Orchid Island Capital, Inc. (ORC) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Orchid Island Capital Third Quarter 2025 Earnings Conference Call. [Operator Instructions] 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 Alfonso. ] Please go ahead.

Good morning, and welcome to the Third Quarter 2025 Earnings Conference Call for Orchid 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 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.

Thanks, Melissa. Good morning. I hope everybody is doing well, and I hope everybody has had a chance to download our deck. As usual, that's what we will be focusing on this morning. And also, as usual, I'll start with Page 3, just to give you an outline of what we'll do. The first thing we'll do is have our Controller, Jerry Sintes, 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 it over to Hunter who'll go through the portfolio characteristics and our hedge position and trading activity, and then we'll kind of go over our outlook going forward. And then we will turn it over to the operator and you for questions. So with that, turn to Slide 5, Jerry.

Thank you, Bob. So on 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 loss in Q2. Book value at 9/30 was $7.33 compared to $7.21 at June 30. Q3 total return was 6.7% compared to negative 4.7% in Q2, and we had a $0.36 dividend for both quarters. On Page 6, our average portfolio balance was $7.7 billion in Q3 compared to $6.9 billion in Q2. Our leverage ratio at 9/30 was 7.4 compared to 7.3 at 6/30. Prepayment speeds were at 10.1% for both Q3 and Q2. And our liquidity was 57.1% at 9/30, up from 54% at June 30. With that, I'll turn it back over to Bob.

