Good morning and welcome to the Fourth Quarter 2018 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, February 22, 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 Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir..

Thank you, operator, good morning everybody. Welcome to our call. I hope everybody has had a chance to download the slide deck off of our website, I also saw that Seeking Alpha had in out there this morning. So I'll be going through the slide as I normally do. I may skip a few but I'll no go out of border.

Many of these slides or slides that we use every quarter, so few regular listeners you should be cautioned to seeing these slides. I'll start on Slide 3 which is basically just the table of contents. Just run through a quick outline of what we are going to discuss today.

We will start off with -- financial highlights of the quarter ended December 31, 2018.

Now, let's spend some time as we usually do, talking about market developments and this was a significant quarter for the markets and the outlook for the economy and rates going forward, and we will discuss our financial results, portfolio characteristics and then our outlook and strategy. Turning now to Slide 4.

The financial highlights for the quarter. Orchid Island reported a net loss per share of $0.52 for the quarter, this incurred -- this included $0.80 of incurred losses per share from net realized and unrealized gains and losses on RMBS and derivative instruments, including net interest income on interest rate swaps.

Earnings per share of $0.28 excluding unrealized and realized gains and losses on the RMBS and derivative instruments including net interest income, non-interest rate swaps. We have Page 18 in the slide deck for reconciliation of that.

Book to value per share was $6.84 at December 31, 2018, a decrease of $0.72 or 9.52% from $7.56 compared to previous quarter. Total dividends paid for the quarter were $0.24. In 2018, the Company declared and subsequently paid $1.07 per share in dividends. Since its initial public offering, the Company has declared $10.065 in dividends per share.

Economic return for the quarter was negative $0.48 or 6.35% $0.80 per share and $9.18 for the year. The Company repurchased 3,380,536 shares between October 31, 2018 and January 3, 2019, representing 6.5% of the shares outstanding as of September 30, 2018. The Company has repurchased 10.43% of all shares issued since inception. Now turning the Page 5.

Our return data. What we see here is our returns, booking down by different periods.

At the top, we have the annual returns for our stub year after our initial public offering in the early 2013, the years 2014, '15, '16, '17; and then on more recent six months return one when you look back three and since inception; and in the quarters for '18 and the total year of '18. This is also shown versus our peer average.

Our peer average is defined at the bottom of page. It includes Annaly, Anworth, CMO, Cypress, Armour, Hatteras, AGNC, Arlington and Dynex. And of course Hatteras and Cypress were only included for part of a period as they were acquired at different points in time.

As you can see, after Orchids IPO in 2013, we have generally faced upwards movements in rates and a flattening at the curve and its somewhat reflected in the results. So you can see their early returns were quite large and then slowly declined.

And of course 2018 which really represented the peak and the tightening cycle with rates moving higher for most of the year.

The results were negative 9.2% total return on using book of value versus stock price, but that’s still slightly better than the peer average and also for the fourth quarter which we are here to discuss today negative 6.3%, so obviously, a very rough quarter, but also slight outperformance versus the peer average.

Turning now to the Slide 7, this is just a snapshot of the yield curve. On the left hand side, we have the -- what we call the cash market or the treasury benchmarks. And on the right hand side, the dollar swap curve. And as you can see, this was a very pivotal quarter. We had a significant movement in the curve.

The green line represents the various respective curves at the end of the third quarter. The red line is at the end of the year then the blue line is through last Wednesday. You can see since the end of the year, rates have not moved much here in swaps or in the cash market, but we did have a very significant move in the fourth quarter.

The fourth quarter of 2018 is in all respects an extremely pivotal quarter. It's quite remarkable when you consider what happened over the course of the quarter. So for instance, the very beginning in the quarter on early October 3rd, the Dow hit an all-time. Oil, WTI oil was a multiyear high. In terms of economic growth, the outlook was very positive.

In early October, the unemployment rate printed at a 49-year low. Wage growth was accelerating. Global growth while certainly nothing like the U.S. was still seeing to be kind of lukewarm. Confidence in the market was extremely high.

And in the September Fed meeting, Chairman, Powell said, the Fed was a long way for neural and as they may actually pass-through neutral. Fast forward to the end of the quarter and pretty much everything had changed materially. With respect to the markets, the Dow and other major indexes had made significant correction.

