Executive Summary

Q2 2025 produced a GAAP net loss of $33.6M ($-0.29 EPS), with book value per share down to $7.21 and total return of -4.66%; negative excess returns stemmed from Agency RMBS underperformance relative to duration hedges and swap-spread tightening driving derivative losses .
Liquidity and funding remained robust (liquidity ~$492.5M, 24 active repo lenders), leverage reduced to 7.3x; interest income and net interest carry improved sequentially, but mark-to-market derivative losses of ~$53.3M overwhelmed carry .
Management highlighted an “extremely attractive” forward environment for production-coupon Agency RMBS (≈200 bps over swaps) and a strategic shift up-in-coupon with a hedge mix biased toward swaps; dividend policy held steady at $0.12 monthly (Q2 total $0.36) .
Versus S&P Global consensus, Primary EPS consensus for Q2 was $0.14* while GAAP EPS was -$0.29; “Revenue” consensus $22.1M* maps to S&P’s framework (not the company’s GAAP “revenue”), while actual “net portfolio income” was -$28.6M, implying a significant miss under S&P’s construct* . Values retrieved from S&P Global.

What Went Well and What Went Wrong

What Went Well

Liquidity and funding resilience: Liquidity of ~$492.5M (≈54% of equity) and borrowing capacity across 24 lenders; funding spreads stable outside period ends .
Core carry improved: Average yield on RMBS 5.38% with average economic cost of funds 2.95%; net interest income rose to $23.2M; economic interest spread stayed healthy at 2.43% .
Strategic repositioning: Continued up-in-coupon rotation (5.5s/6s/6.5s increased) to capture attractive carry in a steep curve; management: “the investment environment for agency RMBS remains extremely attractive” .

What Went Wrong

Derivative losses and excess return: Mark-to-market hedge losses totaled ~$53.3M, largely from swaps amid sharp swap-spread tightening; combined portfolio ROIC was about -4.0% for Q2 .
Book value decline and negative total return: BVPS fell $0.73 to $7.21; total return -4.66% driven by dividend $0.36 and BV decline $0.73 .
Agency RMBS lagged risk assets: Management noted Agency RMBS did not fully recover versus comparable duration hedges after April’s tariff shock; forced early-quarter balance sheet reduction led to modest permanent losses .

Financial Results

Metric	Q4 2024	Q1 2025	Q2 2025	YoY (Q2 2024)
Net Interest Income ($USD Thousands)	$8,143	$19,713	$23,154	$(697)
Net (Loss) Income ($USD Thousands)	$5,545	$17,122	$(33,578)	$(4,979)
GAAP Diluted EPS ($USD)	$0.07	$0.18	$(0.29)	$(0.09)
Dividends Declared per Share ($USD)	$0.36	$0.36	$0.36	$0.36
Book Value per Share ($USD)	$8.09	$7.94	$7.21	—

Key Performance Metrics	Q4 2024	Q1 2025	Q2 2025
Average Yield on RMBS (%)	5.38%	5.41%	5.38%
Average Cost of Funds (%)	4.98%	4.29%	4.23%
Average Economic Cost of Funds (%)	2.81%	2.83%	2.95%
Average Interest Rate Spread (%)	0.40%	1.12%	1.15%
Average Economic Interest Rate Spread (%)	2.57%	2.58%	2.43%
Adjusted Leverage (Period-End)	7.5x	7.5x	7.3x
CPR (Total Portfolio, %)	10.5%	7.8%	10.1%

Portfolio Mix (Investable Capital Allocation)	Q1 2025	Q2 2025
PT RMBS (%)	97.9%	98.1%
Structured RMBS (%)	2.1%	1.9%

S&P Global Consensus vs Actual (Q2 2025)	Consensus	Actual (S&P)	Company GAAP
Primary EPS Consensus Mean ($USD)	$0.14*	$0.1586*	$(0.29)
Revenue Consensus Mean ($USD)	$22.103M*	$(28.582)M*	“Net portfolio (loss) income” $(28.582)M

Values retrieved from S&P Global.*

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Monthly Dividend	July–September 2025 cadence	$0.12/month implied for Q2 (total $0.36)	July dividend $0.12 (announced Jul 9); Q2 total $0.36	Maintained
Leverage Posture	Ongoing	“Near lower end of range”	“Maintaining leverage levels on the lower end of our historical range”	Maintained
Hedge Mix Bias	Ongoing	TBA hedges moved to Treasury futures (late 2024)	Hedge DV01 ≈78% swaps / 22% futures; may tilt further to swaps	Increased swap bias (strategic)

No formal revenue/OpEx/tax guidance provided; management commentary addressed strategic capital allocation, leverage posture, and dividend cadence .

