Robert Cauley - Chairman and CEO Hunter Haas - CFO.

Christopher Nolan - Ladenburg Thalmann David Walrod - Jones Trading.

Good morning, and welcome to the Second Quarter 2018 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, July 27, 2018.

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 the 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 further forward-looking statements to reflect actual results, changes in the 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 welcome to our earnings call. I hope everybody has had a chance to download our slide deck off of our Web site. I will be using that exclusively for the call today, try to walk you through our results, where we've -- steps we have taken with the portfolio and how we see things going forward.

I'm going to start with slide three, which is the table of contents as I always do, just to kind of give you an outline of the discussion today. As usual, the first thing we'll do is kind of go through the market developments that took place during the quarter, both the rates market and the mortgage market.

This gives us a background to then move our discussion onto how these developments impacted our results for the quarter, what steps we've taken with the portfolio to position the portfolio and how we see things going forward. So with that, I will dive right in to slide four, which is just the highlights of our results.

I do have to apologize that we did make a last second change to our earnings which caused two of these numbers to round. The second and the third bullet points are the items I'm referring to. One line that did not change is the earnings per share. For the quarter, we generated a GAAP net income per share of $0.03.

We incurred $0.34 as opposed to the $0.33, apologize, of net unrealized and un-realigned gains and losses on MBS and derivatives including the net interest expense on the interest rate swaps. Excluding those items, we generated $0.37 of earnings per share.

So $0.37 of earnings per share less the $0.34 of unrealized gains and losses resulted in a net income per share of $0.03. Book value at the end of the quarter was $7.86, a decrease of $0.23 or 2.84% from $8.09 at the end of the previous quarter.

We paid dividends of $0.27 per share and during the quarter using our share buyback program, we repurchased approximately 1.07 million shares at a weighted average purchase price of $7.19. Economic return for the quarter was $0.04 or 50 basis points for the quarter and 2% annualized.

I will now turn to slide six and we can start talking about market developments in the quarter.

I will proceed through these slides fairly quickly, because at the end of the day what we want to talk about is what all this meant for Orchid during the quarter and what we've done with the portfolio, how we see things going forward and how we're positioned. Starting on slide six, what we show here are movements in the U.S.

treasury curve and the U.S. dollar swap curve. We show both Q1 and Q2. And what we saw in Q2 was really a continuation of what took place in Q1. So if you look at that left-hand side, which is the treasury curve, the top part of that shows a blue line, which represents the treasury curve at the end of 2017.

The red line shows the curve at the end of the first quarter and the green line is at the end of the second quarter. On the right you see the same thing, only for the swap curve. And in both cases, the bottom part shows the change during the quarter.

And what is very evident, of course, is that the curve has continued to flatten, rates have moved higher and flattened the curve, so what we call a bear flattener, and this has been the case as I said for the entire year.

Turning to the next slide, now we just focus a little bit on the 10-year part of the curve, primarily the reason we do that is that that's the most important part of the curve for mortgage-backed investors.

And as you can see on the left side of the page, we show movements in the 10-year treasury during the second quarter of '18, below that the 10-year swap, and on the right side of the page, we just give you a broader -- a two-year look-back for both the U.S. treasury note and the 10-year dollar swap.

I'm not going to spend much time here, just pointing out a couple of things. As you can see with respect to the 10-year treasury, the first half of the quarter, rates sold off. We got north of 3.1% primarily driven by strong economic data and the announcement of fiscal stimulus. The second half of the quarter, things turned around.

Trade war talk became much more prominent and we also had these surprise election result in Italy on the Memorial Day weekend, which caused the market to rally below 2.8%, came back from there, ended up the quarter slightly higher in rates on the long end.

If you look to the right hand side you can see that, big picture, we are now at levels and rates that we last saw at the end of the taper change on late 2013 early 2014. The big difference, of course, is that the FED has been moving rates much higher over this period.

Turning to slide eight, here we show -- this is something that the market is focused on very much, the spread between the five-year treasury note and the 30-year treasury bond. On the top of the page, we show two lines. The blue line represents movements in the 30-year treasury bond. The red line is the five-year treasury rate.

It's interesting to note if you look at the end of 2013, the peak in the 30-year treasury bond was reached at just under 4%.

