Robert Cauley - Chairman, CEO and President George Haas - CFO, CIO, Secretary and Director.

David Walrod - JonesTrading Institutional Services Christopher Nolan - Ladenburg Thalmann Frank Benosa - FWG Limited.

Welcome to the Second Quarter 2017 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, August 1, 2017.

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 the 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..

Thank you, Operator and good morning, everyone. For the second quarter in a row, we placed a slide deck of supplemental materials on our website late last night after we released earnings at around 4:30. I hope everybody has had a chance to download those and can look at them.

My remarks today are going to be exclusively focused on the contents of the slides. We'll be walking you through them. I also -- I will apologize in advance, because I'm not going to follow them in an exact order, going to basically focus on our results.

And then, I will look to some of the other side whether they be with respect to what's happened in the market over the course of the quarter or our positioning, our portfolio details, kind of as needed. Before we get started, like I said, I just want to walk you through the results on Slide 5.

I'll just read these for you very quickly, just to the extent somebody doesn't have them, they can hear. Our core -- our headlining earnings per share was a negative $0.26 for the second quarter. We incurred $0.88 of losses per share of net realized and unrealized gains and losses on our MBS and derivative instruments.

Our earnings per share were $0.62 excluding these realized and unrealized gains and losses and we have a reconciliation of this number with our GAAP number on Page 14 for your reference. Book value per share was $9.23 at June 30, 2017. That's a decrease of $0.52 or 5.3% from $9.75 at March 31, 2017.

Dividend declared for the quarter, there were 3 for $0.42. And the result of all this is an economic return of negative 10 basis points or 1% unannualized, 4.1% annualized. Now I'd like to go into our results in a little more detail. As I mentioned, I'm going to jump around the slides. So now I'm going to go to Slide 14.

I'll give everybody a second to catch up. Slide 14, as we showed at the end of our first quarter, is a slightly different variation on how we represent our financial statements and more particular, our income statement.

If you look on Slide 14, the far right column is basically the income statement that's in our -- will be in our Form 10-Q and was in our earnings release yesterday. So for instance, you can see we had net interest income of $25.8 million.

Mark-to-market gains and losses, expenses and so forth and it foots down to a negative 26% earnings per share number. And as we stated in the first quarter, we want to highlight the fact that we use the fair value method of accounting as a result fluctuations in the value of everything.

Assets and all of our hedges go through our income statement and that is this middle column here, we held all the realized and unrealized gains and losses. And the first column is simply just everything else. So it's our net interest income and expenses.

And as a result of this market-to-market accounting, we do get a lot of volatility in our headline reported earnings per share. I'd like everybody to turn to Page 15. In here, we have a graph going back to our very first quarter of operations in the first quarter of 2013 and you see 2 lines here.

The blue line is our headline reported earnings per share. In the case of the most recent quarter, it's negative $0.26. And the red line or orange line is basically just our net interest income less expenses over this period absent these mark-to-market gains and losses.

And before we go on, I want to stress that this red line is not meant to be our core earnings or our proxy for our taxable earnings. It's nothing more than net interest income less expenses. But the takeaway that I would like everybody to have, is that there is stability in this line over time.

Even though our reported headline number is extremely multiple [ph] because of mark-to-market accounting, the underlying income stream absent our expenses needed to operate the company, is quite stable. And in fact, if you look back over the last few years, you see a range of approximately $0.62 to $0.70 over that very long period of time.

Before we get into the results in any great -- so I want to say a few words, though. Over the course of the last -- the first 6 months of the year, the market has been rallying. After the election in November of last year when Donald Trump was elected, took the market by surprise.

The Republicans gained control of all branches of government, again, to everybody's surprise and there was a lot of euphoria because Trump was viewed as such a probusiness president. And there was a lot of talk of fiscal or of tax reform and infrastructure spending, deregulation and so forth.

But a lot of that, as we all know, has not come to fruition as a result of market has rallied. To understand our results, you have to understand that the most important reason that we have these results is positioning. How does the portfolio position? What is it positioned for? And I'm going to go through that now in a little more detail.

So again, I apologize I'm jumping around a bit. If you wouldn't mind turning to Slide 17. This shows you our capital allocation. So as we've discussed at length on all of our earnings call, we allocate our capital into 2 strategies, in IO or structured security strategy and a pass-through strategy.

