Good morning and welcome to the First Quarter 2019 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, April 26, 2019. 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.

Thank you, operator, good morning everyone. I hope everybody has had a chance to download or to view online our slide deck we released last night. I will be spending, as usual, the bulk of my time going through the slides and of course we have our press release with further details regarding our earnings. With that, I will start walking through the slide deck. As always, I’ll start on Slide 3 and just give you an outline of what we’ll discuss today, and the outline really hasn’t changed since prior quarters. First thing I’ll do is, go through our overview of our results for the first quarter of 2019. I’ll speak to developments in the market with an eye towards what that meant for us and how we did with respect to positioning the portfolio and our results, go through our financial results and then go into our portfolio characteristics, including hedging, and then speak briefly about outlook and strategy. Turning to Slide 4. Orchid Island Capital generated a net income per share of $0.22, incurred $0.02 loss on realized and unrealized gains and losses on RMBS and derivative instruments, and that includes net interest income on our interest rate swaps, earnings per share of $0.24 excluding that $0.02 loss across the balance of the portfolio. Book value per share was $6.82 on March 31, a decrease of $0.02 from $6.84 at the end of 2018. Total dividend of $0.24 per share were declared during the first quarter. Since its initial public offering, the company has declared $10.305 of dividends. Economic return for the quarter was $0.22 or 3.2% for the quarter that’s not annualized, and the company issued slightly under 2 million shares under its ATM program in the first quarter. Slide 5 just shows you our results.…

Thank you. [Operator Instructions] Our first question comes from Christopher Nolan with Ladenburg Thalmann. Your line is open.

Hi guys, and I echo the sentiments of Dave Walrod, he’s a great guy. The share count went down quarter-over-quarter despite issuing shares. So, did you guys repurchase shares as well as issue?

Yes, there were some of the – some of the buyback activity which ended in late Q4, actually settles in January. As a result of our GAAP accounting purposes, it does not – if you bought the shares back, there is a delayed reaction in recording. So, they are same with our sales.

Got you, thanks.

But I would – it would be higher today. In fact, I believe the press release we’ve put out last week on the 17th, we would have updated share count would reflect to be higher. It’s still below the peak. Through our share buyback activity, we bought back, I believe, 10.4% of all shares that we’ve ever issued. So, we’re still below that all-time peak and shares outstanding, but we are slowly growing back.

Okay. And Bob, do you guys have a weighted average share price for what you bought? You issued share out?

It’s in the Q. I don’t have in front of me, but it will be in the Q released later today. I wanted to say, it was 6.84.

Great. And then, I noticed that your duration declined in the quarter, should we expect it to start rising going forward given your comments?

Well, that’s novel duration, Chris. You know there’s been times when we were positioned extremely defensively, and it was, you know, close to 3 that’s our model duration, you know, the empirical duration which matters more for us was much lower. You know, I would expect us to trade empirically longer than we did. So, I would not put too much confidence in the model number. You know we do publish it and it’s an unbiased representation of the portfolio’s risk characteristics, but it is a model-driven number. It's – they do have their limitations there.

Chris, just – there’s definitely been a shift into lower coupons, which have – tend to have a longer duration, so, you’re certainly right on that front. Some of the higher coupons do have higher pay ups, so they tend to also be long, but there's been a strategic shift to try to add a little bit of duration as our bonds have gotten shorter into the rally that’s occurred this year. So, we’ll continue to try to – I think our goal is to be a little more flat during the Fed tightening cycle. We’re always trying to be slightly short – have a short bias at least empirically, and I think we want to really sort of be more flat here going forward. So, in order to do that, we’ll have to add a little bit duration in the rallies, and then hopefully back it off as we sort of delta hedge through these rate movements within the cycle.

Okay. Thanks Hunter. Final question is, Bob, in your comments you mentioned for the TBAs. It seemed that the higher coupon stuff has more – is more leverageable, more – my impression was, you can get increased leverage from higher coupon bonds. Should we read that where your balance sheet leverage ratio could pick up back to nine times or how should we read that?

I think it would stay in – we’ve been on 8.5% at the end of the quarter. But yes, I would expect it to stay at the high end of our historical range, which as you mentioned was about 8.5%, maybe low 9’s, and I think we’re comfortable doing that. Consistent also with the migration, not just the high coupons with high pay ups and therefore duration, but also in contrast with our prior history of lower coupons as well, which have duration just because of the discount nature of the bonds.

Okay. And final question, does – do you think the strong GDP number today, it sort of – gives any sort of change in terms of how the Fed might be thinking about the rate environment because from my observation it looks like GDP number came in a bit stronger than people were expecting?

