Orchid Island Capital, Inc. Q4 FY2024 earnings call

Market Developments: The treasury curve disinverted, with the economy being strong, labor market leveling off, inflation sticky, large fiscal spending, and a new administration with a pro-growth agenda. In the mortgage market, the spread to the 10-year treasury of the current coupon was at 125 basis points (attractive historically), dollar-rolls improved, and volatility was at local lows. Portfolio Actions: Implemented a barbell strategy, buying shorter in nature assets with an up-in-coupon bias. Put on a 15-year five position, covered Fannie III shorts, reinvested in higher coupon pools, raised capital, purchased 30-year 5.5s and 225,000 max 6.5s, funding costs decreased, executed first indemnified repo, and adjusted the hedge book to address bear steepener risk.

For the fourth quarter, Orchid Island Capital had a net income of $0.07 per share, compared to $0.24 per share in the third quarter. Book value decreased from $8.40 at Q3 to $8.09 at 12/31. Total return for the quarter was 0.6% unannualized including a $0.36 dividend. Year-to-date, full year income was $0.57 per share compared to a loss of $0.89 per share in 2023. Book value went from $9.10 at the end of 2023 to $8.09 at the end of 2024. Total return for the year was 4.73% with a dividend of $1.44. MBS assets were $5.3 billion in the fourth quarter. Leverage ratio decreased slightly to 7.3x equity, prepayment speeds increased to 10.5 CPR from 8.8 CPR in Q3, and liquidity was approximately 53% of equity.

Positive view on the market and economy, with a pro-growth administration and low recession risk. Expect the Fed may not ease aggressively, but if they do, it would be positive. Anticipate long-term rates to be slightly higher under pressure, deficit spending to continue, inflation to remain sticky, and a strong economy providing good carry for bonds.

Risk of a bear steepening scenario that could hurt the portfolio. Potential reacceleration of inflation leading to hawkish Fed actions, causing a sell-off in the long end and impacting mortgages. Uncertainties regarding regulatory changes and GSE reform.

Q: Could you provide a book value update year-to-date?

A: Book value was unchanged as of last Friday, and mortgages were up about 1% this week.

Q: What are your thoughts on the Fed moving towards a holding pattern versus a more hawkish stance, and the impact of a flight to quality?

A: A hawkish outcome could cause a sell-off in the long end, which would be short-term detrimental to mortgages, but could be a good long-term investment opportunity if it settles at a higher rate environment.

Q: Is there a level of yield curve steepness where you might extend duration gap, and thoughts on MBS supply and regulatory changes?

A: Model duration gap could be up to year-and-a-half. MBS supply estimates have been lowered. GSE reform is unlikely due to affordability issues and banking regulatory constraints.

Q: Does the current book value include today's dividend, and thoughts on MBS supply and GSE reform?

A: Book value is inclusive of the dividend. MBS supply estimates have been lowered. GSE reform is not likely due to banking constraints making it impractical.