And what I'm really trying to point out here, is as you can see, whether it be at 3/31 or at June 30, we have a significant allocation of our portfolio to IO and inverse IO securities and these are defensive positions.

They are, on balance, going to exhibit negative empirical duration and of course, given the market's rally for the last few quarters, those have done poorly as the market has rallied.

Another thing I want to point out, if you look at the first column, they are pass-through portfolio, just the market value from the first quarter -- end of the first quarter to the end of the second, you can see that we added a lot of positions during the quarter. So that part of the portfolio grew quite substantially.

Now I'd like to jump around again and move to Slide 25. And this is kind of where I want to spend a few moments talking about this slide. So I'll give everybody a chance to get there. The first thing I want to point out, if you look at our -- there's a -- the second and the last column is the weighted average coupon.

And if you look there by halfway down the slide, you see our total fixed rate MBS. The weighted average coupon is 4.42%. So what this means is that, again, entering this quarter and frankly, entering the year, we have a very defensively positioned portfolio.

So we own a lot of high-coupon fixed-rate 30-year pass-throughs, with a weighted average coupon as you can see in this case of 4.46. We do not have a significant allocation to arms or hybrids and we own IOs and inverse IOs. So we have a very defensive portfolio. We've been positioned for higher rates and more Fed hikes.

Unfortunately, that is not panned out or at least the market has not priced that kind of outcome in over the last 6 months. We have seen 2 Fed hikes, but if you look at the market today, you see there's very little priced in going forward. Maybe at most, one more Fed rate hike priced in over the balance of, say, the next 18 months.

And the long end of the curve is quite flat, reflecting the market to view that there is very little inflation risk. So this has been our positioning. Speeds have not been that big of a problem. We have a -- we're very much exposed to speeds with these high coupons and IOs.

But as you look at the last call and you can see that our realized speeds both for July and frankly, for the balance of the year, have not been high. So it's actually not been a problem. However, as you know with the market rallying, it's not been kind to this kind of positioning. IOs have not well, our hedges have not well.

And frankly, our higher fixed-rate mortgages have not so well either. So before I move on, I kind of laid the groundwork here. I want to make you understand.

Clearly, where positioning has meant for our portfolio for the first six months of the year and a few moments, I'm going to speak about how our position going forward, how we see the market unfolding over the balance of the year. But I just wanted to lay this groundwork.

In the meantime, let's just briefly go over some of the developments in the quarter. On Slides 7, 8, 9, 10 and 11, we have some market color for you. I'll just go through these briefly. Slide 7 just shows you the 10-year treasury note and the 10-year dollar swap. The reason we show these is, these are pretty critical for mortgage-backed investors.

Most people view the movements in these 2 rates as critical for both showing what happens to the price of mortgages but also, prepayment speeds as well. And as you can see that over the course of the quarter, both rallied in the case of the treasury note, 8.3 basis points to swap a little more.

In fact, it even rallied more up until the last week or so of the quarter, then we had a 15 basis point selloff. So that's kind of the environment that we were managing through in terms of rates for the quarter. The next two slides, 8 and 9, just show you the movements and the treasury curve and the swap curve.

I'm sure you've listened to many earnings calls so far, as you kind of know what happened. Just wanted to show you that you had a flattening of the curve here, it's reflected in the bottom of the page for both curves. The pivot point, in the case of the rates market was 4 years for treasuries and 2 years for the swap market.

The swap market was a little more extreme in terms of the flattening. Moving on to Slide 10. Slide 10 just shows you the performance of 2 fixed-rate 30-year mortgages that we tend to own quite a bit of. As you can see, in the case of the red line, 4.5 was our largest holding. They're only up a half a tick in price over the course of the quarter.

Fours were up 6.5 ticks, 3% or more current coupon mortgages were up 19 ticks and the U.S. treasury was up almost 0.75 of a point. So it was not a good quarter to own higher coupon mortgages as they wide quite significantly during the quarter.

The next two slides, 11 and 12, this shows you the pay up that we pay when we buy various mortgage-backed securities with forms of prepay protection. They traded a premium in this case, we're showing Wells Fargo production, 85k max which is probably -- which is the most expensive form of call protection.