It was. It did – other than any other market rally going into the number briefly backed off and resumed rallying. A couple of things, 3.2%, 1.03% of that was net exports. The trade balance changed a lot, and then also I think there’s 0.65% inventory build, and the market assumes both of those are kind of transitory. Another number that’s very important is we will fund our sales to do domestic purchases, which excludes net exports and inventory build. That number was 1.4%. If you go back to Q1 of last year, it was I think a little over three, it’s declined every quarter since. And I think that might be one thing the market look forward through to, and then also the PCE data was a little on the soft side. So, you know, it could be that what we’re seeing is continued robust growth without any inflation, and, you know, it’s kind of a paradox if you’re a, you know, traditional central banker because you assume prolonged periods of extended high high-trend growth, you should get inflation, but we don’t seem to have it, and, you know, I would assume it’s hard to say because Powell’s only been in his seat for a short period of time, but he seems to get it, and I don't think he's going to over hike in the face of soft or weakening inflation just because the growth numbers or the [indiscernible] payroll numbers [indiscernible] a little strong. If he did, I think it will probably be a mistake. I also think that the markets, equity markets in particular would react very negatively and we’ll get kind of a repeat of what saw last December. You know he seems to kind of get it and I think that was a good thing because at the end of the day, if you can somehow maintain growth at these levels without inflation, it’s – you know, probably it’s something [indiscernible] welcome and not try to fight. So, we'll see.

Great. Thanks for taking my questions.

Sure.

Thank you. [Operator Instructions] And our next question comes from Steve DeLaney with JMP Securities. Your line is open.

Thanks. Hi, good morning Bob and Hunter. How are you?

Hi Steve, how are you?

Hi, Steve.

Great thanks. Just one thing for me, you know, listening to a couple of earnings calls earlier in the week, we’ve seem to be getting a little disparity in terms of where people are suggesting repo is being priced and we also notice – you know, we track this, you know, the – I guess its GCF RMBS on Bloomberg and we’re also seeing some day-to-day volatility like it's not unusual for that rate to move 5 basis points or 6 basis points in a day. So, just wanted to know if you could just give us couple of – you know tying into your chart on Page 25, just your sort of general view or conditions in the agency pass through repo market and where you’re seeing pricing currently? That would be great, thanks.

Okay. I’ll speak briefly and let Hunter talk, but I think the repo market itself has been stable. The GC market has been volatile, no doubt.

Okay.

I don’t know if that’s – other than over quarter end intra-quarter. It’s not [indiscernible] not seen that pass-through to the repo market and there’s a lot more to do with settlements of – in your cash management bills, 3, 6, 12-month bills and shortages of cash in the system.

Okay.

So, you do see volatility in the overnight funding markets, and you do see it in the repo markets over quarter end, but otherwise I would say it’s stable and trending down.

You know we don’t have a lot of exposing in the overnight market, so we tend to I guess sort of draw a little bit of the line through that volatility.

Got it.

I think, you know, our overnight repos, which are all of the federal home loan bank were priced at 285 over year end, and have since come a way off, and I think a lot of people were shell-shocked from that going into the first quarter. There was some sort of, you know, little bit of panic in the market, so we priced in – started pricing in slightly higher repo rates trending into the end of March, and then it turned out to be just a complete nothing on the turn. So, I think it's continuing to sort of drift back down. We still see people trying to take advantage of, you know, heightened year-end or quarter-end anxiety. But just to give you some data points I think we …

Sure.

…pricing one-month repos in the low 260s. If we want to get out over quarter end, it’s going to take 263, 264, 265 for say a three-month type of turn, and you’re able to do – you know because of the shape of the curve and the, you know, slight probability that the Fed cuts it some point in the next year, so, we actually see a return of term rates that are lower than current rates. So, you can lock …

Price again.

Yes, six-month or …

The forward curve, yes.

Yes, exactly. So, we haven’t done anything that’s over six months yet, but we did a lot of six month in the low 260s I’m going to say.

That's extremely helpful, Hunter and Bob, and I think that the concern was that the level of 285 was kind of thrown out there, and we certainly over the years, you know, and we know that quarter end can be crazy, and, you know, I sort of remember that Japanese year-end is March 31 and that sometimes…

Yes, it is. And that was elevated then, you know.

Yes, and that exacerbates it. So, what I was trying to get at is, you know, while spot rates, you know, for a few weeks before and after quarter-end, you know, may have been that high than what you’re seeing on the run now is more like a 260 handle, whether it was 30 days or 60 days.

Yes.

And, yes, okay. That's very helpful because a lot of us – I know Chris's is doing the same thing and he probably heard the calls I've heard, and, you know, as we sit down, you know, obviously we’ve got to adjust our repo rates in our model for 2Q and beyond kind of based on current conditions and…

Yes.

…that’s a very helpful comment, so thanks for that and have a great day.

Bye Steve, thanks.

Thank you. I’m showing no further questions at this time. I would now like to turn the call back to your speakers for closing remarks.

Thank you, operator. I thank everybody for taking the time to listen in today. To the extent somebody has questions that come up later in the day or next week, please feel free to call us or if you’re just going to catch a replay, our number here at the office is 772-231-1400. We are always here to take your questions and welcome them. Otherwise, we will speak to you next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day.