seen is predominantly coupons in the 4%, 4.5%, and 5% range, even some 5.5s. It wouldn't take much of a rally for those securities to get in the money. So we could, in the event of a recession, in a rally in the long end of the curve, start to see a decent size of the market become refinanceable, which of course, would affect the quality of the carry of those assets. Lower coupons are discounts. And so the fact that we could rally is just upside for them just because you're accreting discount versus amortizing premium.

Now I'll just go into our financial results on Slide 17. We always show this slide to kind of decompose our results between mark-to-market gains and losses and just carried. We were at about USD 0.12 versus the dividend of USD 0.135. These numbers don't capture premium or discount amortization and hedging costs. I'll say a little bit more about the latter in a moment, but now that we are in a position where our portfolio is all at a discount, and we tend to own seasoned bonds that are paying in the high single digits, so we're actually accreting discount which adds to these a little bit.

And then our hedges are now finally in the money. So those are helpful from an income perspective. Obviously with respect to the returns for the quarter, with the meaningful selloff and the widening of mortgages, fixed rate mortgages did very, very poorly. IOs did well, but not nearly enough to compensate for the poor performance in the pass-through portfolio.

Slide 18, this is where you start to see the impact of our hedging. You can see that the blue line there is just the yield on assets, and it's trending slightly up. Obviously, our funding costs are going higher, but the red line is our economic cost of funding. And you can see while it's increasing, it's increasing at a slower rate, just captures the fact of swaps and so forth kicking in. And as a result our economic net interest in spread is actually increasing slightly. We'll see how much longer that can go. Obviously, the Fed is going to be very, very aggressive and has been so far in the second quarter and will be probably in the third. So definitely it will challenge the effectiveness of our hedges, but we are seeing so far very -- the performances holding in quite well.

Slide 19, again, I really don't have to dwell on that. That's just the same thing. You could see some slight degradation in the core earnings per share, but I addressed that already. Finally, a couple slides that are new. The leverage ratio on Slide 20. That number is 7.8 as of the end of the quarter. We have not reinvested paydowns of late and our book value has recovered.

Our book value recovery quarter to date is in the mid-to-high single digits. It was close to 9% -- approximately 9% as of Wednesday. Today. I don't know, mortgages are having a very rough day. They didn't have a great day yesterday. So I won't say -- that's why I say mid-to-high single digits. But again, it can change on any given day. But we have had a very nice recovery quarter to date. And as a result our leverage ratio is probably just under 7, as we speak, so it's in the high 6s.

On the right side, we show our leverage ratio versus our peers, and as you can see, we're the blue line there, and we are on the high end of the range, and we are going to take steps to bring it down, maybe not all the way as far as our peers, but we are going to bring it down slightly and try to eliminate some of the book value volatility. So we will be trending down. I mentioned we're at 6.8. We may let that get back up above 7, but we're not looking to get that number up to 8. So we are going to be bringing the leverage ratio down back closer to our peers over the balance of the year and the quarter.

Slide 21, you see our dividend versus our peers. Again, quite a bit higher, and we described who our peers are on the bottom of the page. I will say that we are anticipating an adjustment to the dividend in the near future and the rationale is to bring the dividend into line with our book value. We think we need to get that into the lower double digits, maybe not as low as our peers but much closer. So that's just really reflective of a few things.

Obviously, bringing our leverage ratio down is going to be a factor, but also just the fact that the curve is inverted. the Fed is likely to be very aggressive in their tightening, and while our hedges are working, it's not 100% effective. And so we're just going to adjust the dividend to bring it in line with our leverage ratio. Our rate yield to book and just what we view as the current earnings environment. So that is likely to occur in the near future.

Finally, next slide moving on, few more slides, our allocation of capital, just stable. I don't need to get into the details here. Our allocation between the 2 portfolios has remained the same. And the portfolio on the right-hand side just reflecting the fact that we had an adverse market conditions and the portfolio did shrink some. I mentioned we have not been reinvesting paydowns. So even though the allocations across capital are the same, the portfolio is slightly smaller.

Now moving on to the portfolio itself on Slide 24. I'm going to skip right to the takeaway. The takeaway is not much has changed. There have been some changes to the 30-year fixed rate portfolio. We basically eliminated our small position in 2.5s. The 3s, which is by far the biggest holding, is roughly the same percentage wise, 3.5s maintained, and we've added our allocation to 4s is up to 6.9%, so that's quite an increase. We may increase that a little bit further.

We did shift our small 15-year holdings from 2.5s to 3.5s, and with respect to the IO portfolio, we basically just harvested some profits because the market had sold off, and we got to the point where these IO positions really didn't have much upside left in them, so we just harvested those profits. And so other than that, though, the portfolio is relatively the same as it was last month.