The next slide is what they call new production. That's one of the, if not the lowest form of call protection. And it just shows you the movement of these pay ups over time. For the current quarter, you can see for both, they kind of moved up ever so slightly. Actually, for new, they were actually down. So that's all I have to say.

So that's kind of my wrap on what happened in the market for the quarter. Now I want to start talking about what the portfolio actually did in a little more detail and things that were done during the quarter. So as a result, I'm going to change -- move to Slide 16. This is going to show you the rule four [ph] of the portfolio for the second quarter.

Give everybody a second to get there. On Slide 16, the far right-hand column just shows you the beginning and ending value of the portfolio. So the first thing I want to point out, as you can see, is the portfolio grew quite a bit. We were growing our capital base through our ATM program. I've more to say about that in a moment.

But suffice to say, the portfolio grew. If you look at the first column, the pass-through portfolio, two [indiscernible] numbers to point out, one, the securities purchased and sold. What we were doing here, two things, on the one hand, we were deploying new capital, but we were also selling some older securities.

We own various forms of call protection. We've been migrating to the lower pay up stories because of the cost. And also, in anticipation of higher speeds in the summer, we were selling some older more seasoned bonds and buying newer securities which typically have lower prepays, at least, initially.

So we were buying newer securities, generally speaking, lower forms of pay up and also the point of fair amount of capital. So we have very large purchases there. And I want to point out one point before we move on. You might see that the mark-to-market had losses for the pass-through portfolio.

That doesn't seem to make sense, given the fact that the market rallies. The reason for those losses was simply the fact that we were buying a lot of pass-through securities during the quarter than the market, even the 4.5 coupon which traded in around a 20-or-so tick range over the course of that quarter, ended at the bottom end of that range.

So most of the securities we happen to buy this quarter were bought at a price above the price that prevailed at the end of the quarter. We don't put much stock in that fact. The 4.5 coupon over the last 3 years has traded in at 3.5-point range. We're more or less in the middle of that range.

So the fact that we moved out a few ticks intra quarter is not going to skew how we look at the world going forward, but it does explain why we have this mark-to-market loss which seems counterintuitive, given which took place in the market. I'll skip ahead to Slide 18. 18 shows our results on by -- or the return by strategy.

If you -- I'm going to focus on the bottom line which is the return on average capital. Just simply because we did grow the capital base quite a bit. I think that's a more representative number. As you can see, the pass-through strategy had a negative 250 basis point return.

Up to some extent, that was exacerbated by the unrealized losses on the passes which we acquired during the quarter. The rest of that is our hedges. The IOs and inverse IOs. IOs had a bad quarter as the market rallied.

Inverse IOs actually did well, simply because the market was pricing out the Fed and therefore, the curve -- the forward curve was flattening. But on balance, we own more IOs and inverse IOs, so the return for that component was negative.

And the reason which I'll say a few words more in a moment here, but the IO book is just bigger because we use -- it's more important for the hedging of the pass-through securities. Okay.

So now before I start to discuss at length how we're positioned now and where we see the world going from here, we have added a lot of slides that show some historical information about our portfolio size and composition of the portfolio. I'm just going to go through these quickly.

They're not really critical for what's going to happen in the future, just basically historical information. Slide 20 just shows you the growth in the portfolio over time. We have grown Orchid from our IPO days in March of 2013 to now, predominantly through the use of our ATM program. An ATM program allows us to sell shares in the market.

We don't do a large secondary offering after the close. It is a very low cost, effective way to raise capital. All-in cost is less than 2% and we don't have to sell these shares at a discount to last trade, as everything implies, they're sold at the market. And we've been very successful using this program over time.

And also, you see on Page 20, just a clear bias for fixed rates. We have -- we do not like now and have not liked for -- basically, since our inception, arms or hybrids and that's it. Next I want to go on Slide 23. This is our capital allocation.

Just so basically, the capital, not the market value of the portfolio, but just that capital allocation to pass-throughs, IOs and inverse IOs. This is the historical allocation going back to our inception. Not much to say here. I'll make a few comments.

