ORC (2020 - Q2)

Good morning, and welcome to the Second Quarter 2020 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, July 31, 2020. At this time, the company would like to remind the listeners that statements made during today's conference call relating to matters that are not historical facts are forward-looking statements subject to the Safe Harbor provision 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 that are subject to risk 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. Bob Cauley. Please go ahead, sir. Robert C

Thank you, operator, and good morning, everyone. I just want to mention that our slide deck was not put up last night. It was put up this morning. I hope everybody's had a chance to grab a copy so that you can participate with us as we go through the presentation today. As usual, we'll follow the same kind of format. Starting on Page 3, the table of contents. The first item will be just to discuss our results for the quarter, high level. Then, I'll spend a few moments describing the market in which we operated in during the second quarter. Then, I'll go through our financial results in a little deeper detail, and then spend the rest of the time talking about the portfolio positioning changes we made, how we see the market evolving in the future, how we want to be positioned for that. And of course, some discussion of our hedging strategy and leverage and so forth. So with that, turning to Slide 4, financial highlights for the quarter. The first thing I want to mention is that Orchid had a very strong quarter. We generated an economic return of 15.8% for the quarter that is unannualized. As a result, our performance versus our peer group, which I'll describe in a little more detail in a moment using a total rate of return based on stock price and dividends, stacks up extremely well against our peers going back throughout our history and our existence. And finally, we find ourselves finally in a very favorable environment. That has not always been the case. And we've had to slug through a series of Fed rate hikes and the like, but that is not the case now. And the environment that we find ourselves in is very attractive for our business model. We recently raised our dividend. We feel very comfortable with the dividend at that level. And as long as speeds don't accelerate meaningfully to the upside, we actually see room for earnings expansion, going forward. The key, of course, is going to be speeds and how we manage those speeds. So with that, I'll dive into the results. Orchid generated a net income per share of $0.74. This is $0.31, excluding realized and unrealized gains and losses on RMBS assets and derivatives, including net interest income on interest rate swaps generated gains of $0.43 per share on these realized and unrealized gains and derivatives, including swaps. Our book value per share was $5.22 at June 30. That's up $0.57, or 12.3% from the end of March. Our estimated book value per share as of July 29 was between $5.23 and $5.33, an increase of 0.1% to 2.1% from quarter-end in June. And this also gives effect to the payment of the dividend in August with a record date July 31. So that is above and beyond the dividend. In the second quarter, we declared and subsequently paid $0.165 of dividends. Since our initial public offering, we have declared $11.33 in dividends, which includes the most recent $0.06 dividend declared in July. As I mentioned, our total economic return for the quarter was $0.74, or 15.8%. That is not annualized. In our third quarter year-to-date results, between 1.3% and 3.3%, comprised of that $0.06 dividend and a $0.01 to $0.11 increase in book value. On Page 5, we show our results versus our peer group. The peer groups are described at the bottom of the page. And I want to point out that Orchid was founded in February of 2013, not long before the taper tantrum in the summer of that year. And essentially, since that period, we've been operating in a rising interest rate environment. The Fed first raised rates in December of '15 and December of '16 and throughout '17 and '18. And we've only really had, excuse me, about a 1-year period where rates were actually falling and we kind of had the wind at our back before the pandemic struck earlier this year and kind of through the markets into turmoil. But in spite of all that, if you look on this Slide, you see the first column, our total rate of return versus the peer average, and then the final column shows our relative performance. And as you can see, we've done very well against our peer group over these periods for all lookbacks, both year-to-date, 1, 2, 3, all the way back to inception, and we're very proud of that. On the next Slide, we show the same kind of results, only this is with book value. Unfortunately, we don't have all of our peer group's book values for Q2. So as always, this table tends to lag. But I want to point out that when we put together Orchid and marketed the business as an agency-only model, that was around the time when we were coming out of the throes of the financial crisis and credit was starting to turn around, and a number of our peers took on credit. And in times, especially in 2017 and '18, when the economy was very, very strong, did exceptionally well where we lagged. But now that the cycle has kind of come full -- gone through the full length of the cycle and come around to a point where credit is lagging, it shows that the strategy has paid off. We've mentioned before in our calls, and I'll mention it again, at some point we may expand our investment strategy to include some credit