Earnings Call Themes & Trends

Topic	Previous Mentions (Q4 2024, Q1 2025)	Current Period (Q2 2025)	Trend
Tariffs & Macro/Fiscal	Q4 2024: Curve re-steepening; deficits likely to keep long rates elevated . Q1 2025: Tariff shock introduced late Q1; early April deleveraging .	April “Liberation Day” tariff shock and subsequent pause; “One Big Beautiful Bill” passage; resilient data pushed out Fed cut expectations .	Elevated macro volatility; fewer near-term cuts; term premium rising .
Swap Spreads & Hedging	Q4 2024: TBA hedges shifted to Treasury futures .	Swap spreads extremely negative; hedge DV01 ≈78% swaps, 21% futures; mark-to-market hedge loss $0.47/share .	Greater reliance on swaps; careful risk management.
Portfolio Coupon Strategy	Q4 2024: Up-in-coupon bias within barbell . Q1 2025: Continued increase in higher coupons .	Deliberate shift away from barbell to production coupons (5.5–6.5%) to improve carry/resiliency .	More concentrated production coupon focus.
Funding Environment	Q4 2024: Stable repo with broad counterparty base . Q1 2025: 24 lenders, blended ~4.46% .	Ample funding; blended repo ~4.48%, 24 lenders, avg maturity 35 days; counterparties “asking for more bonds” .	Stable; ample capacity.
Prepayments & Housing	Q4 2024: CPR ~10.5%; affordability pressure . Q1 2025: CPR ~7.8% .	CPR ~10.1%; muted outlook; inventory rising, affordability low; refi index at lows .	Muted speeds; carry supportive.
Regulatory/Legal (GSE privatization)	Not emphasized.	Management views privatization as unlikely near term; implicit guarantee would be maintained per administration statements .	Low risk near-term.

Management Commentary

“The second quarter of 2025 was a very turbulent period… reciprocal tariffs… pause… Agency RMBS sector did not fully recover… negative excess returns… returns available in the market remain very attractive.” — Robert E. Cauley, CEO .
“Swap spreads are becoming extremely negative… using swaps is becoming a very attractive option… the outlook for mortgage investing could be quite attractive.” — Robert E. Cauley .
“Production coupon spreads are apparently ~200 bps over swaps… historically wide… compelling total return potential… our hedge structure… designed to mitigate upward rate shocks and a steepening curve.” — Hunter Haas, CIO/CFO .
“Funding has been stable… ample for our asset class… counterparties asking for more bonds, not less.” — Robert E. Cauley .

Q&A Highlights

Capital raise and ROE: Management sees potential ROE ~16–18% at 8x leverage with current coupon mix; willing to raise capital at slight dilution when spreads are highly attractive .
Premium risk in high coupons: Focus on lower pay-up specified pools with “stories” to mitigate premium risk; maintain diversification with discount coupons for rally scenarios .
Prepayment outlook: Expect muted speeds post seasonal Q2 uptick; portfolio seasoning and new upper-coupon specified pools should hold WA speeds down .
Book value update: Un-audited quarter-to-date change down about $0.03, inclusive of dividend accrual .
Dividend/tax mechanics: Dividend policy currently driven by REIT taxable distribution requirements; convergence with go-forward economics likely “maybe a year or two”; taxable income projections in first seven months tracking on top of dividend distribution .

Estimates Context

EPS: S&P Global Primary EPS consensus for Q2 2025 was $0.14*, while company GAAP EPS was -$0.29; S&P’s “actual” Primary EPS shows $0.1586*, reflecting definitional differences for REITs (normalized/tax-based measures vs GAAP). Investors should anchor economic assessment on GAAP EPS and BV changes and use S&P normalized series cautiously*. Values retrieved from S&P Global.
“Revenue”: S&P “Revenue” consensus was $22.1M*, with “actual” $(28.6)M*, which aligns to Orchid’s “net portfolio (loss) income” rather than GAAP sales revenue; under this construct, Q2 represented a significant miss*. Values retrieved from S&P Global.

Where estimates may need to adjust: If management’s view of sustained steep curves/negative swap spreads persists, forward normalized EPS/ROE assumptions could be supported by carry, but volatility in swap spreads and Agency RMBS basis may keep realized results choppy; dividend trajectory remains tied to taxable income mechanics and hedge accounting effects .

Key Takeaways for Investors

BVPS fell to $7.21 on derivative losses and Agency RMBS basis weakness, despite stronger net interest carry; near-term performance remains sensitive to swap-spread dynamics and term premium shifts .
Funding/liquidity remain a core strength (24 lenders, ~$492.5M liquidity), enabling opportunistic positioning in higher-coupon specified pools during dislocations .
Hedge mix is increasingly swap-centric to exploit negative swap spreads; this can elevate mark-to-market volatility but aims to enhance economic carry .
Portfolio strategy has pivoted from barbell to production coupons (5.5–6.5%), targeting robust carry with muted prepayments given low refi activity and affordability constraints .
Dividend maintained at $0.12/month; policy presently driven by REIT taxable income mechanics, with management expecting convergence over the next 1–2 years as closed-hedge equity amortizes .
Tactical capital raising at slight book dilution is possible when spreads are exceptionally attractive; management’s ROE framework (mid- to high-teens at modestly higher leverage) underscores return potential if Agency RMBS basis improves .
Trading implications: Near term, stock narrative hinges on (i) swap-spread path and Agency RMBS basis, (ii) curve steepness and prepay behavior supporting carry, and (iii) stability of funding spreads; monitoring BV trajectory and hedge P&L sensitivity is critical into Q3 .

Orchid Island Capital, Inc. (ORC)·Q2 2025 Earnings Summary