If you look at the June 2016 and September '16 quarter, you see that pass-through allocation was going down. It was just because the market was rallying. Pass-throughs were becoming very expensive, IOs cheaper. So we were moving the allocation slightly in that direction. That's just kind of an example of how we look at the world.

If you see, in the course of the fourth quarter, the pass-through allocation is down. That's simply because mark-to-market losses on the pass-through portfolio has resulted to selloff and we've since started to move in the other direction thinking the pass-through allocation higher and I'll have more to say about that in a moment.

Now speaking of which, Slide 22. This is the allocation of our fixed-rate holdings. And you can see a very strong bias to 30-year mortgages. The reason we're doing so is because of the better carry that they offer over 15s, we feel we can hedge the extension risk of the these assets fairly effectively -- perfectly, of course.

When I get to the IO book, we'll about that a little bit more. And as I said previously, we dislike arms and hybrids. The dollar prices tend to be high and the speeds are high and very unpredictable. We've been able to buy even cheaper forms of call-protected 30-year mortgages and as you saw, realized very, very modest speeds.

We get very good carry out of these bonds. And we're able to, at least, semi-effectively hedge them with various forms of IOs. On Slide 21 which is the previous slide, I apologize, you can see that the IO allocation has gone up versus inverses.

Again, reflecting the increased use of 30-year fixed rates that we will look for IOs out of extension potential. So that in the event of a selloff in rates, they would tend to perform well and offset the expected negative performance of the 30-year mortgages. So that -- it's kind of done in conjunction with one another.

So when we move the allocation to 30s, we've also added to the IO exposure as a form of hedge. Slide 24. Give you a moment again to catch up. This is just our leverage ratio over time. Again, this is just historical information. Just a couple of comments here. If you see back in our early days, it was quite low.

We were positioned even more defensively than we're now and we, of course, had to taper tantrum. And of course, that ended up being a good decision. Over the balance of period, if you look into 2015 and '16, market was off and rallying. Our leverage was going up slightly. Allocation moving more towards to pass-throughs.

The most recent -- the first quarter got quite high and it was too high for our liking and since then, we have brought it back down. The way we did it was basically the deployment of the proceeds of the ATM.

we basically just invest -- did not invest to the extent we would have normally and we were able to bring the leverage ratio down back in the line. And it just reflected the fact that because of the mark-to-market losses that we felt this was quite necessary to kind of stem the tide, if you will.

And then in a moment, I'll just tell you what I think what we're doing going forward. Few more slides on just positioning and the portfolio. Slide 26, just was our credit counterparties. Not have anything to say other than that, it's relatively self-evident. We just try to provide this information for you. Slide 27 and 28 show our hedged positions.

27, we have our euro-dollar positions. There were no changes during the quarter. At the bottom of the page, we have a treasury note future. We roll this to September from June, other than that, no change. Slide 28, our TBA hedges, both at the end of the first and second quarter, we were short 3s and 4.5s. We have rolled a 3 short.

We did not roll 4.5 that was covered. And with respect to our swaps, we had a couple of small ads, a 2-year swap and a 5-year swap were added during the quarter. And the last page is our appendix which just shows you the underlying data for the chart which shows you our earnings per share number. So that's basically the slide deck.

So what does it all mean and where do we see the world going forward? Well, the way we look at the world is that we still have not changed our prime -- or primary view of the world going forward. Trying to just to review, as I mentioned last fall after Trump won in surprising form, there was a large amount of optimism about the economy.

People were expecting tax cuts, tax reform, infrastructure spending, regulatory reform, rollback of existing regulations, new healthcare law. We've got almost none of that. In fact, the outlook for it isn't really that good either. But it's also important to note that while we didn't get all of those things, we didn't go the other way, either.

We're not getting higher taxes. We're not getting cuts in infrastructure spending. We're not getting more regulation. And so while it's not as good as it looked like it might be, 6 or 8 months ago, it's still not a bad environment. So when you look at the economy around us today, the labor market is still very healthy.

We're at or near full-time employment. Wages are increasing, maybe not as great as some would like, but there is still 2 -- 2-plus percent growth. The consumer balance sheet is in very good shape. The housing market is very sound. Price growth is ideal. It's mid-single digits. It's not too fast, not too slow.