although we think it's premature to do so now. Given the evolution of COVID this year and what we're seeing with the reemergence in the summer, we're not certain that we're completely out of the woods. And in which case, if we're not, I mean, credit could still have some more downside. So we're not going to dive into credit in the immediate term. And if we miss the absolute bottom, that's not going to hurt us because we don't want to jump off to get in front of something before it jumps up a cliff. With respect to the markets and the environment we have to operate in, I'll just go through this relatively quickly on Slide 8. The first thing that stands out is the rates market, essentially unchanged. We did not experience meaningful movement in rates throughout the quarter, whether it's the nominal Treasury curve or in swaps. This is in pretty sharp contrast to risk assets generally, which, while they were up, were quite volatile throughout the quarter. The rates market has been very, very stable. And in fact, if you turn to Slide 9, the left, you see the 10-year Treasury and swap over the quarter. And really, with the exception of that brief period in early June, when we had the surprise nonfarm payroll number of plus $10 million versus expectations, we had a short-lived bump-up in rates. But otherwise, we've been in a very, very stable rate environment, and which, as people are familiar with the mortgage strategy, no, that's generally a good thing for mortgages. Slide 10 just gives you a picture. This is our proxy for the slope of the curve. And after years of a flattening curve, we've finally started to get some relief. The 5-30 spread get over 100. Since the last few weeks, it's dipped below 100, between 90 and 100. So we may see some continued downward pressure. We'll see. But generally speaking, with funding where it is, this environment is very advantageous for our business strategy. Slide 11, we'll say a few words about the mortgage market. The left side is big market, if you will; the right side is when we look at specs. And a few things to point out. If you noticed on the top left, this is just the performance of TBAs. The blue line is at Fannie 2.5, 30-year. The red line is a Fannie 3.0, and then 3.5s and 4s. And what's very obvious and what sticks out, for instance, in the case of Fannie 2.5s, they're up 23 ticks in price with rates unchanged. Fannie 3s were up 14 ticks, but the higher coupons were actually down meaningfully in price. And staying with the roll market, if you look at the lower coupons, you can see rolls are very, very strong in the lower coupons; very, very weak and the higher coupons. And the question is why is that? And the answer is very obvious. It's the Fed. We all know the Fed got into the market through QE, both buying outright and reinvesting their paydowns. And there, as well, it changed over time, and they eventually bought all coupons. Now, it's very much focused in production coupons only. So in the case of 30-years, they're buying 2s, 2.5s and 3s. As a result, those coupons do very well. And also, very importantly, they're rather an indiscriminate buyer, so they buy the kind of cheapest to deliver collateral, if you will. So in other words, the securities that have the worst convexity in prepayment characteristics, which means what's left for the market is very desirable. Since they don't buy the higher coupons, that means the market is left to bear all of the cheap collateral or poor-quality collateral. And as a result, TBAs and those coupons have done very, very poorly. As a result of that, if you look to the right in the spec market, in these higher coupons, those spec pools become very desirable. And given the extremely poor performance of the TBA, the payouts for those securities are much higher than they would be even otherwise. So for instance, on the top right, we show a $85,000 max loan balance, 3.5 and a 4. The red and the blue line -- I apologize. In the case of the 3.5, there's some breaks in the line. That's simply because those securities weren't produced in those periods. But look at where these pay-ups are versus, say, 2016, shortly after Brexit when rates hit their then all-time lows, 10-year got to about 130. As you can see, we are meaningfully higher than that level now. And that is given that we are at low rates. And even though the economy is somewhat weak, the housing market is the exception and doing quite well. And in spite of the effects of COVID and social distancing and shelter-in-place, refinancing activity is extremely robust. And as a result, these securities command very high pay-ups. Now, that's even reflected in the price of just new securities. The logic there is that securities don't tend to refinance right away after they're produced. There's usually a respite for a few months. And you can see that the pay-ups there are approaching a point, which is very high on a historical basis. Slide 12 is just a picture of volatility. In this case, it's a swaption of 3-month into 10-year. And as you can see, after the spike earlier in the year, it has dropped tremendously. And for us, that represents an opportunity in terms of our hedging strategy, which I'll discuss more later. We've been using WALA related products for our hedging more so than in the past. Slide 13. I won't dwell on this. It just basically shows LIBOR OAS. And as you can see, the lower coupons are lower, reflecting what I just said about the Fed. And on the right, we show the pay-ups for specified pools for, in this case, a 3.5% coupon. You can see they're quite elevated. Turning to Slide 14. These are