Fast forward to today, and we've seen the economy continue to be very strong, the unemployment rate has moved below 4% at least briefly and the FED has raised rates seven times over that period, yet the yield on the 30-year treasury bond is actually lower than it was then.

However, the five-year being sensitive to Fed's expectations has moved higher, approaching 3% itself in May of this year and the result of all this is what you see on the bottom.

And that is simply the spread between these two yields and it has continuously declined and at some points has gotten below 20 basis points over the course of the last few weeks. Now given this backdrop, I'll turn to slide nine. I'm just going to talk briefly about returns in the U.S. fixed income markets.

This is basically a year-to-date, which I think is appropriate, given that the conditions have been relatively the same for the first two quarters of the year that is a flattening of the curve. Just a few highlights here, we have a table on the left.

If you look at the treasury returns, three-month, five-year and 10-year, you can see that shorter duration has outpaced longer duration. And then with respect to credit quality, it's interesting that investment grade corporates substantially underperformed high yield corporates by over 300 basis points.

With respect to agency mortgages, the year-to-date performance is negative 99 basis points. So generally, agency mortgages have outperformed other high grade structured products and corporates. And then within the third agency space the results are fairly similar, 15 years have outperformed 30 years slightly.

For Q2 alone the returns for the mortgage index were positive 24 basis points, so first quarter was clearly the worst of the two. Now turning to slide 10, mortgages are obviously affected by movements in volatility. All mortgage-backed securities have embedded options in them and volatility has been a driver of performance year-to-date.

If you look on the left-hand side, you see a slide -- what we're showing here is at the money 1y10-year volatility. This is kind of a short-dated volatility measure. That's the blue line. The red line is just showing that same number for 50 basis points out of the money option. And you can see their movements are highly correlated.

Just want to make a few points here, as you can see in the first quarter volatility spiked, and that had a meaningful impact on our mortgage in Q1. However, volatility has come up during Q2. That was a positive development for the mortgage space. It has continued to decline into third quarter.

Another benefit or a significant event related to this was volatility declining is that with respect to our hedging strategy, declining volatility means that all else equal premiums and swaps have come in some and we have used those as a more so as a hedge instrument of -- when I get to our discussion of where we see the market going forward, this will become more relevant, but we basically see greater risk to upside movement in rates and volatility than the opposite.

And therefore, these swaps has represented very attractive hedge instruments for us since they will obviously go in the money with rates moving higher and/or volatility moving higher as well. Turning to slide 11, now I will get into a little bit more of mortgage performance before we start talking about our specific portfolio.

The left-hand side of the page just shows the performance of a 30-year mortgage versus a 10-year hedge ratio. We are using JP Morgan's hedge ratio as the beginning of the period. And each line corresponds to a specific coupon. The blue line is a Fannie 3. These are 30-year fixed rate mortgages. The red lines are 3.5, the green 4, and the purple is 4.5.

This is somewhat misleading because as I said, we are using a 10-year hedge ratio, the higher coupon mortgage is more or less rest on the front-end of the curve, and with the substantial flattening that we saw their performance was adversely affected. And as a result, their performance towards that 10-year hedge ratio appeared much less.

With respect to Q2, we did see some modest widening of mortgages. As a result, the price component of total return for the mortgage universe was a slight negative. But not enough to drive the total return for the quarter as coupon income was sufficient to overcome that.

And as I said previously, the mortgage index generated return of about 24 basis points. And as we will see in a few moments, that was very consistent with the performance of the portfolio. Couple of other things to point out here, one of the things with respect to mortgage performance is supply.

With rates higher, we have seen the refi index move lower, we have seen refinancing activity much lower. And as a result, supply of mortgages has continued to decline. And this has offset negative impact of reduced Fed purchases.

In fact with the refi index, about a thousand in the instance of May if you look at prepayments across 3.5, 4, 4.5 and 5, they were separated by only 5 CPR, so refinancing activity has definitely come off.

We turn to slide 12, here we show the performance of -- previously actually two of our holdings still two of our biggest holdings standing at 4 and 4.5, but we also show on the right-hand side, these two lines represent pay-ups for various specified pools in the case of the red line in the top right, that is a 85k maximum, 4.5 and the blue line is a 4, in which you can see as these pay-ups have come off, and this really reflects the fact that the market has become much more concerned with extension risk and less so with prepayment risks.

