Good morning and welcome to the First Quarter 2020 Earnings Conference Call for Orchid Island Capital. This call is being recorded today May 1st, 2020. 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 files 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 factors affecting forward-looking statements. Now, I'd like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead sir.

Thank you operator and good morning everyone. I hope everyone is safe and has been not been adversely affected by the pandemic and COVID-19. Hopefully, by next quarter's call, this will be largely behind us. However, it was all about COVID-19 this quarter. I'm not going to follow the prior practice and goes through the slide sequentially. The events of the quarter don't really lend themselves to doing so, so please bear with me as I flip around slightly. Instead of what I'm going to do is focus on six main points and use the slides as needed in an effort -- in any event I will not cover all the slides and again just focus on the ones needed to support my points. The six main points I'm going to focus on are; one, I'll briefly go over what happened in Q1 don't dwell on that too much. Second, I'm going to pause and just kind of revisit our investment strategy and say a few words about our strategy versus that of other mortgage REITs, try to draw some contrasts. Third, I'll come back and review our results -- I'm sorry not our results, but what we did as these events unfolded during the quarter. Then I'll go over our financial results and then the focus of the call hopefully, we are positioning where we stand today. How we look at the world going forward and our expectations for rates, speeds, and spreads. And then of course we'll open the call up to questions. So, to it, I guess, we could start on slide seven that's as good as any. It just shows you what happened to the treasury curve and the dollar swap curve. And the first point I want to make is that the financial -- as…

[Operator Instructions] Our first question comes from Christopher Nolan with Ladenburg Thalmann.

Hey guys.

Hey Chris.

I hope you're all well.

Hopefully, I hope you are as well.

Bob leverage, the leverage ratio kind of my calculation is about 9.3 or so which is relatively high mostly due to lower equity. Are you guys looking to raise equity or you look at the lower -- what are you thinking in terms of -- on leverage front?

Well, you're right it was 9.3, but remember we got a lot of book value back in the month of April. So -- and we did add some assets, but the effect of that is actually to bring it down. Our book value as we say is up over 10% through the month of Aprils. So that in and of itself brings our leverage down, the assets that we acquired on net probably -- it's even probably still down slightly. As far as capital raising, obviously, that's just a question given where the stocks are trading. But the investment opportunities are very attractive. And even though that's -- this isn't addressing your question per se, when we look at say for instance repurchasing shares, do you want to sell assets to buy back shares, two points on that. One, asset prices are still recovering, so that makes me somewhat hesitant to sell a lot of assets just because I think they have upside price-wise. And two, the investment opportunities are so attractive right now. Who knows what the future holds, but everything that we're seeing and hearing makes us think that our funding cost is going to be in the range of 25 to 30 basis points on the pass-through portfolio. And even with yields in the high ones low twos that's a very attractive NIM. And if you can contain speed those are very attractive returns. So while capital raising isn't on the immediate horizon, if the opportunity presented itself it would be an opportune time to risk capital.

Great. Given that you were experiencing higher investment spreads, assuming no change in leverage, what are you thinking about in terms of equity returns for the balance of the year?

Like I said, mid-teens are very attractive. We -- who knows, I mean, I think there's one wildcard. It's -- we're seeing a lot of states reduce or eliminate restrictions. And so if we were to have a relapse and the markets will get thrown back in the turmoil that could obviously change things. But absent that, it should be a very attractive year from this point forward, obviously, the first quarter was quite challenging.

Sure. Final question. Turning to prepays. A lot of this turns on the ability of people to get mortgages in the first place. And given that the government is willing to do anything and everything to get this economy moving, do you anticipate where you can see regulatory changes, which almost like Community Reinvestment Act by the banks in the 1990s where they lowered standards relative to in the past where people to get mortgages, do you think we can return to that? And if so would that have a negative effect on prepays for you guys?

Well, two things. One, they've already done a lot. In the forbearance program out of the Cares Act allows borrowers to not make payments for up to six months then into 12, a big concern that caused was obviously services having to advance against those. The FHFA announced that they would limit the services obligation to advance the four months, which is a big point for them in terms of liquidity. From that point on, the GSEs would advance. Importantly the GSE has also said that they would keep the loans in the pool through the end of the forbearance period. Now at the end of that to the extent these loans and these borrowers are unable to recover you could see them enter or stay in default effectively, and in which case they would have to be bought out. So you could see a spike in prepays. But at the end of the financial crisis and the aftermath of that there were a lot of steps put in place in terms of remediation steps that are mandated that have to be taken to avoid borrowers losing their homes. And so the steps have been laid out. In this case, I suspect that somebody can't make a payment for 12 months. They're probably not going to be able to recover. They're going to be thrown into the modification pool, in which case they will see -- they'll go through the modification process. Their loan will be taken out of the pool. And they'll either have some principal reduction, rate reduction, whatever it takes to get the loan payment down to something they can afford or they ultimately do default. But a lot of that's already in place. And the immediate effect for us is to the extent they cannot make their payment, we'll still receive principal on interest. So it'll mute prepays with the caveat that you'll probably have a spike in 13 months or 14 months from now.

