Orchid Island Capital, Inc. Q2 FY2025 earnings call

• Financial Highlights: Reported a loss per share, book value decrease, negative total return, but consistent dividends.
• Portfolio Highlights: Average MBS increased, leverage ratio down, prepayment speeds up, liquidity up.
• Market Developments: Discussed events like tariffs in April and the One Big Beautiful Bill. Swap spreads became negative, attractive for levered MBS investors. Analyzed mortgage metrics, curves, and swap spreads widening. Mentioned low refinancing activity and bank holdings of mortgages.
• Portfolio Repositioning: Shifted towards higher coupons, weighted average coupon increased, rotated out of lower pay-up Fannie 4s/5s, increased 5.5s/6s/6.5s.
• Funding and Hedges: Repo funding stable, blended rate 4.48%, leverage at 7.3, hedge ratio 73%, biased towards interest rate swaps.

During the quarter, Orchid Island Capital reported a loss of $0.29 per share compared to income of $0.18 per share in Q1. Excluding realized and unrealized losses, net income was $0.16 per share, same as Q1. Book value decreased from $7.94 per share at 3/31 to $7.21 at 6/30. Total return was negative 4.66% compared to 2.6% in Q1, with $0.36 of dividends in both quarters. Portfolio highlights included average MBS of $6.9 billion (up from ~$6 billion in Q1), leverage ratio at 6/30 of 7.3 (down from 7.8 at 3/31), prepayment speeds of 10.1% (up from 7.8% in Q1), and liquidity at 6/30 up to 54% (from 52%).

Expect the market to remain favorable for mortgages. Swap spreads could continue to erode. Volatility is low, curve is steep, and mortgages are attractive from a carry perspective. Higher coupon specified pools offer carry, and the hedge structure is designed to mitigate upward interest rate shocks.

• Uncertainty around tariffs and potential job losses affecting affordability.
• Funding spreads choppy around period ends.
• GSE privatization risk, but current administration likely to maintain implicit guarantee of mortgages.

Q: Jason Weaver asked about share repurchases, ROE, and premium risk in high coupon pools.

A: Robert Cauley discussed ROE range, and George Haas talked about premium specified pools and diversification.

Q: Mikhail Goberman inquired about prepay speeds outlook.

A: Robert Cauley and George Haas stated prepayments are expected to be muted.

Q: Jason Stewart questioned capital activity and ROE vs dividend.

A: Robert Cauley discussed impact of mark-to-market, dividend policy, and tax vs economic return.

Q: Eric Hagen asked about MBS spreads and Fed cuts.

A: Robert Cauley and Jerry Sintes talked about Fed cuts, economy resilience, and MBS spreads.