The Fed is clearly in play, and will probably remain so for sometime, not many investors see a meaningful variety on the horizon and even with the long-end of the curve fairly muted and being held back by a variety of things, there are still some risk that you could have a sell-off, and therefore mortgage is very much exposed to extension.

Before we go to our -- before I just want to -- actually a few things on slide 13, just with respect to our funding. We have a chart here which is very much a topical decision this year especially in the first quarter.

Two lines here, the first one is a green line which represents the spread between three-month LIBOR and three-month OIS; OIS just refers to Overnight Index Swaps that's basically the market's proxy for movements in the Fed funds rate or Fed hikes.

And what we saw on the first quarter was a large movement in three-month LIBOR relative to market expectations for the Fed. That spread moved from 25 basis points to 60 on April 1. It has since come off and continues to do so.

What that means for us from a funding and hedging perspective, our predominant hedge vehicles are euro dollars and swaps, and in both cases, the floating side of that is three month LIBOR.

SO the three month LIBOR moving out as it did, it was somewhat of a windfall for us on the hedge side on the REPO funding side that spread which is represented by the blue line and that spread was much more muted, did not blow up nearly as much basically has remained fairly stable to straight in a 10 basis point range year-to-date and are as a result we did not see that spike in our funding costs.

So terms are running it levered MBS book this movement was you know beneficial for us in the sense that the received floating leg of our hedges did much better than they pay falling on the actual funding book, so that was a good outcome as I said is come up quite a bit in the spreads are narrowing as we sit here today.

Now I'll turn to slide 15 as I talk about our results all of this information is going to be for information only I'm not necessarily going to speak to every slide but I will just go highlight the ones I think are the most important on slide 15, this is based on the left side we decompose our return apologize are the bullet points in a box at 33 and 36 the numbers were actually 37 and 34, for the net income and the net income attributable gains and losses.

On the right hand side we show our returns across the portfolio both the pass portfolio and the structured portfolio.

The bottom right hand corner that table shows a return of 100 basis points, what we saw this quarter in our portfolio mired what we saw and then mortgage numbers as a whole slightly negative price returns offset by coupon income resulting in a net slightly positive return for the quarter in our case 100 basis points with a levered portfolio versus the 24 basis points for the index.

Now I'd like to turn to slide 16 and this is kind of the big picture story of where we see things both in the recent past but also going forward, what we show here on the top are several lines or so blue line a green line a red line.

A blue line just shows in the yield on our portfolio over the life of the company, the bottom line there is the red line there of our economic funding cost which basically is just our actual REPO spends adjusted for hedges and then a net of those two is the green line.

On the bottom of the page you show the dividend, what's interesting as I said previously the 30 year treasury bond peaked at the end of the taper tantrum and it's since moved lower, however yields on our portfolio not follow that pattern has continued to move higher and for the last four or five quarter's have been generally about 4%.

On the other hand of course the Fed has been raising rates seven times, so far during this cycle with probably more to come and as you can see our funding costs have approached 2% has somewhat stabilized of late, more to say about that in a moment.

The net of that is our net interest spread and as you can see for the last four quarter or quarters has been between 218 basis points and 227. So relatively stable, the dividends been at $0.09 for a few quarters and running.

Going forward what does this mean, well the spread is key the gap between the yield on the assets and our funding cost will drive our dividend going forward and we will spend a little more time speaking about how we see that unfolding going forward in a moment.

Turning to slide 17, this is just our earnings per share both the bottom line number which was I said was $0.03 for this quarter but also this item that is not a core number but basically is our net income excluding mark-to-market gains and losses on our portfolio and derivatives as you can see has been trending lower reflecting what we just saw in the last page.

Finally, page 18 with respect to results, we show activity in the portfolio on the left hand side our capital allocation as you can see it has been relatively stable, the allocation of capital between the attachment portfolio and the structured portfolio was not changed meaningfully and on the right hand side we just show roll forward of purchases sales, mark-to-market gains and pay-downs and so forth.

The portfolio size was reduced slightly during the quarter. Now I'd like to get into the portfolio characteristics and where we position the portfolio what we see going forward.

On slide 20, we show the composition of the portfolio but before I get into the details just want to highlight an overview kind of what we said, so we're seeing this flattening a bit curve throughout the entirety of the year, the long end of the curve has stayed generally below 3% and our funding cost have continued to go higher.