Great. That’s it for me. Thanks guys.

[Operator Instructions] Our next question comes from Jason Stewart with JonesTrading.

Good morning. And I hope you're doing well. I wanted to add one thing before question, great job going through what was a really difficult time. So this has been tough to watch but nice performance.

Thank you.

The question -- Chris asked most of mine. But one on pay-ups and spec pools. If you think through your view on prepays, do you think that we see a relatively quick recovery in pay-ups, or is this something that perhaps sticks around these levels and we wait two or three quarters until there's some clarity on access to mortgage credit?

Hi, this is Hunter. Yeah, we -- the guys I talked to and transact with in the spec pool market, there is, sort of, a joke going around that. We've seen a V-shaped recovery in spec pool pay-ups. And so yes they recovered quickly. I expect them to continue to recover. My outlook is very positive on pools. We've seen even some of the REITs that were doing crazy things like selling on a Sunday afternoon have been in and had a very large appetite for adding specified pools. Dollar roll markets make it very easy to hedge these things. You can be long one cash flow and short something that's very, very similar and not have a lot of mortgage basis risk on the books. And in some cases, you can get paid for your hedge. So short answer is yes they have recovered quickly. And I expect them to continue to recover quickly.

Yeah. The March cycle they were very, very high. Of course those collapsed. And our little picture in the slide -- I apologize it's not that great. But they have come back 85% 90% of what they were they would be -- they should be higher because rates are lower, right? So they could potentially go through those levels. Next week we'll get the auction cycle. And I would expect them to do very, very well. And don't forget, refis in the most recent month were up, surprisingly higher than expected a very meaningful jump last month. And so when people grapple with how speed is going to evolve over the next few months, you have two forces working against each other. One is just absolute low level of rates. And the second one is the impacts of the pandemic which tend to mute refis. It looks like for now that the formers seeming to win out. Most of the Street expects speeds to increase again next month. We'll see what happens in June and July. But everything that's happened so far has tended to support pay-up valuations. And then, as Hunter mentioned the roll market. And the higher -- away from the production coupons those are mostly negative. So, it makes it very easy to hedge. So, I would not expect spec pool pay-ups to do anything. But be very strongly supported moving forward.

Yeah. One final point on that is, remember that the Fed since they stepped in and got involved in this crisis bought $585 billion worth of the worst-quality mortgages. So, that puts demand on the goods that just shoves everyone else into that camp of looking for higher-quality assets that the Fed is not consuming.

Right, that's a good point. And then on Chris' question about -- or your answer, Bob on repurchases of the stock relative to putting new capital to work. Your mid-teens number to me sort of as just levered cash-on-cash doesn't include any appreciation from basis tightening et cetera. So, one is that correct? And then two, how does that change going forward relative to purchasing stock assuming that does change?

Well. You're right. It doesn't include that. So the -- I think the assets have room to appreciate. And as we said, I think that, we could see pay-ups go through the levels we saw in March. So selling assets to buy back stock even though we're trading at -- I don't know where we're trading at, this very moment, but somewhere in the 80s percentile of book value which is still a big discount. But still those assets are going up in value plus the income-generating potential of them. I think those returns all in are actually higher. I don't try not to say those things on calls because then if it doesn't happen people hold me to it but they look very attractive. We -- typically when we trade less than 90% of what we want to buy back, this might be the exception where the returns on the assets both the existing. And from an income enhancement potential are just too attractive.

Yeah. I mean, as evidenced by the fact that, we put in our press release last night that we thought our return was somewhere in the 10% to 12% range for the 29 days that we -- of the quarter that we have been through so far. So that makes a pretty sharp justification for keeping the cash in the mortgage portfolio as opposed to buying the stock back at 10-or-15-point discount to book.

Understood. Thank you for taking my question.

Thank you.

And I'm not showing any further questions at this time. End of Q&A:

All right, operator. Thank you. Thank you everybody for taking the time to join us. As always, if you have other questions or you happen to catch the replay, you can reach us in the office. The number is 772-231-1400. We'll be happy to take your calls. Otherwise, we will talk to you at the end of the second quarter. Everybody be safe. Thank you.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect. And have a wonderful day.