Orchid Island Capital, Inc. Q4 FY2025 earnings call

• Robert Cauley introduces the call, noting they'll use the deck and introducing Jerry Sintes (controller) and Hunter Haas (CFO and CIO).
• Jerry Sintes goes over financial highlights for Q4, including net income, book value, dividends, total return, MBS figures, leverage, liquidity, and prepayment speeds.
• Robert Cauley discusses market developments, covering the treasury curve, swap curve, mortgage spreads, swaption volatility, swap spreads, refi index, and the relationship between M2 and GDP.
• Hunter Haas details portfolio highlights: $3.2 billion purchase of agency specified pools, portfolio growth in 2025, repositioning to higher coupon assets, improvement in funding costs, hedge adjustments (including TBA shorts and interest rate swaps), risk metrics (low portfolio duration, OAS attractiveness), and prepayment speed trends and outlook.
• Robert Cauley concludes with remarks on the outlook for mortgages, the benign rate environment, the company's expense ratio trending lower towards 1%, and the dividend policy reflecting taxable income.

During the fourth quarter, Orchid Island Capital earned $103.4 million in net income, equating to 62¢ per share compared to 53¢ in Q3. Book value at the end of the quarter was $7.54 vs $7.33 in Q3. Stockholder's equity at the end of Q4 was approximately $1.4 billion. Dividends of 36¢ were paid during the quarter. Total return for Q4 was 7.8% compared to 6.7% in Q3. Average MBS was $9.5 billion in Q4 vs $7.7 billion in Q3, with an actual balance of $10.6 billion (a ~27% growth during the quarter). Leverage for Q4 was 7.4% (same as Q3). Liquidity at the end of the quarter was 57.7% vs 57.1% in Q3. Prepayment speeds for the quarter were 15.7% compared to 10.1% in Q3.

• Mortgages could continue to tighten further if GSEs remain active.
• The benign rate environment seen in the fourth quarter and generally in 2025 could continue unless a black swan event occurs.
• The expense ratio is trending towards 1% as the company continues to manage expenses while growing.

• Interest rate shocks and spread widening events that could impact portfolio performance.
• Federal Reserve policy changes that might affect funding costs and rates.
• Geopolitical or political events that can disrupt economic data and drive interest rate movements, potentially differing from forward-looking statements.

Q: Any update on current book value?

A: The book is up just ever so slightly inclusive of the accrual of the dividend, approximately 1.6%.

Q: Thoughts on prepays going forward and premiums on prepaid protected pools?

A: Securities in the portfolio are targeted at par to slight premiums, focusing on mid-tier call protection in certain regions and borrower types. Prepay speeds have trended higher, but the portfolio's call protection and lack of excessive premiums should mitigate significant impacts. Outlook on prepays involves considering Fed actions and GSE policy headlines, with expectations of moderate prepay speed moderation.

Q: How much more capacity is there for driving down expenses further?

A: Most expense increase was from management fees. Non-management fee expenses are increasing very modestly. The marginal management fee is a 100 basis points, and the expense ratio should trend towards 1% as the company grows.