returns across the aggregate index. On the top, these are Q2 results. And as you can see, risk had a very strong quarter. So if you look to the far right, you see high yield. Emerging market high yield in the S&P 500 did extremely well this quarter, whereas safe haven assets like treasuries and mortgage backs, agency mortgage backs had more modest returns. However, when you put this in the context of the whole year, which then captures what happened in March, you can see that risk assets -- so on the far right, high yield and emerging still have negative year-to-date returns, whereas mortgages and treasuries have very strong returns. Now turning to Slide 15. This is really the crux of the matter in terms of what we face, going forward and what we view as the most critical variable for performance throughout the balance of the year and into 2021. And that, of course, is refinancing activity. As you see on the top left, the red line here just represents mortgage rates. And as you can see, they continue to decline steadily. The blue line is the refinancing index. And while it's spiked and is elevated, it really hasn't remained as elevated as it once was earlier in the year. And the driver of that is what you see on the top right, and that is just this primary secondary spread. So in other words, what originators are charging for mortgages versus a theoretical current coupon mortgage, and you can see that spread's elevated. It is coming down. We anticipate, over the course of the balance of the year, that that number or that spread will normalize, maybe not quite all the way to where it was at the end of last year, but it will come down. And as a result, that will drive the primary mortgage rates below 3%, and refinancing activity will remain quite robust and could accelerate, but it remains to be seen. The bottom of the chart just shows the percent of the universe that's refinanceable by at least 50 basis points. As you can see, we're pushing 80% and could go higher. So that's the market backdrop. Now I'll talk about our results. On Slide 17, just want to point out a few things here. This left-hand chart is where we decompose our return for the quarter between mark-to-market-related and just kind of net interest model-related. So we generated $0.31 in net interest income, and then we also had $0.43 of net mark-to-market gains. So in other words, our assets meaningfully outperformed our hedges. A $0.43 return for a quarter is extremely strong. This is, of course, in contrast to Q1 when the opposite was true, but it reflects just how strongly the asset class has recovered in the second quarter. And so, obviously, with the effect of the Fed, the market has completely recovered. In fact, if you look on the right-hand side, we show our returns by strategy. In the case of the pass-through portfolio, we generated a 16.4% return. That's unannualized. So obviously, an extremely strong return. Slide 18 is just a picture of our net interest margin and dividends. A couple of points. The obvious ones on the far right, the blue line is the yield on the assets. You can see a drop, reflecting the decline in rates. But importantly, the red line, our funding costs, dropped even more. As a result, our net interest margin has expanded, and we sense that there's room for even further expansion, going forward. The dividend on the bottom just shows the dividend through the end of the second quarter. As you know, in July, we increased our dividend modestly to $0.06. And as I said, if we see speeds, if we're able to control speeds, we see room for expansion there. Slide '19 is a similar picture, just presented slightly differently. You can see the red line there is the core earnings, and it's hit bottom and is starting to recover. Slide '20, a few items here about our capital allocation and activity in the portfolio. The capital allocation continues to shift towards pass-throughs as we continue to deemphasize structured securities. The returns in the pass-through strategy are extremely attractive. And while we still use structured securities and IO's hedging instrument, using them less as an income component. So we own no inverse IOs at the moment. We just own IOs for hedge purposes. On the right-hand side, this shows our activity. I will point out that this excludes TBAs. We do own a little over $200 million in TBAs. Inclusive of those, the portfolio expanded by about $600 million, or 19% this quarter. So we've gotten back a meaningful portion of what we had to shed in the first quarter. So the portfolio is not far below where it was at the end of the year. Now we'll get into the portfolio characteristics. A few points I want to make here, and this is really kind of the key as we position ourselves, going forward. We continue to migrate down in coupon. In this chart on the pass-through component, which is the top of the page, right in the middle there's a column labeled CPN, or coupon. The pass-through coupon is 3.62%. That was 3.89% at the end of the first quarter, and we suspect that could continue to drop slightly as we move forward. The age of the portfolio is 11 months. That's unchanged. So we've been able to maintain the age through trades. One thing we have done since quarter-end is prune a lot of faster paying securities. So within these buckets, we've been able to shed some of the worst convex or faster-paying pools, and we've been able to add slower paying pools. The higher coupons, 30-year 4s, 4.5s and 5, those are all down 3% to 4% from quarter-end or from the end of Q1, and I suspect will continue to drop. We've since added some in July of this year, some 20-year 2.5s. And the positions shown in this page as a 30-year 2.5, that's since been converted to a TBA position from a pool. With respect to hedges on the bottom, we're still running at about 50% of our repo balance. We -- likely to continue to do so, although we are adding more in swaptions. I mentioned how low volatility has been in the rates market. And we're taking advantage of that by adding to our hedges through mostly payer spreads strategy. So we have a better carry, and given benefit from both a raise in rates and volatility, they tend to occur at the same time. So in the event that ever does happen, we think these instruments will behave very, very well. At some point, we may add more swaps. 