With respect to speeds, everything is slow as you would imagine. The universe -- we had speeds come out last night. They dropped quite a bit, high-teens. We continue to see meaningful declines in speeds reflecting rates. We did have a rally in July, but now we're selling off in August. And net of all that, I don't think -- given the fact that we're moving into the late summer it's likely to be meaningful, so I would expect speeds to stay on the slow side.

One thing I do want to point out, though, with respect to our portfolio, if you look on Slide 26, obviously, the yield on the 10-year is very high, getting to where it was back in 2013 and '14. But if you look at the green line, which represents our portfolio's performance, back in '13, we were very, very low. That reflects the fact that at the time we owned a lot of discounts that were new.

Now we still own discount securities, but they're seasoned, so they're paying a little faster. And as a result, we're able to accrete a little more discount, which is beneficial from an earnings perspective. And it's always good to have good carrying bonds. And we also like these bonds, as I said, going forward. What we tend to own in fixed rate space are a lot of spec pools. As we said many times, the payoffs on those specs are quite low.

And this all leads to the following conclusion. And that is that the convexity in these assets is very attractive because the payoffs have been basically depressed to 0 and these securities have extended for the most part. In a rate selloff, they should do fairly well, and they're fairly easy to hedge in the event of a rally.

Obviously, their duration can extend because these spec pool payoffs will increase in value. And obviously that's not a small rally. That would have to be something of decent size. But in a meaningful rally, they would do very, very well. And so combination of owning these more seasoned bonds maybe better carry today. The portfolio was prepaying in the high-single digits versus new issue which are in the low-single digits, but also we have retained very good convexity and as a result we're very bullish on the portfolio going forward for the balance of 2022 and into '23.

Turning on to our funding, new slide here on Page 27. This again goes back to the beginning of 2020. We show the gray line, which is just 1-month SOFR. As you can see, it's rising rapidly. The blue line -- the red line is our cost of funds, but as you can see, the blue line is our economic cost of funds, which is now below our actual cost of funds, and that just reflects the fact that the hedges are kicking in.

Obviously SOFR is going to continue to rise quite a bit. This only goes through the end of June. Needless to say, we're already -- SOFR is up near 1.50% and -- no, sorry, over 2%, so this number is going to continue to rise. But our hedges are effective and they're basically minimizing or counteracting to the extent possible this rise in our funding cost.

With respect to our hedges on the next slide, again, the takeaway is not much has changed. We did add some TBA shorts and Fannie 2s. Very, very minimal adds to our futures, and some of the swaps just rolled down. We have 2 buckets there, kind of a 3- to 5-year and a greater than 5 year. Few of them rolled from over 5 years to under 5 years, and that's pretty much it. So that's pretty much it.

I just want to make a few concluding remarks. 3 basic points: one, we've had some book value recovery. We like the portfolio going forward. We think the convexity of the portfolio is quite good. We think what's going on in the market bodes well for us and mortgages generally. We are going to be adjusting the dividend, as I mentioned, to bring it into line with the combination of a lower leverage ratio, a more reasonable yield to our book value, and just more in line with the earnings available in the market today.

And then one final point which I haven't mentioned is that we are considering a reverse split just to recognize the fact that the stock has traded down to 3 or even in the high 2s so, we are considering doing a reverse split of the stock. I know we've seen several of those in this space over the last few months, but there's a good chance you will see one of those from us.

That's pretty much it from my prepared remarks. Operator, we can open up the call to questions.

(Operator Instructions) We'll take our first question from Jason Stewart with JonesTrading.

Appreciate all the color and remarks as always. Bob, where do you see terminal Fed funds ending up in this environment?

Well, it's probably going to be in the mid-3s or slightly higher. It's hard to say, though. Like today, for instance, the data looks to be so strong, and the market's reaction is obviously very strong, but a dive deeper into the data, the establishment survey showed a gain of 528,000 jobs. The household survey was only 179,000. Last month, the household survey was negative. So it's hard to believe that the economy can really be adding, in my opinion, jobs like that. I think you're starting to see -- the pervasive evidence that I see that the economy is slowing is too hard to ignore. And, again, in spite of today's data, I think we're going to slow and continue to slow through the balance of the year. And while the Fed, I think, has to be aggressive, it certainly has to maintain that image in the eyes of the public and the markets, I just think it's going to be hard to be tightening aggressively beyond this year.

So do we get another 100 bps this year? Probably. It's just a question of what you get next year. Maybe you get one more, but I just -- I have a hard time seeing it getting up to 4%. That being said, some of the evidence on the inflation side is troubling. You're seeing commodity prices come off, but you're seeing evidence of wage pressures becoming ingrained. That would be the risk to my thesis, if you will, that they can't go that much more. To the extent I'm wrong there and you really see inflation become fully ingrained, then the Fed -- then you get more like that Volcker scenario where they have to really slam on the brakes, and that'll get you to 4%, maybe beyond. But I'm sticking with my theory for now.