We're actually in a bear the market. Year-to-date gains were all gone. WTI oil was down 43% peak to trough and generally risk assets of type were suffering mildly. While the labor market in terms of economic growth was still positive, the ISM measure which is our significant metric for the market had a meaningful decline.

The largest decline we received for one month in 11 years. And various other measures home sales new and used have plummeted. Global growth had fear to change dramatically.

China had each successive quarter of 2018 was lower than the last, the quarter had 6.4%, growth for the year was a 28 year low, yet driven worse, many economies reported negative growth for the third quarter including Germany and Italy. Confidence obviously plummeted.

The markets hit the year-to-date low on Christmas Eve, which was right around the time, the government shutdown was steady. With respect to the Fed, while they have said that they are long way from neutral, at the end of the third quarter, they now saw themselves at end of neutral.

And in fact at their January meeting, they said they were full within the range of neutral, had become gated to pay and the next move could be either a hike or a cut, so, obviously, a very significant turnaround in the fourth quarter. Turning to Slide 8.

We will just go through kind of fairly quickly and I'm sure this is all relatively almost everybody by now, but there are some key takeaways that I want to point out. So for instance, turning to Slide 8, we see the movements in the 10 year treasury and the swap, both for the quarter and if you look back.

You can see in the fourth quarter, we had this meaningful move but what's noteworthy is that, we have stabilized since yearend. In fact both the swaps and treasuries all of actually gone into a relatively narrow range with respect to the 10-year, it's roughly 260 to 270 and the market seems to have stabilized.

But keep in mind, the Fed funds as we speak is at 2.41%, so tenure between 260 and 270 is quite a flat curve. In fact the 2, 3, and 5 year points at curve were all in the low and mid 250, so marginally above Fed funds, so quite a flat curve. We turn to Slide 9. This is just another picture of the same basic printing.

You can see we have been in a multiyear flattening cycle. The bottom chart shows the green line, which is the spread between the five year and Treasury note and a 30-year bond. It has been declining for multiple years. It actually troughed last July but with all the developments in the fourth quarter is actually started to steepen again.

And since the market's view of the rates going forward and the Fed has changed so dramatically, this steeping is generally being driven by the five year, the five year for the curves typically the most sensitive to the path of Fed hikes or cuts and is usually driven by the market's perception of the terminal funds rate for the next cycle.

So to the extent the economy would have softened further and the market would start pricing easy, we probably see the five year part of the curve lead the rally and pause that part of the 530 curve to steepen. Turning now to Slide 10. We kind of go back -- get to our net leverage which is the mortgage space.

And what we show here is just the relative performance of the various 30 year fixed rate coupons in all cases, Fannies. The blue line represents the Fannie 3, the reds are 3.5, the green is a 4, and then the -- I am sorry, the grey is 4 and then green is a 4.5. And this is performance versus hedge ratios.

And you can see, it was quite a rough year particularly slow in the fourth quarter. What was also noteworthy is that there was clearly a coupon bias and by that I simply mean that lower coupons did better, more duration. And as you can see in the fourth quarter, higher coupons did particularly poorly.

However, again looking at the development so far this quarter, 2019 has seen stability and in this case recovery as these relative performances has actually gone in the other way. Turning to Slide 11. Four chart curves which just gives us a little deeper dive on the same thing.

Again, the top left we're just looking at the prices of the Fannie 30 or 4.5. As you can see they've actually stabilized and tightened somewhat. That's somewhat misleading because there is lot more going. The bottom left chart shows the roles for these securities.

And it captures the fact they are plummeted something we have seen now for several months and that is an exchange in the TBA deliverable. In other words, what is being the cheapest to deliver collateral that is delivered in the TBA market, and it's been very uniformly poor in quality and reason it's so poor is several fold.

One, the spread between the gross WAC in the net WAC on all of these has grown quite above norms and in some cases approaching 90 and 100 basis points. The average loan balances are higher and cycle scores are higher. So, it’s a result the characteristic that convexity securities have deemed to be very poor. So, what's that for the TBA market is good.

For specified market in the top right, you see the pay up for certain key loan balance pools and they've certainly recovered and we continued to see that into 2019. Bottom right just shows the pay up for new pools and consistent with what we assumed and the deterioration in the TBA deliverable both levels are essentially zero.