5-year swap rates are getting down in the mid-20s. At some point, we may add to that just to try to lock in long-term funding. Page 23 is one of our newer slides where we show the blue line is just the refi index, and the red line is our concentration of very high-quality spec pools. So lower loan balance, $85,000, $110,000, up to $150,000. As you can see, it dropped slightly in the current quarter. That's simply because we added that large position in 15-year or 30-year 2.5s. Those were not high-quality specs. That was more of a credit story there. Since quarter-end, we've actually brought that percentage back up to 86.5%, and that's likely where it's going to remain for the foreseeable future. The benefit of these strategies and the positioning in the portfolio are reflected in Slide 24. This is what it's all about, we think, going forward. This is our results, if you will, from the perspective of speeds versus returns. What we show here in these respective charts, the red line just represents the speed of the given cohort, so whether it's 15 years or 30-year 3s and 3.5. The blue line is our securities, and it shows you how we prepay versus the cohort for the month of June, May and April. In the bottom right, we show that same kind of information slightly differently. In this case, it's the rolling last 4 quarters. So the four quarters would be Q2 of '20 back to Q3 of '19. And what we're showing here is the percent of the cohort speed that our securities prepaid at. And as you can see, it's quite low with the exception of 30-year 5s, a very small allocation of ours. But more importantly, the blue line, the most recent quarter, is quite low. And this is going to be critical in terms of securities selection and how we position the portfolio for the balance of the year since speeds are obviously going to be the primary driver of performance. Slide 25 just shows you something we like to present. It shows you the orange line here, which is just rates, the proxy for rates, the 10-year. And this another way, I guess, we look at speeds, and that's just simply the absolute dollar amount of prepayments we realized versus the unpaid principal balance of the portfolio. We like to see that around 1%. In this environment, that's quite hard to accomplish. But it is interesting that where we are now is actually lower than we were in late 2019. So we've actually, even with rates much lower, behaved better, and that's really what's driving our performance. Slide 26, we show our repo position by counterparties but also leverage on the right side. As you can see, we're at 9.7%, so the high end of our range. And given where returns are in the market, we expect to stay at the high end of the leverage range. To the extent returns drop, the leverage would probably come down. And then, finally, Slide 27. This is very key to what we've been discussing. And this just shows you our interest expense per share. And as you can see, going back to January of '19, when it was $0.13 per share, it peaked in May of that year at $0.15. It's come all the way down to $0.01. So obviously, a big drop. And so this really gets at what we've talked about when we say we see earnings as being very strong, going forward. We're paying a $0.06 dividend, which equates to a low double-digit yield. There's probably the ability to go slightly above that. So we see return potential in the low to mid-teens. So to put some numbers around that, spreads in 125 basis points. Sometimes you can get higher than that with newer securities that prepay slowly as they ramp up. And so generating returns in the low to mid yields or mid-teens is very strong in this environment. And we think if we can maintain speeds, that we have the ability to achieve those returns. And as you can see from what we just described so far, we're having very good success in that regard. The final slide is just our hedge positions. And I'll just point out, as I said on the bottom-right, we've been adding to the swaption book using payer spreads where we're long and short, 2 different instruments usually with similar structures, trying to take advantage of differences in forward vol so that we can reduce the upfront cost of entering into the position. We've done these trades a few times now. And so we like this kind of positioning. If we get a steepener or movement in the long end, meaningful movement, you would see both uptick in rates and vol, and these strategies will do very well. So just to summarize, we think we've had a very strong quarter. We're very, very proud of our performance versus our peers, both from a book value and the stock price performance. And we see the environment is very attractive from a return perspective. And to the extent we continue to keep speeds under control, we do see some upside for our dividend. So with that, I will turn the call over to the operator and questions. Go ahead, operator.