And, Jason, I think that plays into why we've held off on the dividend, cutting the dividend back a little bit as well. There's just a tremendous amount of uncertainty right now. 6 months ago people would have told you you're crazy if you had said that they were going to -- the Fed was going to hike 75 in June and July and then here we are. So as it relates to that, I think we were trying to get a little bit more time to pass and see how that played out and how that affected the portfolio.

Yes. No, that makes sense. And then second, on the mortgage origination industry, what's your view on capacity right now and how that's going to impact prepays going forward, if that plays out as you expect?

Well, I would assume they're struggling to maintain it. What's been originated is the low-hanging fruit now, to the extent we see a rally. Cash-out refis, as you know, declined very rapidly. I think they're going to struggle to maintain it. And I think that you're already seeing evidence of that. We're in very hot housing market here in Florida, for many reasons, not just the economy, people moving away from some of the high-tax states to here. We're clearly seeing signs of it slowing, very clear signs. Inventory levels are rising. They're not troubling yet, but they're rising. So I think they're going to be hard pressed to maintain staffing levels and eventually that's going to come off.

Yes, okay.

(Operator Instructions) And next we'll go to Mikhail Goberman with JMP Securities.

Some book value recovery. I was wondering if there's a number to that thus far in Q3.

Well, as I said, it was high-single digits until Wednesday. Yesterday we were soft and then today it's really hard to say. When I came in here, mortgages were underperforming by a lot of ticks, 8 or 10 ticks. That would bring it down closer to 6% or 6.5% maybe, but it's been a good recovery. We own, as I mentioned, a lot of belly coupons. They've had a good run. There's mostly specs and specs have hung in fairly well, but it's been also on the TBA front. So I would have -- Wednesday, like I said, it was very high single digits, but it's probably more in the 6% to 7% maybe today with the underperformance of mortgages.

Just one more question, if I may, on expenses. I noticed expenses up a little bit to just under USD 5 million this quarter versus about USD 4.7 million last quarter. Are there any one-time items in there? And also a second part to that, given your comments on the dividend probably coming down and a smaller portfolio, the core earnings run rate trending lower, what expense ratio or expense run rate level are you targeting, if at all? And are there any plans in the works to get to that USD 5 million down a little bit?

Well, probably on the high end of the range where we'd like to see it. The one-off changes that we internalized our repo operations and back office. I think we talked about that late last year and early this year. And there are some costs associated with getting that online. Those are mostly at the Bimini level, though, but there is an overhead reimbursement arrangement, so some of it does filter through. I would expect that to come down. But to the extent that we can recover some more book and even with a slightly lower leverage ratio we'd probably net-net be able to get the portfolio a little larger which covers some of that. We were at a point late last year, early this year when the portfolio was north of USD 6 billion. Obviously, that was a very comfortable point from an expense ratio perspective. We obviously shrank relatively quickly because of the market, so it's now on the high end of the range. But I don't think we have to do anything drastic at the moment, but we would like to see that ratio come down.

All right, best of luck going forward.

(Operator Instructions) Next we'll go to Christopher Nolan with Ladenburg Thalmann.

Bob, what sort of leverage range are you thinking about? I know you sort of referred that was coming down, but anything...

Probably low 7s. I think low 7s. It's not a hard number. We're looking at the market, we're looking at our holdings, we're looking at our hedges. I'll let Hunter talked about this as well, but just a little on the lower end of the range. We're just trying to maybe bring some of the book value volatility down, which is obviously been high of late. And we think we should be able to run with a lower dividend yield as a percentage of book value. We've been in a very high premium to our peer average and don't think that, that is necessary or prudent. So that's what's going on here.

And then I have a follow-up.

Hunter, you want to...

Please go ahead. No, I would just add that it's really a byproduct of the time we're in. And when we see, I think, as Bob was a leading to a moment ago, Wednesday our book value was up high-single digits on the quarter and a couple of bad days can put that back to mid-single digits. That's an incredibly volatile operating environment, and we tend to take our cues from the market and adjust our leverage ratio accordingly. Then as a follow-up, on the repo financing, are you guys getting any hints in terms of where the banks are thinking about how they're trying to manage their risks? Are they changing their haircuts or other things? That's it for me.

Hunter...

We haven't seen.

Yes, go ahead Hunter.

Sorry, didn't mean to step on your toes. No, we haven't seen any signs of that. We have ample balance sheet availability. I don't think anyone in our space has been in trouble. As sloppy as this market has been over the last 6 months, we haven't seen any agency REITs stub their toes in the way that they did in early days of the pandemic. And we're always in constant contact with our lenders and all seem to be pretty comfortable at this point in time.

And as there are no further questions at this time, Mr. Cauley, I'll turn the call back over to you for any additional or closing remarks.

Thanks, operator. I thank everyone for taking the time. As always, we're available in the office for follow-up questions. Our number is (772) 231-1400. To the extent you get -- after listening to the replay and you have questions again, we'll be more than willing to take any questions. And otherwise, we look forward to talking to you next quarter.

This concludes today's conference call. You may now disconnect.