Good morning and welcome to the Third Quarter 2019 Earnings Conference Call for Orchid Island Capital. This call is being recorded today October 25, 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. Sir, please go ahead.

Thank you, Operator and good morning, everyone. I hope everybody has had a chance to download our slide deck or at least view online and that will be the focus of today's call. As always, I will start on Page 3, the table of contents. Just to give you an outline of what we will be discussing today and this is the standard format. I will start off by going over our financial highlights for the quarter ended September 30, 2019. I will then review market developments during the quarter and summarize at the end and provide us an overview of our outlook of the market as we see it going forward. And then, of course, I will talk about our financial results, portfolio characteristics, credit counterparties and hedge positions. And then a final few words about our outlook and capital raising activity. Turning to Slide 4, our financial highlights for the quarter. Orchid generated a net loss per share on a GAAP basis of $0.14. We incurred $0.32 in losses from net realized and unrealized gains and losses on RMBS and derivative instruments, including net interest income on our interest rate swaps. Earnings per share were $0.18 excluding these same realized and unrealized gains and losses on RMBS and derivative instruments. Including net interest income on interest rate swaps. Our book value per share at the end of the quarter was $6.22, a decrease of $0.41 or 6.18% from $6.63 at June 30. During the third quarter of 2019. The Company declared and subsequently paid $0.24 per share in dividends and since our initial public offering, we have declared $10.705 of dividends per share, our economic return for the quarter was negative $0.17, or 2.6% which reduced the year-to-date return to 1.5%, 1.9% annualized. The Company issued 8,771,301 shares…

Hey, guys.

Hey Chris.

Bob, on Page 10, you are showing there hedge updates and you are showing that the 4.5s were outperforming. Could you explain that a little bit and that is surprising.

Well, I think it's to a large extent, it was the desirability. I will just give my answer and I will let Hunter speak. I think it was the less of evils, 3.5s and fours during this quarter - very, very poorly. They were basically shunned enforced - this is versus a hedge ratio, and 4.5s and we are very low hedge ratio versus the 10-year and it was more of just a what would you want to call it a - people ran from the other coupons to these, threes did poorly simply because they went from being the convexity play when they are at a discount to a premium and did poorly. So it was really just a lesser of evils now. Hunter, you want to add to that.

Yes, I would just, I think in particular, we use the hedge ratios that we use for that slot are from a firm who modeled 4.5s to be very, very short. So I don't remember off the top of my head what it was at the beginning of the period, but I want to say somewhere around like 12% to 15% of a tenure. So you have the 4.5 going up in price by

Five or seven ticks. On the next page, I think it was 27 ticks.

27 ticks versus the tenure going to up [100] (Ph). So that seems consistent with that math. The other using like a 15% hedge ratio.

And I would just add, when you get into periods like this. You can see a large disparity and hedge ratios that people use. The fact of the matter is a lot of times, the empirical duration shrink, very, very low. So mortgages just don't behave well in a sharp rally or sell off generally. But in this case, it was a very meaningful rally and there was a psychological significance too in late August early September we were getting very close to the all-time low in 10-year yields and when people are chasing duration, they are not looking to mortgages and therefore that is why they can typically such in a lower coupons do so poorly. And I think the higher coupon really just benefited from the math as Hunter alluded to just the fact that the hedge ratio was so low.

Great. And then on Page 23, I'm looking at your interest rate sensitivity in the lower right hand corner.

Yes.

Which has changed dramatically from the last quarter. And is it fair to characterize that you guys are basically not baking in any possibility of a rate increase on your hedge position, you are just looking at.

Yes, we definitely try to add duration to the portfolio, we think that the bar for rate increases is or at least dramatic ones is fairly low right now. So we are trying to flatten that out as much as we can. We are delta hedging the portfolio to a certain extent. So while in times when we get to the upper end of the range, we will try to add a little more duration. It was quite frankly very hard to come by, last quarter there was mortgages widening on a spread basis and then volatility increasing. So even if it's a little wider in term in OAS terms and we were also lower dollar price, because volatility was increasing. Yes, the speed dynamic at play, which was more of an income event for us, but then also you had also the funding squeeze so that coming in at quarter end, certainly didn't help our marks out. So we are at the higher end of the range, I think we feel comfortable trying to flatten that portfolio out. We tend to perform a little better than modeled then the down shock scenario that is just because when on a model. Some of the higher coupon assets and some of our more seasoned IOs empirically have performed better than models in those down scenarios. So I would think that we are actually a little bit flatter than what is suggested here. So anyway, I think the goal is yes to have less exposure to sharp moves downward in rate and willing to take on a little more of a flat profile onto a rising rate environment.

