Orchid Island Capital, Inc. Q3 FY2025 earnings call

• Jerry Sintes went over summary financial results, noting net income, book value, total return, portfolio balance, leverage, prepayment speeds, and liquidity.
• Robert Cauley discussed market developments, including cash treasury and SOFR swap curves, labor market impact on Fed rate expectations, and mortgage market attractiveness. He also mentioned the steepening curve and low interest rate volatility beneficial for mortgage investors.
• Hunter went through portfolio characteristics, hedge position, and trading activity, noting the portfolio's weighted average coupon increase, improved effective yield and net interest spread, hedging details with interest rate swaps and short futures, and positive prepayment outcomes across the portfolio with call-protected specified collateral performing better than TBA deliverables.

For Q3 2025, Orchid Island Capital reported net income of $0.53 per share compared to a 29% loss in Q2. Book value at 9/30 was $7.33 vs. $7.21 at 6/30. Total return was 6.7% vs. negative 4.7% in Q2. Average portfolio balance in Q3 was $7.7 billion vs. $6.9 billion in Q2. Leverage ratio at 9/30 was 7.4% vs. 7.3% at 6/30. Prepayment speeds were 10.1% for both Q3 and Q2. Liquidity was 57.1% parity, up from 54% at June 30.

• Anticipates Fed rate cuts and potential end of QT, which could provide tailwinds to repo funding costs and net interest margin.
• Believes the portfolio's construction with high coupon bias, hedges further out the curve, and call-protected securities positions it to do well in either a low rate or strengthening economy scenario.
• Expect to potentially adjust hedges to lock in lower funding and gain uprate protection if Fed eases.

• Funding market friction, including spikes in overnight SOFR and tri-party GC rates relative to Fed reserve balances, attributable to declining reserve balances and heavy bill issuance.
• Potential market volatility and economic uncertainties affecting portfolio performance, such as geopolitical events or unexpected labor market changes.

Q: Given relatively consistent leverage and greater liquidity, anything particular on the horizon macro-wise to change overall risk positioning, maybe leaning more into leverage?

A: If Fed continues to cut rates and stays in a low rate environment, could take leverage up; if economy rebounds and sees strengthening, would not take leverage up and look to protect on asset side.

Q: View on pay-ups upside potential of high coupon spec pool purchased, especially with more refi momentum?

A: Pay-ups ratcheted higher early in the quarter, benefited from raising capital and deploying before early September spike; almost all portfolio has call protection, and while not paying extreme pay-ups, still doing well.

Q: Scenarios where dollar roll specialness would return to the market in a more meaningful way? How about trading volume and market dynamics?

A: Don't see QE return, specialists in dollar roll market not likely to come back big; upper coupon driven by fear of prepayments and bad speeds in TBA deliverables, so likely to stay depressed.

Q: Supply and availability for longer-dated repo and its hedge for Fed not cutting as much as anticipated?

A: Spreads too wide, done some opportunistically; repo lenders quick to price in hikes, reluctant to price cuts, so been more effective to do in future space with a good chunk of portfolio hedged.

Q: Percentage of portfolio covered with call protection and effect if rates go down 50 basis points sharply?

A: Almost 100% of portfolio has some form of call protection; even with 50 basis point drop, premium amortization modest compared to immediate aftermath of COVID.

Q: Benefit to portfolio if swap spreads widen back out?

A: Around $2 million DV01, and would benefit if swap spreads continue to widen, though market is priced in Fed reinvesting paydowns in treasuries.

Q: Any update on current book value month to date?

A: Up very modestly from quarter end, not audited daily but has increased slightly.