As I said, we expect going forward the economy to remain fairly strong for time being and the Fed to continue to raise rates, we do not see a meaningful rally in a long end of the curve and in fact we see the risk going forward is asymmetric.

By that I mean I think the risk that longer rates would have moved higher is higher probability than a long in rally and as a result, we are positioning the portfolio with that in mind, we're trying to remove as much extension risk as we can from the portfolio in anticipation of that potential outcome and as I will see here, the portfolio has changed.

Now we show far more detail here than we have in the past and I think it's important because we want to delve into the details of what we've been doing with the portfolio to address these risks that we see moving forward.

As you can see, we show you on the left hand column, the various securities that are owned where they be arms or fixed rate CMOs and the various fixed rate securities dump to interest IOs and inverse IOs and then subsequent column show you the par amount to market value, the percentage of the portfolio, average price and so on.

I want to point out a few things that reflect this movement that we, the steps we've taken to remove extension risk, we've added fixed rate CMOs as of the end of the most recent quarter that market value of those was almost $550 million. At the end of last year, we have none of those.

These are generally securities that were structured format, they are more or less plain vanilla sequential but these securities are fund sequentials and therefore don't have much extension risk.

We've added fifteen year 710 or $34 million excuse me as of the end of the quarter, we have not owned any of those previously again this is a higher coupon 15 year mortgage versus a 30 year offers good income but has much less extension risk.

With respect to 20 years, we have 20 year force little under $200 million at the end of the quarter that number was almost $400 million at the end of the prior year and then with respect to the 30 year portfolio, 30 year we have approximately $450 million market value at the end of the current quarter.

At the end of the prior year, that was $1.3 billion, 30 year 4.5, we have little under $1.4 billion that number was almost 1.8 and we've added slightly to our 30-years.

So in other words the finger obviously is reducing extension risk in the portfolio while also maintaining generally speaking I had a coupon bias taking on prepayment risk, if you will given where we see rates and the market and the level of refinancing activity, we are very comfortable taking that risk, we think we get paid to do so, we're trying to mitigate our extension risk.

With respect to the structured securities portfolio, the bias is much more towards idle securities versus interest only and we continue to move that allocation more towards IOs.

Finally with respect to seat speeds and two right hand columns just one general comment basically that speed is as I said before remain very well contained mid to high single digits. Slide 21 just shows you some tables with all of our allocations; this is basically reference material I'm not really going to dwell on it.

Slide 22 shows you both the details of our credit counterparties and our leverage ratio, the leverage ratio continue to drift lower, I think because of the amount of extension risk we removed from the portfolio, it may not drop as much as it would have otherwise.

Now I'm going to turn to slide 23 and this is quite important slide, I want to spend a fair amount of time talking about this slide.

This shows our hedge positions and it shows our hedges by different product types, so the top left is our euro dollar positions, below that we have our treasury futures which is $165 million notional five year no futures. On the right hand side we show our swaptions.

I mentioned that we've added to those or continually plan to add to those, TBA shorts and on the bottom right are swaps, I want to make stress a couple of points, if you look at the euro dollars, you see a couple of things one the notional amount outside of the September quarter is a $1.5 billion and we have the entry rates there and you can see these rates are in the low twos until you get into 2020.

Currently three month LIBOR which is the fixed component of this is a 2.34%, so these are in the money 2020 not so much but then with the Fed continues the hike they likely will become so. With respect to our swaps on the bottom right we had a little over a billion notional and a paced fixed rate of 143 basis points.

So if you look at these two in conjunction with one another, little over a billion in the swaps and 1.5 billion in the year dollars, that represents about 70% of our funding, which is basically in the money.

So what that means is the extent that Fed continues to raise rates, this kind of caps our funding on this component of our liability switch little under 3.5 billion at the end of last quarter at rates that we see today, so that they should not move higher. That also means that 30% of our book is either not hedged or less so.

The balance of our funding book is hedging with a combination of five-year futures, TBA shorts which are not up to funding hedge of course, and then auctions. So these may not be as quite an effective of a hedge, but it does only represent 30% of the portfolio.

So what does this all mean going forward? I mentioned previously on the slide where we showed the yield on the portfolio that it moved above 3%. Our funding cost is to some extent contained by what I just said.

