Orchid Island Capital, Inc. Q1 FY2025 earnings call

Financial Highlights - Jerry Sintes presented financial highlights for the quarter, including earnings per share, book value, total return, and dividends.

Market Developments - Robert Cauley discussed market developments such as the rally in the cash treasury curve in Q1, later market changes due to tariffs and Fed cut expectations, and movements in swap spreads and mortgage performance.

Portfolio Activity - Hunter Haas talked about raising $206 million in capital, deploying proceeds into higher coupon but shorter duration assets, repurchasing over 1.1 million shares of stock, adjusting the portfolio by selling lower carry assets and shorting Fannie 4s, and discussing hedging strategies including basis hedges and unwinding swaps.

For the first quarter of 2025, Orchid Island Capital earned $0.18 per share, compared to $0.07 per share in the fourth quarter of 2024. The book value at March 31 was $7.94 per share, down from $8.09 per share at December 31. The total return for the quarter was 2.6% unannualized, versus 0.6% in the fourth quarter. The company declared and paid dividends of $0.36 per share. The average portfolio in the first quarter was just under $6 billion, compared to $5.3 billion in the fourth quarter. The leverage ratio at March 31 was 7.8, up from 7.3 at December 31. Prepayment speeds in the first quarter were 7.8%, down from 10.5% in the fourth quarter. Liquidity at March 31 was 52.2%, compared to 52.9% at December 31.

Growth Outlook - Management noted there is tons of uncertainty in the market with slower growth potential. The market is pricing in potential Fed cuts, and there is potential for inflation to rise, leading to a steeper curve which is favorable to the company's positioning with higher coupon, shorter duration assets hedged on the long-end. However, management remains cautious as the market is volatile and much is uncertain.

Market Volatility - The market has been highly volatile with significant movements in swap spreads, treasury yields, and mortgage performance.

Tariff Impact - Tariffs are expected to have an impact on inflation and growth, creating uncertainty.

Mortgage Deal Impact - The merger of Rocket Mortgage and Nationstar has the potential to affect mortgage prepay speeds and the convexity of the mortgage universe.

Insurance Costs - Rising property insurance costs, especially in areas affected by natural disasters, are impacting housing affordability.

Q: Jason Weaver from Jones Trading asked about the duration gap at the end of the quarter and post-quarter-end hedging changes.

A: Robert Cauley and Hunter Haas responded that they don't focus on duration gap in numbers but on DV01 basis, noting it's very narrow and hedging changes post-quarter-end.

Q: Jason Stewart from Janney Montgomery inquired about gross ROE and dividend/buyback considerations.

A: Robert Cauley and Jerry Sintes discussed that gross ROE is very high versus swaps, and the dividend is related to taxable earnings with considerations of hedge accounting and the need to consider raising capital for liquidity.

Q: Mikhail Goberman from Citizens asked about the Rocket Mortgage and Nationstar deal impact on prepay speeds and MBS supply.

A: Robert Cauley and Hunter Haas commented on the potential for Rocket to speed up prepays and discussed MBS supply expectations considering affordability, rates, and economic factors.

Q: Eric Hagen from BTIG asked about swaptions and hedging volatility.

A: Robert Cauley and Jerry Sintes discussed the high cost of hedging volatility, the difficulty of putting on such trades currently, and their approach to delta hedging and managing leverage.

Q: Christopher Nolan from Ladenburg Thalmann and Company questioned banks not buying MBS and home insurance pools.

A: Robert Cauley and Jerry Sintes responded on banks' limited participation in MBS and challenges in forming new home insurance pools due to high costs and regulatory factors