From the perspective of homebuilders, there is clearly evidence that demand is higher than supply and that allows them to add new homes over time at their leisure. In fact, even the same is true for the used or existing home market where clearly, demand is outstripping supply.

CapEx spending which is definitely related to productivity growth has been lagging for some number of years, showing some early signs of rebounding. That's also a positive. Most recently, the trade weighted dollar has weakened which is helpful for exporters and the like. And of course, earnings are coming out.

And S&P earnings are very strong and more importantly, headlining sales numbers -- revenue numbers are strong. And in fact, it's not just the domestic economy, it's abroad. Today, we got GDP data from Europe and the euro-zone grew at a 2.1% year-over-year, very decent recovery.

And inflation there, while it's not -- kind of like here, it's not out of control but at least, it's moving away from the zero bounce. So to us, we see an environment where we may or may not get meaningful inflation. But the risks certainly are there. I mean, this is the kind of environment where we see this going on for several quarters.

We don't see a risk to the economy. We certainly don't see an easing from the Fed anytime soon. And so, we should continue to see slightly above-trend growth. And there's certainly the potential for inflation to eventually emerge and start to strengthen and that would in turn cause the Fed to continue to hike.

Maybe not quite as aggressively as their dots imply, but certainly probably more than the market does. And as a result, we will be -- our intention, given this backdrop, is to maintain the positioning of the portfolio with a higher coupon bias.

We will continue to hedge the way we do and use our inverse IO and IO portfolio, again, to help us hedge against higher rates. So we're somewhat of a contrary in that regard. We do recognize that the market is quite content right now with a very passive Fed, while as we all know, is very low. There's no proceeds inflation threat.

But we all think that, that is going to prove to be the case over time. In fact, we see quite a -- as I mentioned, quite a few risks to the opposite which would be at least a continuation of growth at this level if not higher in the process for potential inflation.

All of which, coupled with the feds tapering of their balance sheet and the ECB tapering make us view the risk going forward as biased to the upside, not to the downside. So that's basically how we're going to position the portfolio from here going forward. With that, that's the extent of my remarks and we will open up the call to questions, operator.

Operator?.

[Operator Instructions]. And our first question comes from David Walrod of JonesTrading..

Can you tell me were there any shares issued in the third quarter by the ATM?.

No..

Okay. Can you talk, I guess -- it looks like, based on your average share count and then your end-of quarter share count that the capital raised in the second quarter, the timing was more back-end loaded.

I guess, can you just talk a little bit about the speed with which you were able to deploy the capital and any drag that the capital rates may have had on your earnings for the quarter?.

I'll talk about the shares and Hunter can talk about the deployment. Yes, the most of the shares were sold in May and June. Actually, we -- I think around the 20th of June, we exhausted the program. So it was back loaded. And then I'll let Hunter talk about the deployment..

Yes. We're running in a little bit of lag in terms of the putting the money to work. When we closed the proceeds from the May sales and June sales, we really didn't have the portfolio invested for a full month associated with the proceeds from those respective monthly sales.

So any capital we raised in May, we were buying bonds in May and really settling them, sort of, mid-month. June was the same. And in fact, we ended June with the leverage a little bit lower than we were targeting. So that has since ticked backed up a little bit. We're kind of in between that 7 and 9 number that we reported and maybe one turn higher.

So upper 8s now. So I think, just from the standpoint of earnings, the -- in July, at least, not having raised any capital in the month of July, we would expect to see a little bit of an earnings rebound. And then just -- that will ebb and flow based on what we're able to do with the ATM to the extent that we're raising money going forward.

We might -- we always going to have a little bit of a drag to the extent that we're not buying the assets or sort of prebuying the assets. So -- but I think -- as it stands today, we'll have a bit of a recovery and -- from whatever drag was caused by the second quarter earnings -- or second quarter capital raise, I should say..

Sure. And my last question is just on speeds. They were pretty well controlled in the second quarter.

Can you give us how they've come in, in the beginning of the third quarter in your outlook?.

So far so good. July was actually one of the better months, really since going back to early in the year. We had positioned for an uptick in, sort of, summer seasonals. And in doing so, we were just sell some slightly seasoned pools and buy some new issue stuff in the summer production months.

And so it looks like that's working out and we'll know more early next week, whenever the August speed report comes out. But we feel pretty good about the way we're positioned..