So we have about 70% of our funding locked in at rates in the low-twos, the balance is hedged not quite as effectively using predominantly swaptions and euro dollar futures, and then we have had a portfolio that it's continuing to generate nice yield.

So what does this mean going forward? It really gets down to the inter play of what happens with respect to our net funding cost, the 30% is not hedged explicitly as the balance, and how effective those hedges will be containing on hedge our funding cost versus the yield on our assets.

To the extent the yield on our assets continues to move higher, it would probably offset the incremental increase in our funding cost, and the 30% is not as purely hedged. And if then it does so not do so then it has the potential to put dollar pressure on our earnings. The dividend as I mentioned has been stable at $0.09.

The outcome going forward will really hinge on the inter play between the yield on the portfolio versus the performance of the un-hedged component of the book.

And so, that's really I wanted to drive everybody's attention to that and show you -- you know, that in conjunction with the removal, the extension that's in the portfolio has been the big driver of what we have done in these two quarters, and we think we are pretty well-positioned going forward for what we see as the most likely outcome, which is continued Fed increases and a potential for spike higher longer term rates.

With that, that's pretty much it. I think we are ready to turn the call over to questions, operator..

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

Hi, guys..

Hi,.

Bob, thanks for the highlight. Just back to the hedges for one second; thank you for highlighting the 70% of the funding is locked in the low-twos.

The variable of that 30%, is that hedged using the euro-dollars or other things, or that is sort of un-hedged?.

Well, at this point putting on additional euro-dollar in swaps are going to be at much higher levels. So we've been using swaptions more, we also use treasury futures, and we have TBA shorts although not really an explicit funding hedge, but it's basically swaptions.

Volatility is low and it's an effective instrument to use the hedge up, although it's just not as pure hedge as euro-dollar as a swap. So that 30% of our funding will drift higher as the Fed continues to raise rates.

And we have these hedges in place, which is as I said not a perfect hedge, but they surely upset the increase in funding to the extent we see movement in the curve. And then the other side of that is what happens on the asset yield.

Our yields have been moving higher, but if we don't get any more movement on the long-end of the curve, they may not move any higher, and that would leave us with the -- the net of that would probably be compression in our earnings. So that's kind of how we see things going forward..

All right.

And then on the asset side, touching on the investment yields potentially going up, what do you see to be the driver of that, because looking at your portfolio it looks overwhelmingly fixed rate?.

Yes. I mean it's just the spreads of where these assets trade, the yields that are available, the CMOs that we have acquired have yields of 3.5% to 3.7% or 3.8% of fixed rate mortgages. The prices of these have come down an awful lot and they prepay slower. So the yields are comfortably in the 3s.

It really gets down to where the long-end of the curve stays stable. It doesn't move any higher, and mortgages spread stay stable in that case those yields would themselves of course be stable. If we see long-end rates move higher and/or spreads that these assets trade at move wider, then we have the opportunity to increase the yield on the portfolio.

That's kind of the big wildcard here going forward.

Everybody is aware of the fact that the curve has been flattening, it's putting compression -- downward pressure on earnings, but what happens on the long-end of the curve is going to be the key driver, whether we can still continue to see more earnings compression or we get some relief in the -- as a result of movement higher, either rates or spreads..

Final question, how does this -- where is your threshold for deciding whether not to grow the portfolio, or to buyback stock, what sort of discount are you looking for in the stock price to initiate a buyback?.

Well, we had a buyback in place. So, generally about 90% of brokers are kind of an unofficial threshold. The stock yesterday traded briefly more than 5% above block, although that since gone away I believe. Same kind of threshold, I mean these are not hard fast numbers, but we like to see at least pushing 10% premium or discount before we do either.

But as I said, that's not a hard fast grow, those are just kind of rule of thumb if you will..

Great. Thank you for taking my questions..

Thanks, Chris..

Thanks, Chris..

[Operator Instructions] Our next question comes from the line of David Walrod with Jones Trading. Your line is open..

Good morning, everyone..

Hi, Dave..

Just wanted to get a feel you've got -- you've talked about your exposure in CMOs in the 15s, should we expect you to keep them at these levels as far as percentage of portfolio or would you continue to have increase?.

I'm going to let Hunter take that one..