[Operator Instructions]. I show our first question comes from the line of Jason Stewart from JonesTrading. Jason?

So I was wondering if you could opine or share your thoughts on how credit availability may impact speeds that you're thinking about versus models and how that puts you in a position in the portfolio that you have today and going forward.

So when you say credit availability, you're meaning to just borrowers generally?

I'm thinking more in terms of restrictive requirements for -- whether you're seeing that in the GSE world. We're clearly outside of the GSE world that's happening, but whether that's impacting your view on speeds in the GSE world, or there's no change?

This is Hunter, Jason, we really hoped to see and thought we were going to see a benefit in the wake of the crisis and pandemic in terms of job losses equating to slower speeds and the forbearance programs that were rolled out around the time the CARES Act came out. We haven't really seen that show up much at all. It looks like borrowers are quite able to refi into this new environment. And we'll expect that they will continue to do so in the coming months as our expectation is the primary-secondary spreads are going to narrow. We can see mortgage rates drop well into the 2s, and that just opens up an enormous bucket of borrowers who have really never had the potential to refi. And so I guess the short answer is no. We don't really expect to see it slow speeds down. And in fact, we would expect there to be continued robust speeds going into the next several months.

Yes. And I would add to that the GSEs, if anything, have become more accommodative. One thing that was really never seen meaningfully so before was what's known as a property inspection waiver, basically waiving an appraisal. And they're becoming prevalent. The GSEs are really bending over backwards to accommodate the origination of mortgages. It's all part of the government, whether it's the Fed or Congress or the GSE's efforts to just revive and maintain the economy. So borrowers' ability to get loans, especially in the non-bank space -- and we haven't really dwelled on that, but banks, or non-banks, the share of the market has grown substantially. That was a concern with respect to servicing earlier because people were afraid that non-banks wouldn't have the financial wherewithal to service delinquent loans. And everybody assumed, as Hunter alluded to, that forbearances would grow, and how are these services going to be able to make these advances. Well, the GSEs accommodated again, basically said that you only have to advance for 4 months, at which point that GSEs themselves will take over the advancing. We've seen an uptick in agency debt issuance to fund that. And for the most part, they don't expect that pools will be bought out, or delinquent loans will be bought out during the forbearance period, which is initially 6 months, but in all likelihood 12. And even then, the most likely outcome is probably going to be a payment deferral, whereby the unpaid interest and principal is just deferred to the end of the mortgage. So it doesn't even necessarily mean the loan gets bought out then. And even within that, the forbearance, many instances, from what we hear, the borrowers that enter into forbearance often continue to stay current. So the credit element of all of the COVID pandemic outbreak has been much, much less than anticipated, and prepayment speeds every month since April have surprised us and the Street to the upside. So we kind of view that as likely to continue.