Turning to Slide 12 and this is our key especially for the outlook. So as I said earlier higher coupons tend to deploy in the fourth quarter and really throughout the year. What we are showing here is that LIBOR OIS by coupon over the course of the fourth quarter.

And in this case, the higher coupons are wider and what just makes sense because their performance was worse so their spread was widening, but the LIBOR OIS that they offered is quite high and very attractive. So, these securities now going forward represent very good value to us and good sources of carry.

On the left hand side, we are just looking at the TBA. On the right, we are looking at specifically the 4.5% coupon, the various specified pool patterns. And as you can see, these numbers are very attractive and that is a very key for us from my perspective going forward. So again Slide 13, I won't spend a lot of time.

These are the, what used to be the Lehman aggregate. Now the Bloomberg aggregate index returns for the year. As you can on the left hand side, these are absolute returns. The aggregate itself generated a return, essentially zero. Mortgages were slight positive 1%. The start for the year by far was non-agency MBS which was 3%.

On the right hand side, we showed the same returns versus treasuries. The aggregate had a slight negative return as did mortgages, but again non-agency mortgages did very well. And just wanted to make a point here, early on I talked about our returns on how we did versus our peer average.

We remained only all agency portfolios, so while over the course of 2018 and '17 for that matter non-agency credit did extremely well. We've been able to generate returns consistent with our peers in some cases better without any credit.

And so to the extent moving forward that the economy would have rolled over and consumer were weakened and credit would be somewhat exposed. And we are very well positioned since we have no exposure whatsoever to any of those risks. Finally on Slide 14. Business volatility, we are using a 3-month swaption on a 10-year.

There are three lines, one represent at the money, the other two are slightly up. In the case of the red line it’s a 25 basis points out of the money, receiver swaption and the green is a payer. But what I want to point out as you can see the spike involved clearly the curve at the end of the year, but note how much is fallen off since.

Not only it stabilized but it stabilized at a very low level. There is an index you can pull up on Bloomberg call, the move index which is similar to this and it's at or written here on all time low. So for mortgage it's good to say, we like to see low volatility because we are short to prepayment option in all cases.

Slide 15 just shows you our rates whether it's LIBOR or Fed funds. The simple takeaway here is that we probably at or near of peak. And this is more elaborated on Slide 16. What we are showing here in all four slides there are two lines.

The red line represents the Fed's Dot Plot as of the respective meaning and the blue line reflects market pricing of Fed funds going forward is the right in the Fed funds futures market. So for instance on the bottom, if you look at the September 18 meeting. The red line was well in the 3s nearly 3.5%.

In other words Fed hikes at least based on Fed expectations were far than from where we are today 240. The market was approaching 3%.

By the end of the quarter, you can see the dramatic shifts Fed expectations were much less and the market has gone from pricing in close to 3% to essentially pricing in the modest probability of a cut moving forward, so a very crucial quarter. And as we turn now into our financial results, this will become clear why we think this is so pivotable.

On Slide 18, we show our results for the quarter. The left hand side is where we tried to show this is our proxy for core income which many of our peers produce. It basically just represents the other income absent mart-to-market issue or gains and losses.

And as you can see, it puts the $0.28 but we did have significant mart-to-market gains and losses in the predominant one was the move in the interest rate futures. As I have been saying, mortgages had a rough year and particularly quarter versus their hedges. And in the case of by fourth quarter, they were the driver of our overall performance.

Mortgage did okay in terms of going up in prices particularly passes, but the hedges over the loan performance and that’s really reflected on the right hand side. This is our typical table where we show results by sector where we allocate capital. The first column is the pass-throughs.

As you can see the derivative losses or material they drove the results for that sector to a negative 7.7% return. IO has had a negative return simply because the market rally. Our inverse booked at very well, had a 9.8% positive return because there was less capital allocated there.

It did not offset the other sectors and under the results the net for the entire portfolio was a negative 6.5% return. Now I'll turn to Slide 19. I think this slide is very important from -- respect with not just where we have been but where we think we are going.

As you can see here, over the last five years, our net interest spread as the curve is flattened has been slowly eroded and. For the last few years our, NIM has been in the low 2% range.