We have continued to increase a little bit on the 15-year side. I think we would like to see an increase in CMO space. We really have to be opportunistic about when we add those. There has been a lot of demand for them of late, so they are tightened up quite nicely, kind of taken them out of the range where we would be net adding.

We haven't sold many into that either though. So we kind of hold right now on that sector. The curve flattening really limits what we can do.

The back-end cash flows are -- the demand for those is very weak, when we have seen the curve is flat because the incremental yield pickup in a flat curve environment for a very long duration bond is just not compelling to those who invest in those back-end cash flow. So we will opportunistically continue to add.

I think I would like to see that balance gets to be around 20% to 23% of the portfolio. And then we will see what the curve gives us. I mean that's really then the strategy is in our view, why take the additional duration and extension risk, when the front-end the belly of the curve offers as much as yield as the longer end does.

So that's been kind of the strategy, it's de-risking the portfolio while still being able to take advantage of the fact that the front-end of the curve and potential to the three to five year point is really compelling from a unit perspective..

That's very helpful.

Next would you say that this quarter, with all the trading activity you did that maybe had a minor drag on your earnings?.

Yes, exactly. We had some -- we had a lot of our CMOs that we added were June 30 settled and some of the bonds that we sold were June settle, so we had about 15 days of interest that we didn't receive on a few $100 million and they were small gaps like that throughout the quarter.

I wouldn't say if this is material but it definitely had able to drag on earnings. The other thing that of note was the Libor where I'm funding spikes that occurred in late first quarter had a little bit of a lingering effect into April and May.

So while the rate started trending back down, if we had on a one or two month repo that we executed in March and we didn't do a lot of longer term stuff because of the small spike in funding. That stay on the books through April and into May.

So those are kind of the two components and I would say we're out of the ordinary that affect might have affected earnings a little bit..

I know you talked a little bit about yields but can you talk about the spreads opportunities and how the 15s and the CMOs, what opportunity is there relative to 30s and to your existing portfolio?.

Go ahead, Bob..

No, go ahead, Hunter. You take that..

These are really I mean back to where is it moment ago, there is definitely a yield gap between 30s and 15s but when we look at what it takes to hedge the 30 years versus this 15s and CMOs. On a risk adjusted basis, we feel like it's a pretty easy trade.

So while there might be 20 or 30 basis point give on nominal yields, we would quickly absorb most if not all of that in adding hedge costs buying options to guard against our extension risk and I think if you followed us for the last few quarters, we are just taking a view that it's okay to have in this period in time this point of the Fed hiking cycle, we'd rather give up a little bit on the earnings front and guard against sort of at inflation type of surprise that gets long end rates moving quickly.

That's the kind of move it can be devastating to portfolios like ours and we'd rather guard against that and maybe soft little bit on the earnings side for a few quarters then be exposed to a windfall decline and the value of our assets..

Great.

And then my last question, Bob you mentioned in your prepared remarks that leverage had been kind of drifting down, any thoughts about how you want to take leverage, do you given the current environment maybe want to take leverage up a little bit or you're comfortable where it is?.

Well at the end of last year, when it was higher we also had a much higher allocation to 30 year mortgages, much higher and therefore we kind of view that differently than we do now, now as Hunter alluded, we have a lot less extension risks.

We have the CMO's, we have 15 years, we have far fewer 30 year coupons and therefore that in conjunction with the added use of the swaptions makes us a little more comfortable with the leverage there.

So it's come down but it's, I would say it's not likely to move meaningfully lower than where it is now that we did not feel that way you know last year we felt we that, we have to meet people we position of portfolio in terms of the asset mix or take the leverage ratio down.

We've changed the asset mix we're continuing to let the leverage get down a little lower but that target is not nearly as low as it was that is frankly net up TBA hedges we're in the mid sevens, I don't know it's going to go materially below that based on the way the world looks today..

All right, it's all very helpful. Thanks guys..

Thanks, Dave..

Thanks for the questions there..

Thank you. And I'm not showing any further questions at this time..

Thank you Operator, and thank you everybody for taking the time to listen to our call. To the extent that you didn't have a chance to listen to the call when you want to listen the replay and then have questions we always are welcoming of those. Please call the office the number is 772-231-1400 otherwise we look forward to talking to you next quarter.

Thank you everybody..

Ladies and gentlemen this does conclude the program. You may now disconnect. Everyone have a great weekend..