[Operator Instructions]. And our next question comes from [indiscernible]. Your line is open..

I think you answered my question. I was looking at the leverage number and looked like there's a large payable there that was being excluded and I was getting leverage in the 8s and I think, you just said that the leverage is in the 8s post the settlement. So I guess, that was my question.

And then my second question regarding leverage is, how should we think about leverage? I know you guys say that the environment is a little bit tricky. But leverage is still in the high side.

Is that just an output based on the income you want to earn? So as mark-to-market goes down, leverage goes up? Or how do you think about that?.

Well that's very true. That happens as well. The biggest driver for us is just the allocation of the capital. So we're very high in our allocation to passage right now. And I didn't really mention that on the call I meant to, but normally, we would be much closer to 50-50.

And also, when we raise capital like we have, we typically put the money to work by buying pass-throughs and then later on, IOs after the fact. The IO market is just not very attractive right now. So we're still a little on the high side with our allocation to pass-throughs as a result and then, of course, our leverage.

The reason we're okay doing that, as I said, the market is really, especially in the last, say, mid-June and beyond, priced the Fed out to a large extent. And if you recall when the June FOMC, meeting, the Chair said that she viewed the recent negative CPI prints or low CPI prints as a result of transitory factors. She since backed off of that.

We've now had four straight months of disappointing inflation data and the market has really priced the Fed out and the back end of the curve was -- we've had a big flattening. So we don't -- it's not that we think rates are necessarily going to go higher anytime soon. We just think that they've kind of come down as far as they can.

I mean, unless you really think the Fed's going to -- or the market is going to price in and ease. they've kind of priced out all the tightening, I think, they can do. And in the market, especially with what is now viewed as almost a certainty that the Fed is going to start tapering their asset purchases.

That's just going to -- if it takes there is any inflation, that's going to dampen it even further. So the market is content with the fact that we're not going to see much inflation. We're not going to see much Fed hiking and as a result, [indiscernible] very well. So we're comfortable and running the leverage and having the allocation.

The pass-throughs be a little higher than it maybe would've been otherwise or certainly would have been the case earlier in the quarter. But -- so that's kind of how we look at it..

Yes. But we hate to reduce to leverage right after a quarter where, specifically, 4.5 coupons underperformed so bad. So like Bob alluded to in his prepared remarks, any 4.5s were up 0.5 tick and the 10-year treasury was up 24. So that's a pretty massive underperformance. And I think that we're reluctant to delever into that.

Although it is, like we said, running a little higher than we would like because we're not able to buy the mortgage derivatives that we would typically want to acquire..

Got it. And then, how much -- now that we're talking NAV and pricing. How much NAV or book value was created via the share issuance? I'm assuming....

Well, we can't give you a precise number. Yes, we can't give you a precise number, but I would guesstimate the number is between $0.10 and $0.15 for the second quarter..

$0.10 and $0.15. So close to 2% for the second quarter? It just looked like you guys issued 25% of the float or something. Don't have it in front of me, but it was a big number..

Yes. I mean it was close to -- yes. This was a big number. The number of shares outstanding was up -- it was $125 million ATM program. We did a little of it March and blind share of it was done in May and June. So we took our capital base up quite substantially.

No, I didn't say it also on the call, but this program, we've been running ATM since late in the second quarter of 2014 and the vast, vast, vast majority of these shares have been issued above book. So it's -- not only is it a cheap form of capital raising, but these are shares issued generally above book..

And can we expect to see another ATM filed this afternoon?.

We may. And just because we put one in place doesn't necessarily mean we're going to be selling either. We look at the stock price, where our book is and what the market is. So we tend to like to have them in place, because you always want to have the option to do so. But that doesn't mean that necessarily we're selling shares.

And by the way, we have a share buyback program in place as well. So to the extent of -- if the stock were to falter materially in the near term, we can start buying shares back again to the extent of stocks trading well below book..

The investing environment is a little bit challenging right now. There have been a few very large secondaries in our space and that is sort of sucking a lot of the oxygen out of the market in terms of -- so it's really a food fight for assets now.

So I think we'll let that play out and put those folks get fully invested before we get too aggressive about raising more money..

And we do show an additional question from Christopher Nolan of Ladenburg Thalmann..