Thanks, Jerry. I'll start on Slide 9 with market developments. What we see here on the top left and right are basically the cash treasury curve on the left and the SOFR swap curve on the right, there are 3 lines in each, red line just represents the curve at June 30. The green line is as of 9/30 and then the blue line is as of last Friday. And on the bottom, we just have the 3-month treasury bill versus the 10-year note. So what I want to point out though, basically the curve is just slightly steeper for the quarter, just reflecting the fact that with the deterioration of labor market, the market is pricing in Fed cuts and so the front end of the curve has moved. If you look at basically the movements on these 2 lines, and it's the same for both. From the red to the green line, that just reflects the deterioration of the labor market. Ironically, the way 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, 10 years point 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 30. But then quickly on the 1st of August, the nonfarm 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 (sic) [ QCEW ], 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 in the last 2 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 see 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 a 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-grade 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 is in place. 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 in 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 a typical benchmark people look at when they think of a current coupon mortgage or to kind of appraise mortgage attractiveness, and this makes it look like the luster is 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 and it's halved 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 in the area of a 5-year -- or 5 or half of the 10-year. So a more appropriate benchmark might actually be a 5-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 7-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 of what we're looking at. The blue line there just represents the spread to the 7-year swap. That's kind of the center point for our hedges, and this is a 3-year look back. 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 5-year asset against a 10-year benchmark. And so it looks like it's tightening when, in fact, it really isn't. And the other thing I would point out to, and we've 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 holdings by bank, and they are the largest holder of mortgages that there are. And you could see this line, while it's increasing, is very, very modest. In fact, from 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 screen tighter. And 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 it is, this one, I show every time, it's normalized prices for 4 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 of 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 2 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 5-year treasury, you see a spike down right around that day. It was over about a 2-week period. But since then, we've kind of plateaued. And so mortgages have still retained some attractive carry. Hunter is going to get into that in more detail. I don't want to rain on his parade, but I just want to point out that mortgages, while we had a good quarter, are 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 would just point out one of these. If you look at the little orange line, again, this is like a 1-year look back. That orange line represents the Fannie 6 roll. And you can see towards the end as we entered September, with the rally, that roll has come way off and the market is pricing in extremely high speeds. And as a result, spec pools, which are the beneficiary of their call protection and performed well in a rally have done extremely well. The cash window list that come out every month, in October, this month, they did very, very well, and I suspect they will probably continue to do so going forward. 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 vol. 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 -- 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 obviously a very volatile event. But immediate after that, you had extremely strong QT 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 a byproduct of that is that they drive volatility down. And as you can see on the right, we're getting near those levels. And I don't think that means that rates are going to 0. But what we are seeing is interest rate vol 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 his term ends in May. In all likelihood, that's going to be by someone who's pretty dovish. So the market expects kind of a very dovish outlook for Fed 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 levered Agency MBS market because mortgages you would think would continue to do well in that environment. Turning 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 what 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 10-year and the green one, which is the 7-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 counterintuitive because the spread to the cash treasury is actually getting narrower, but it is what it is. What happened here was that the Chairman recently in the public, his comments mentioned that the end of QT was in the next few months. Most of the 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 the meeting next week. What that means if they end QT is that the runoff in their portfolio, which we saw in that chart in the appendix is going to stop. It will just plateau. But they'll likely do, and I don't know this, of course, with certainty, but I suspect is the case that treasury paydowns will be reinvested back into treasuries and mortgage paydowns since they don't want to hold mortgages long term, will also be invested -- 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 -- that 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 DV01, in other words, the sensitivity of our hedges to movements in rates. And as you can see, 73.1% of our hedges are in swaps by DVO1. 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 tenor outside of 3 years, every one of them on a 1-, 3- and 6-month look back is at their wides, after we pegged 100% of the wide. 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. This kind of paints a very benign picture, frankly. And I just want to talk about it. If you look at the top left, you can see the mortgage rates in the red line, the refi index. And while rates have come down some, the refi index has bumped up, it's not much. In fact, if you look at the left axis, you can see 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 index. 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, 1.5, 2, 2.5, 3, and they're out of the money. But if you were to do the same chart for just '24 and '25 originated 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 originated mortgages. In fact, we own, to some extent, somewhat of a barbell in the sense that most of our discounts are very old and most of our newer mortgages, the higher coupons are lower vol. And so that really means security selection is important. And in a moment here, I will turn the call over to Hunter. 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. And before I turn it over to Hunter, as always, I'd like to just say a bit about Slide 14. It's a very simple picture. There are 2 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 stimulative. The government is running deficits between $1.5 trillion and $2 trillion. That's in excess of 5% 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, Bob. I'd like to talk to you a little bit about 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 prepayments and give a little bit of my outlook, I suppose, going forward. So coming out of a volatile second quarter, we took advantage of attractive entry point by raising $152 million in equity capital and deploying it fully during the quarter. The investing environment allowed us to buy Agency MBS at historically widespread levels. During the second half of the quarter, equity rate has slowed, but our -- but the assets we purchased in the third quarter were tightened sharply during that second half of the third quarter. As discussed on our last earnings call, our focus has been on 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 carry potential going forward. The portfolio remains 100% Agency RMBS with a heavy tilt towards call protected specified pools. These pools help insulate the portfolio from adverse prepayment behavior and reinforce the stability of our income stream. Newly acquired pools this quarter, all had some form of prepayment 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 5.45% to 5.53%, effective yield rose from 5.38% to 5.51%, and our net interest spread expanded from 2.43% to 2.59%. 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 balance story, if you will. We have virtually no exposure to generic or worse-to-deliver mortgage securities, and we were net short TBAs at 9/30. Overall, we improved the carry of our -- 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 sort of visual representation of what I just discussed, you can clearly see the shift in the graphs, the concentration building in the 5.5s and 6 coupon buckets across the 3 graphs. These production coupons remain the core of our portfolio and continue to offer the best carry profile in the current environment. And I'd like to discuss a little bit about the funding markets. The repo lending market continues to function very well, and Orchid maintains capacity well in excess of our needs. That said, we observed friction building in the funding markets, particularly in the -- 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. Orchid 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 18 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, has kicked slightly higher in spite of the fact that rates are coming down. And 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 rates, any unhedged repo balances will benefit directly from this decline. As of June 30, 27% of our repo borrowings were unhedged, and that increased to 30% more recently, modestly enhancing the benefit to lower -- or potential benefit to lower funding rates. Turning to Slides 19 and 20, speaking of hedges. On September 30, Orchid's total hedge notional stood, as I said, at $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 3.31% 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 funding costs. Short futures positions totaled $1.4 billion, comprised primarily of SOFR 5-year, 7-year and 10-year treasury futures as well -- I'm sorry, SOFR 5-year, 10-year, 7-year treasury futures as well as a very small position in ERIS 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 0 at each respective quarter end, a par rate, if you will. Our short TBA positions totaled $282 million, all of which were, I think, Fannie 5.5s. A portion of this short is really part of a bigger trade where we're long 15-year 5s and short 30-year 5.5s. So a 15/30 swap structured to provide protection 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 have tightened materially. So we didn't want to take the basis exposure quite yet. Orchid held no swaptions during the quarter, which was fortuitous because there was a sharp decline in volatility. At June 30, approximately -- as I mentioned, approximately 27% of our repo borrowings were unhedged. That figure increased to 30% by September 30. This increase reflects the impact of the market rally and the corresponding shorter asset durations, which allowed Orchid 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 30, our duration gap was negative 0.26 years. And by September 30, it had grown to negative 0.07 years. So 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. Orchid's Agency RMBS portfolio remains well balanced from a duration standpoint with the overall rate exposure very tightly managed. Our modeled rate shock showed that a plus 50 basis point increase in rates would -- 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 with outperformance 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-years brief run at 360 last September. In the third quarter, speeds released -- in the third quarter, including the September speeds released in early October, Orchid 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 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 vol of the portfolio. In the premium space, 6.5s -- 6s and 6.5s paid 9.5% and 12.2% CPR for the quarter compared to 13.8% and 29.5% on TBA deliverable. As refi activity spiked in September, the various forms of call protection embedded in our portfolio predicts very sharp divide though. In the most recent month, 6s paid -- our 6s paid 9.7% versus 27.8% for the generics and our 6.5s 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 disciplined pool selection where call protection -- one month call protection specified collateral continues to deliver materially better prepaid behavior than the TBA deliverable, as I mentioned. Just a few concluding remarks from me. In summary, we experienced a 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 as 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 in a selloff, particularly given our call protection and limited convexity exposure. Looking ahead, we're very positive on the investment strategy, as I have 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, White House 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, I'll turn it over to Bob.