And also I would add, Chris, and I tried to make the point earlier was that the volatility in the market was really extreme. When you went - kind of all started right after the Fed ease on the 31st and then following day, there was a tweet by President Trump. [indiscernible] escalated the trade war with China and August was very chaotic, it's very sharp rally. And by the end of the month mortgages pretty much lost all their duration. And when you trying to maintain a relatively flat profile. You have got to find a way to do so, and then we have this sharp reversal in early September, we sold off, I think it was 44 basis points on 10s in like eight days. And then on Saturday, whatever was September 14. We find out that they have attacked oil fields in Saudi Arabia and the market turns right around and rallies again. And so when you are trying to adjust your hedges with rates whipsawing that fast, it gets very challenging. That was really a lot of the reason for the pain in the quarter. And then going forward. You know when you get these extremely low levels of rates, what you are seeing in this table on the bottom right is the market - the models basically telling you that if you have a meaningful rally from here at 50 basis points, mortgages are going to underperform. And the sell-off, the way we are positioned, we would probably do better in a sell-off. I mean, obviously that is not a large positive number. But again, I think that we are at a point where at least from a speed perspective, I think, it's just very asymmetric going forward. Yes, you could see speeds get a little faster. But I think the bar is pretty high. I think in all likelihood, they may be a slow trend lower, but they really can't, I just find it heartedly, they could get meaningfully faster from here.

We have taken steps in October also to flatten that out even more on the down rate scenario. So we have sold some of the really short low-yielding assets and we have added some quality call protection that exhibits more duration.

So is it fair to say that given all that, it sounds like you guys are sort of - and sort of reflect Bob's comments, speeds to start, slowing down a little bit, maybe some of this volatility settling down. And that is the reason for going out for the 4.5, 30-years, which is a change of strategy from the last couple of quarters.

Yes. We were definitely adding the duration in threes and 3.5s. And a lot of this is just relative value, it's two things relative value in the sense that the longest duration mortgages got extremely rich because everybody was trying to add that duration. And two, this is kind of a nuance. But when we talk about the performance of the TBA over the last year and a half, we haven't really, I didn't speak it at all about it today, but part of the reason is, what we see that is very high gross WAC pool. So in other words, historically, when I went out about a 3.5% mortgage. The gross WAC was around 4% give or take. So normally the spread was like 50 bps, now it's 80 bps to 110 bps. So Fannie threes have a 4% gross WAC, so they prepay like a 3.5% So it's like you have shifted the S-Curve, so to speak and not only that, but they tend to have higher average loan balances and very high FICO scores. And so TBA pays at extremely fast speeds, some of the major pools that were produced, even this year, there is a one pool, I think it's a four, that it paid 55 CPR the first month and 58 and 59 or something like that. They have been terrible. But what we did finally find recently, where some originator bid less where the gross WAC was 340 on a three year, 390 on a 3.5. Those are very attractive. So that is, to some extent, which attracted us to those, it wasn't an explicit desire to add that coupon. It was where we could find value and that really like I said, that was more relative value trading driven versus duration chasing driven. If that make sense.

Yes, great. Thanks for taking my questions, guys.

Thank you.

[Operator Instructions] There are no further questions at this time, please continue. Sir.

Thank you, operator and thank you everyone for taking the time to listen in or to the extent you are listening in on the replay. If you do have questions that come to mind after the fact. Please feel free to call us in the office, our number here is 772-231-1400 we will be very willing to take any and all questions. Otherwise, we look forward to talking to you next time. Thank you.

Ladies and gentlemen, this concludes today’s conference. Thank you for participation. Have a wonderful day. You may all disconnect.