The prepayment waivers, in particular, are something that are cause for concern within the way we manage our assets. And Bob alluded to the fact in his prepared remarks that we are migrating down in coupon. So there's been a proliferation of Fannie 2.5s that have hit the market over the course of the last few months since rates have come down, but those loans still have gross WACs often into the low to mid 3s. And so I'm particularly skeptical about those in the coming months. If and when we do see that primary-secondary spread decrease, that could just be very low-hanging fruit for the mortgage, especially like the non-bank lenders who are getting more and more aggressive every day.

I would expect just at this point, just to reemphasize, as we move through the balance of the year, and let's say the primary mortgage rate moves below 3, the paid's going to be felt in the more recently originated 2s and 2.5 because, as Hunter said, they have high gross WACs, fresh docs, they're very low-hanging fruit. Conversely, the higher coupons, the more seasoned pools, they just go from 200 in the money to 250, and they will start to exhibit some burnout. So I would expect a lot of the higher coupons, and especially seasoned bonds, would do commensurately better in that environment. One thing we didn't mention, I mentioned that payoffs on spec pools had risen, but what I didn't say was that you've seen a huge gap between new issue and seasoned. And the reason, initially, was well-founded, and that is that seasoned loan balance in the like pools paid quite fast and, therefore, much faster than new. And so the pay-up changed dramatically. Actually, it probably got too big. And I would expect, going forward, if what we just said is true, and you start to see more and more burnout amongst those pools, that that gap would narrow. And therefore, those securities would be behaving quite well. So if you did own the seasoned loan balance, you could see some pay-up appreciation and speed decline. And so the returns there, we feel are very attractive. And we're more leery of the lower coupons, absent the roll, of course. As long as the Fed's buying, the rolls should be strong. But if you own those in pool forms, I think those are very vulnerable pools.

We've been focusing on purchasing. What we have purchased in lower coupons have been those that are either stories that have such a low dollar price that we could quickly deliver them into a TBA if and when they start paying fast, or loans that would not qualify for the inspection waiver, like investor properties and different unique collateral types that would not qualify for that type of refi.

Right. Well, and kudos to a nice view on positioning in the agency book. You took a very convicted view and have paid off, so kudos on that. But if we pool way up, and then I'll jump out here, do you have a thought on yield curve control and what that means for mortgage?

Well, I think if they do, there's a large variance of opinion out there. If they do, I think it's probably just going to be in the front end of the curve, maybe out to the 3-year point. I think the market, to a large extent, is behaving as if they already are. I checked today. The 2-year is about 2 bps over Fed funds; 3 years, not much more. I wouldn't expect, whether they do it or not, it to have a meaningful impact. It's more the long end. And what you're seeing now with this flattening, from what I hear, is the dollar has been weakening, and Asian investors view the long end of the curve is very attractive. They've been investing in the long end of the treasury curve on an unhedged basis. So when those kind of dynamics are at play, that's really outside the Fed, per se. It's just driven by more market dynamics. And that may persist for some time. Yield curve control probably just -- if it does come, it's probably just going to be on the front end of the curve, and I would argue that the market's almost acting as if it were in place already.

Thank you. [Operator Instructions]. I show our next question comes from Christopher Nolan from Ladenburg Thalmann.

On the ROE, you're talking about low to mid-turn returns. Is that for the second half of the year? Or is that for a full year?

I do have a specific period. I would just say that's what's available today. The higher end of that range is going to be predicated on better speed performance. We just mentioned on Jason's question. We think lower coupons in pool form are a little more vulnerable, so returns there are going to be on the low end of that range and some of the higher coupon, especially seasoned pools, probably going to be more on the high end of that range, unless we're wrong and speeds do accelerate across the board meaningfully, and then, in which case, those returns probably won't be there. But if we can manage speeds, I think those returns are very doable.