So, we have had a very long tightening cycle that accelerated 2017 and '18, as a result, we had the position progressively more defensively add to our hedges more specifically our front head hedges.

And as a result it put a lot of pressure on our earnings; however, prior to that period before the tightening cycle had intensified we were issuing capital to our ATM program because the shares were trading above book.

Since we had made cuts in the dividend as you see in the bottom part of the table the stock has traded below book and we have been aggressively buying back shares. As I mentioned we bought back almost 10.5% of all shares issued.

And this is a key part of our strategy to maximize our book value performance by either selling above or buying below and as part of the reason that our returns there are where they are. Now what I just want to point out here and this is really key going forward. If you look on the far right side of the page, you can see stability.

With respect to the NIM, it's been running in the low 2s, but it's done -- for several quarters. And our dividend has been at $0.08 all the way through February of this year. Going forward, we think the fed appears to either be done or close to being done and we have an excellent carry in the assets we own.

We talked about that earlier and we talked about the various higher coupon securities that we typically own whether it would be LIBOR OIS or any other measures of carry. They look very attractive and we have no credit exposure to the extent that if there is any kind of a downturn we will not be exposed.

So given all of that, we feel that returns going forward should be stable and actually there maybe upside to the extent the economy softens further and the fed will lower rates. Before I wrap it up, I would like to just go say few things about our capital allocation, portfolio composition and our hedge coverage. I'm going to skip ahead with Slide 21.

Just on the left hand side shows the allocation that capital as you can see over the course of the quarter the pass-throughs for instance went from 65.2 to 58.5. we have structured increase. But I want to point out this was not so much -- it was a combination of the strategic decision to shift the way from pass-throughs.

But also because of the book value pressure and the leverage we had to reduce the size of the balance sheet has also reflected on the right hand size. And most of the reductions were in the positive portfolio.

So for instance on the right hand side you can see the market value at the end of the last quarter was nearly 3.4 billion and now it's well under 2.9 billion.

The increase in capital allocation the restructure was modest but simply just kind of gain relative basis through attrition because the pass-through of the portfolio is where most of the declines took place. Something we had in the Slide 23. This is just the composition of the portfolio.

Again, the change of a more driver by was reduced versus what was added. Fixed rate CMOs and 15 years increase modestly versus the end of the third quarter simply because they just been declined most of these sales were in the 20 year and 30 year bucket. So those two buckets reduced slight.

But also keep in mind, the coupon distribution is still very much the same. As we said those coupons are -- while they had a rough quarter are opposed to do very well going forward offered really good carry.

Going forward, we may actually add slightly to the duration, simply because of everything else we said so far in terms of our view, does look like the Fed at or near the end of its tightening cycle.

And we would expect if and when they also reduced that we would see declines in rates and therefore we will have a more significant positive direction gap. The final slide I'll refer to is Slide 26 which shows our hedges. If you can see we have all these different hedge products. The top left is our Eurodollars.

On the right hand side we have swaptions which now actually gone. TBA positions in swaps, the swap positions in conjunction with our Eurodollar is affectively cover out of our funding costs, re-pool balances that is to the extent there are more fed hikes. e have essentially locked in our rate as reflected on this page.

251 in the case of the euro-dollars and 170 in the swaps, but as I said we do think that we are at or near the end of the cycle, so that we would think overtime at these percent of our re-pool funding that hedge will decline.

So whether it's through growth that we are able to access the market through the ATM program for instance or just trading that that coverage will start to come down. And with that, operator, I will conclude my prepared remarks and turn it over to questions..

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

Looking on the portfolio allocation, I'm on Slide 23 that you highlighted -- and by the way thank you very much for all the great commentary. And I saw you guys lined up on the 30 year 4.5s.

Is that sort of an indication by expectations for you that prepays are going to start spiking up in general?.

I would say a few words and then I'll turn it over to Hunter. I would say, no. We actually had the benefit from the last few months of being in the seasonal trough. And we have seen a rally in race although that has since kind of abated. We are coming out into the where we typically see a pickup.

We have been adding forms of pay up protection typically lower pay ups. So even if we do see some modest uptick, the combination of fact that we are still at relatively higher mortgage rates and we do have forms of call protection, we would not expect to see a spike. I'll let Hunter say more about that..