Should we see more capital allocations towards the structured products going forward?.

We would like to. Hunter just mentioned the fact that the market is not that attractive right now. We're -- that's pretty far out outside our normal range, but the market has not been very attractive.

So we're looking for opportunities to bring that allocation back into line, not necessarily 50-50, but certainly, we're well north of 60% in our allocation to pass-through. So we're looking to move that down, but it's just a little challenging right now, yes..

We're certainly running things every day and looking for assets or stories that we can get behind. In particular, in the IO space, it's just so tight that you really have to take specific risks and, I think in our last call, we talked about how we bought but IOs backed by jumbo loans. Those have a lot of convexity.

We did that at a time when they were still prepaying rather quickly. So we were able to take advantage of maybe a slight market disconnect. But absent having some sort of a strategy like that where we think we see something that is not very well known, then it's a challenged add there.

So we'll keep looking, but it's kind of a tough environment for adding those assets..

Simply inverses, right?.

Absolutely, absolutely. Inverses have pretty terrible convexity here. If we go into -- if we rally more, the IO starts acting up. And if we sell off, they can start getting really long and have a lot of LIBOR exposure. So we're really in the middle of the range where it's not -- the rate range, where it's not real clear.

It's not as easy to say we should be adding or subtracting IOs and inverse IOs..

And then on your comment in terms of your outlook for the economy. It seems like, if anything, you are positioning yourself possibly for a further flattening for the curve, possibly even in inverse if inflation ticks up and the Fed becomes more active in tightening.

Is that a fair characterization?.

Sort of. I would think if -- no, I don't think we stay like this. I mean, we think that we would do okay if the market stays exactly as it is because we don't really think that the Fed's going to ease. So -- and the market is priced out all -- most of the Fed hikes going forward.

Our view is if the Fed did indeed start to hike, say, along the lines of their dot plot, there have to be a reason and that would have to be, for instance, that inflation turned and went the other way. The economy remains strong. If that's the case, I would be hard pressed to believe that the long end would continue to be as flat.

Specially, with the tapering about the begin both here and domestically. That's a lot of extra treasuries that are going to have to be sold. And then the other thing is, even looking further down the road, we all know, for instance, that potential growth of the economy has been reduced because population of dynamics.

Demographics, right? So we have the aging of the workforce. We have a lot of baby boomers, they're leaving the workforce. And so it's caused potential growth of the economy to slow. But it also means that they're about to start drawing Social Security. And I was looking at some forecast late last week.

But the budget deficits forecast 5 or more years as a result of the significant uptick in entitlement payments from the government. These were going to have a meaningful increase in supply. Now academics will tell you that, that the crowding out effect, as it was referred to, by extreme government issuance has typically not driven rates higher.

Maybe that's the case, maybe not, but it's hard to see that long end of the curve stayed where it is and so we would think the curve would start to move more in a parallel fashion. So we're not really expecting an inversion of the curve, at least not in the near term. We would view it -- somewhat of a more parallel shift.

And that's kind of what we're expecting..

[Operator Instructions]. We have a question from Frank Benosa of FWG Limited..

I have a question about the dividend right now which is rather high. I was reading an article last week that this author seemed to think that there's no way you can hold the dividend where it is currently..

We can't say anything about our dividend policy. That's been the -- our policy is, we don't talk about the dividend going forward. I'm very much familiar with these articles. Certainly the stock trades at a high dividend yield, but we declare the dividend monthly and I can't say that it's going up or down. We just don't discuss it publicly.

We've only had two dividend changes in our history. We went from $0.135 which was our initial dividend to $0.18 in late 2018 and backed down to $0.14 in July of '15. The dividend is -- it's just not something that we give guidance on..

Okay. The current net asset value is $9 .63.

Is that correct?.

$9.23..

[Operator Instructions]. And I'm showing no further questions from the phone line. I would now like to turn the call back over to management for closing remarks..

Thank you, Operator. Again, thank you everybody for listening in, taking the time to hear us. We appreciate all of your questions. To the extent we were unable to listen to the call live and you have any questions, feel free to call us. Our number here at the office is 772-231-1400.

Otherwise, we look forward to talking to you at the end of the current quarter. Thank you..

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day..