The TBA's a great alternative, as well, for us if we become overly concerned with the potential performance of the pools. Buying TBAs is a great option. The rolls are great. The Fed is going to continue to buy production coupons, and they're going to trade special for the foreseeable future, in our opinion.

And I'm just sort of doing back-of-the-envelope on the new dividend of $0.06 per month. That equates to roughly a 14% of book value, so that sort of falls within that range. Is that a fair way to look at you're setting your dividend consistent with your view in terms of ROE?

Yes.

And then, I guess the other thing is really everything just sort of turns on speeds. By the way, very nice quarter, but that is the key question here. I just want to make sure that's the key takeaway.

Yes absolutely. And we tried to make that point as strong as we could. And you saw how so far we've behaved versus the cohorts, and it's how you position in terms of what spec pools you own or what vintage you own. TBA, of course, always offers attractive returns. You see that, especially a lot of our peers use the TBA market more than we traditionally do. But in those coupons the Fed's buying, implied financing cost is very, very low. And if you listen to the Fed, it doesn't sound like they're going to back away from the market anytime soon. But it does create opportunities for everybody.

We just go back to that Slide 23 here. We're sitting at over 80% of our portfolio in what we would consider to be very high-quality specified pools. That's especially true of the higher coupons that we own. So the 3s, 3.5s, 4s, 4.5s -- apologize. I'm not used to call them 3s high coupons quite yet. But it's all $85,000, $100,000 max, $110,000 max, a few $125,000 and 150,000s. And then some New York, predominantly in 3s and 3.5 space. So we feel pretty good about the quality of the portfolio. We've sat on these assets and watched their pay-ups go through the moon, but we have a good cost basis in them. And so, while we could grab quick profits by selling them, we'd just be left with the replacement problem. And so I think we're going to sit on them for a little while. And as they pay down, we'll venture into lower coupon space and make sure that we're in safe territory there, as well.

Yes. And we did also own some 15-year TBAs as well, too. That trade, we actually got in and out of that trade a few times, has done very, very well. So there's a lot of opportunities in the marketplace today. That's for sure. And funding looks like it's readily available. We didn't really dwell on this. We're in the mid-20s, and we can even term that out, if we like, in most cases, at around the same level or very, very modest increase in rate. And we don't have any of the issues that some of our credit peers do. We didn't have to go through any forbearance or anything. We maintain adequate liquidity throughout. And so that allows us to be nimble to the extent we want or need to be. And we've got the leverage ratio back up to the high end of the range. That was not a challenge to do so, and we're not going to go higher, but we see very comfortable maintaining it at that level, as long as the recent returns are available.

I guess on the question of leverage box, I guess your lenders are assuming that the Fed backstop will not allow another liquidity trap like we saw in March.

Yes, I think that's safe to say. I mean, the Fed -- go ahead.

Yes. And if that's the case, and if you're really dealing with a one-dimensional risk here, which is namely prepayments, why not take the leverage as high as can bear?

You need a lot of conviction to do that, and it would be very costly if you were wrong. I guess the one thing that would drive me away from that is that a lot of people have the view that we do, that rates are going to be low for longer. And there's no reason to think they won't. It's just that, whenever you get the market so offside on one view, it can be very painful when the market goes the other way. It doesn't have to be a meaningful move. It just has to be enough to trip a few people to shift, and that in and of itself can drive the market higher. So that would keep us from doing that.

[Operator Instructions]. I show no further questions in the queue at this time. I'd like to turn the call over to Mr. Bob Cauley, Chairman and Chief Executive Officer, for closing remarks.

Thank you, operator, and thank you, everybody, for joining us. As always, we appreciate you spending the time with us. To the extent you aren't able to, you want to listen to the replay of the call or you just want to call in with questions, we are more than happy to take your calls. The office phone number is 772-231-1400. Otherwise, we look forward to talking to you next quarter. And our next dividend announcement will be out in mid-August. I hope everybody stays safe, and look forward to talking to you next time. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.