Thanks, Hunter. Great job. Just a couple of concluding remarks, and then we'll turn it over to questions. Basically, just to reiterate kind of our outlook. 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 is 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 in the economy could 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 out 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 out 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 data 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 up-rate protection because we think if the fact the Fed does ease a few times that in all likelihood, the move after that's a hike. So with all that said, we will now turn the call over to questions.

[Operator Instructions] Our first question is going to come from the line of Jason Weaver with JonesTrading.

Congrats on the results in the quarter and the growth. I guess, first, given the relatively consistent leverage and even greater liquidity now as well as sort of the positive development that you mentioned in the prepared remarks, especially lower vol. Is there anything particular on the horizon macro-wise that you'd be looking for to change overall risk positioning, maybe like -- notably like maybe leaning more into leverage?

Well, as I kind of said at the end, I don't know -- we could with leverage. I mean, like I said, there's two paths I see the market following. One is where we kind of stay where we are, the Fed continues to cut, rates stay low. In that environment, we're going to benefit, obviously, from the first few rate cuts because the percentage of our funding that is hedged is 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 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 end of 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 rate sell-off impact on mortgage prices.

Got it. 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 pay-ups upside potential here, especially if we see more refi momentum growing?

We've really seen pay-ups ratchet higher in the beginning part of this quarter. This most recent cycle of the GSEs, we saw pay-ups increase sharply. A lot of that is attributable to the fact that there were people who were long TBAs as kind of a strategy when the roll markets were more healthy and that carry from those rolls has 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 was really in kind of the first half of the quarter. So yes, that's just to reiterate that point. I mentioned we had the spike tighter in mortgages in early September. And forgive me if you mentioned this, I missed 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 -- we talked about this at the end of the second quarter. At that time, the weighted 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 higher coupons. But that being said, the average price of the portfolio now is a little over $101, $101.07 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 own, but we've gotten, as you saw in our realized prepayment speeds, very good performance out of those securities without having to pay extremely exorbitant pay-ups. I don't know that we're ever going to get back to where we were in '20 or '21, just by comparison. Back then, our higher coupon, New York, whatever coupon they were, the pay-ups were multiple 4 and 5 points. I don't know that we're going to see that anytime soon, but it's -- we've done quite well without having to go anywhere near those kind of levels.