Yes, a lot of that Chris just had to do with the fact that as Bob alluded to, we were both trying to get manage our leverage in a pretty choppy market in the fourth quarter, and we were also aggressively buying stock back and shrinking the equity base. So, we were selling 4.5s because that was the biggest and the most liquid part of the book.

So, the 15 years that we owned, we have lightened up on this a little bit into the first quarter. Those are largely loan balance. So into the rally we think we best to hung onto those. The CMOs were not something we really wanted to sell in the fourth quarter because they are not nearly as liquid as the pools that are booked that had a TBA back stuff.

So, it was really just sort of a hotchpotch of few different varieties of 4.5s..

And talking about buybacks, I'm seeing you guys were pretty active in the quarter.

What's the thought for the buybacks going forward?.

Well, we are not going to change to the extent that the stock trade is materially below book. We don’t have any unofficial level about 90% of book, but that’s not issuing stone. We will buyback.

And when the bottom fell out of the market in December and the stock traded down efficiently and with all other pretty much everything else, we got very aggressive, and as I said, we brought back 6.5% of the shares that were outstanding at the end of the third quarter.

We are externally managed REIT and I don’t think that’s typical that type of aggressive buying back of shares. But it helps to drive returns because we are doing so adding to book value and of course for the fourth quarter when book value is being plummeted you are kind of net in some of that up by buying back shares so accretively..

Yes, Bob alluded to the fact that risk markets behave poorly in at least the second half of the fourth quarter, but I guess there is a silver lining in all that. It was the equities in particular Orchid stocked turn it.

There isn't only as well, so we were able to liquidate some mortgage assets that had double but better than our stock price on a relative basis and buyback pretty aggressively some shares..

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

Could you give us an update on where book value is today or at the end of the January?.

It was up slightly at the end of January, it's actually come back down. It's probably more or less in line with where it was at the end of the year. Most of the recovery we saw was in January and we since given back some of that..

And then both from an asset allocation standpoint and the leverage standpoint, given the decline in equity, given your share repurchases as well as the market conditions, the leverage has picked up, your asset allocation changed and you noted.

How should we think about that going forward? Where are you putting run off today? And how should we think about leverage given the current equity levels?.

Yes, first on the leverage we put in the slide that I think was 90.1. There were some unsettled sales, so it came off slightly than that plus TBA is short. So, it's actually somewhat lower and that’s closer to 8.4. We will probably going to stay at or near that kind of level.

We were so defensive for so long with the tightening cycle that seem like they were never going to end. And then they may resume tightening, but I think it's a stretched to thing. There is a meaningful amount of tightening still to go.

So going forward, you would expect eventually to go the other way, who know when exactly that will curve, but it seems like we are probably being ranged bound here for a while. So, we don't have overly concerned with having that risk, we were very fully hedged, maybe too hedges.

And so, we will probably take some of that off and then we keep going to the securities yield too. The IO securities that should be the way Hunter say, but there is a lot of two way risk in those so they actually ask -- have some true hedge benefit to them..

Yes, exactly, and their fixed rate securities and themselves have much lower hedge ratios at this point in rates. So, there is less need to hedge, so we expect to curtail some of those positions.

With respect to the portfolio allocation, as we alluded to, the percentage allocated to, mortgage derivatives, CMOs and 15 years increase really just because we were selling 30 year fixed rate.

So, it will probably be the focus level of the portfolio back out, more in line of what you saw probably in the third quarter, maybe even a larger SKU towards fixed rates, getting shying away from some of the hyper or prepays so into the coupons like 5s and 4.5 as maybe going down a little bit in coupon.

But I wouldn’t expect to see meaningful changes, just sort of redistributing the allocation back to where it was prior to the buybacks and deleveraging..

Thank you. And this concludes our Q&A portion. I would like to turn the call back over to Mr. Robert Cauley for closing comments..

Thank you, operator, again, thank you everybody for taking the time to listen. To the extent anybody has any additional questions or only had a chance to listen to the replay, please feel free to reach out to us at the office. We will be here all day as usual. Our number is 772-231-1400.

Otherwise, we look forward to talking to everybody at the end of the next quarter. Thank you. Thank you, operator..

Ladies and gentlemen, thank you for your participation in today's conference. You may disconnect. Have a wonderful day..