Our next question will come from the line of Eric Hagen with BTIG.

I think you guys have kind of talked a little bit around it. But are there scenarios where dollar roll specialness would return to the market in a more meaningful way? How do you feel like specialness would affect like trading volume and kind of market dynamics overall going forward?

I don't know that -- I mean we saw that 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 specialness of the roll market coming back in a big way. 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, I don't -- it's never been a core element of our strategy.

No. It's -- I think as long as -- especially in the upper coupon, that's really being driven by fear of prepayments and the speeds that are being delivered into these worse-to-deliver pools that are being delivered in the TBAs are pretty bad here. So -- and I would 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. We'll either pop out of this rate environment that we're in now. So turn back towards the top or middle of the recent rate range or until rates move meaningfully lower. But I think we're kind of in a spot here where we're not going to see too much in the roll space.

Okay. Yes. That was interesting. Can you talk through some of the -- 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?

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, 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 and the market prices in 7 or 8 cuts that's when we try to do those things. So it opportunistically.

Yes, it's been -- 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 on hedged right now. So we can certainly have room to move in and do some shorter-dated short futures in the first year or 2 of the -- first couple of years of the curve or some kind of a swap or something like that with a relatively low duration. But we joke around that repo lenders are always very quick to price in hikes and very reluctant to price rate cuts. So that's been kind of the experience that's kept us from -- and you just think about the dynamics of what usually happens when the Fed gets involved and it has to cut 5 or 6x, which usually coincides with a credit market rolling over or a weakening economy, and those are not particularly comfortable environments for repo lenders.

Our next question will come from the line of Mikhail Goberman with Citizens JMP.

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

Almost 100% of the portfolio has some form of call protection. We have little pockets of what we call our 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 are relatively low in terms of pay-up. But we have housing market that's under pressure and borrowers going out with -- it's difficult for borrowers with high LTVs to turn around a refi at every opportunity. They will ultimately be able to do so, but it's not very cost effective for them. So a little -- it's not the lowest hanging fruit, I guess, the more generic stuff is. So yes, almost all of it is. We have some stuff that we keep around just in case we have a dramatic spread widenings and really low pay-up pools that we use 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's been working out really well for us.

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 still high 5s. So we're -- it's premium, it's in the money, but it's not so extreme, so another 50 basis point rally gets you obviously, like a north of the 6, which is like a $102 or $103 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 amortization for this quarter was very, very modest. So it was uptick obviously from there, but it's nothing like, for instance, what we saw in the immediate aftermath of COVID when those numbers were very, very large. Yes.

As we bounced around kind of this rate range, where we have bought the more expensive, I guess, or the higher quality stories has been kind of in that first discount space. And the rationale there is just they're relatively cheap at that point in time. So like when rates were a little bit higher 5s were $98, $99 handle. We bought a lot of New York 5s in the very beginning part of the quarter where rates were a little bit higher. And so those will do very well as -- if we continue to rally.

That's helpful. And if I can ask one about the -- flesh out your comments a bit about the hedge portfolio. If swap spreads were to widen back out, how much benefit do you guys see to the portfolio?

You said, widen out, like they've been widening, right? I know it's unusual...

Actually, if they continue to widen, yes.

Yes, continue to benefit from that. I mean it's -- I don't know if we have a dollar amount on it, but it was -- if you look at...

It's around $2 million DV01, so you can think of it in those terms, yes.

So like, for instance, like the long end is like a negative 50. So let's say you went to 40, obviously, something like that. I don't know how much further you can go, though, because you could argue that the market is 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 QE, not just reinvesting paydowns. But what Hunter said, so $2 million DV01, if you get like another 10 bps, what is that in cents? Something like $0.15 or something like that or $0.12 a book.

Fair enough. And if I could just squeeze in. Any update on current book value month-to-date?

It is up a hair basically. We don't audit that number every day because we get a dollar -- an amount every day, it's up very, very modestly from quarter end.

And I would now like to hand the conference back over to Robert Cauley for any further remarks.

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. Thank you. Bye.

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