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OI

Orchid Island Capital, Inc. (ORC)·Q4 2024 Earnings Summary

Executive Summary

  • Q4 2024 GAAP EPS was $0.07 on net income of $5.6M; book value per share declined $0.31 to $8.09, and total return was 0.60% (dividends $0.36 offset book value decline) .
  • Net interest spread inflected positive to 0.40% (from -0.19% in Q3) as average cost of funds fell to 4.98%; economic interest rate spread improved to 2.57% .
  • Liquidity strengthened to $353.6M (53% of equity), adjusted leverage moderated to 7.5x, and the company maintained the monthly dividend at $0.12 (declared again for January 2025) .
  • Management shifted hedges from TBA shorts to short Treasury futures and reiterated a barbell portfolio with an “up-in-coupon” bias; outlook calls for modest further Fed cuts and potential upward pressure on longer-term rates .

What Went Well and What Went Wrong

What Went Well

  • Positive total return and spread improvement: “Orchid generated a positive return of 0.6%… our book value decline of $0.31 was offset by dividends… net interest spread increased to 0.40% in Q4” .
  • Funding costs trended down: average cost of funds fell to 4.98% in Q4; management noted new repo levels trending ~4.45–4.46% more recently .
  • Strong liquidity and diversified funding: liquidity at $353.6M; borrowing capacity across 25 lenders; adjusted leverage at 7.5x .

What Went Wrong

  • Book value decline and lower GAAP gains: book value per share fell $0.31 QoQ; net realized/unrealized gains were $1.8M vs $21.2M in Q3 .
  • Agency RMBS sector headwinds: “Agency RMBS… one of the worst performing sectors” in Q4 as the curve re-steepened; convexity challenges in higher coupons remain a focus .
  • YoY earnings compression: Q4 2024 net income $5.5M ($0.07 EPS) vs $27.1M ($0.52 EPS) in Q4 2023 as RMBS gains were far lower YoY .

Financial Results

Quarterly progression (QoQ)

MetricQ2 2024Q3 2024Q4 2024
Interest income ($USD Millions)$39.911 $50.107 $49.539
Net income ($USD Millions)$(4.979) $17.320 $5.545
Diluted EPS ($)$(0.09) $0.24 $0.07
Book value per share ($)$8.58 $8.40 $8.09
Dividends per share ($)$0.36 $0.36 $0.36
Avg yield on RMBS (%)5.05% 5.43% 5.38%
Avg cost of funds (%)5.34% 5.62% 4.98%
Avg interest rate spread (%)-0.29% -0.19% 0.40%
Avg economic interest rate spread (%)2.64% 2.47% 2.57%
Adjusted leverage (x)7.8 8.0 7.5
Economic leverage (x)7.1 7.6 7.3
Liquidity ($USD Millions)$265.3 $326.7 $353.6
CPR – Total Portfolio (%)7.6 8.8 10.5

Year-over-year comparison (Q4 2023 vs Q4 2024)

MetricQ4 2023Q4 2024
Interest income ($USD Millions)$71.996 $49.539
Net income ($USD Millions)$27.127 $5.545
Diluted EPS ($)$0.52 $0.07
Book value per share ($)$9.10 $8.09
Avg yield on RMBS (%)4.71% 5.38%
Avg cost of funds (%)5.15% 4.98%
Avg interest rate spread (%)-0.44% 0.40%
Dividends per share ($)$0.36 $0.36
CPR – Total Portfolio (%)5.5 10.5

Portfolio composition (Q4 2024)

AgencyFair Value ($USD Millions)% of Portfolio
Fannie Mae$3,693.032 70.3%
Freddie Mac$1,560.278 29.7%
Total$5,253.310 100.0%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Dividend per common share (monthly)Q4 2024 / Jan 2025$0.12 per month maintained $0.12 declared for Jan 2025; next dividend Feb 12, 2025 Maintained
Leverage stanceQ4 20248.0x (Q3 end) 7.5x (Q4 end); “near the lower end of our typical range” Lowered
Funding costQ4 20245.24% (Q3 end repo W.A.) Avg cost of funds 4.98%; new repos ~4.45–4.46% Lowered
Hedging postureQ4 2024Mix of SOFR futures, swaps, TBA shorts Shifted TBA hedges to short Treasury futures; swaps ~$3.52B notional Repositioned
ROE outlook (marginal capital)Q4 2024High-teens (Q2 remarks) “Around 16%” marginal ROE; portfolio ROE mid-teens at ~7–7.5x leverage Maintained/clarified

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 2024 and Q3 2024)Current Period (Q4 2024)Trend
Yield curve shapeExpect steepening; hedges moved out the curve Cash curve dis-inverted; longer rates rose; bear steepener risk remains Steepening persists
Funding costsRemarkably stable; beginning to decline; SOFR spreads elevated at quarter-ends Avg cost of funds down to 4.98%; new repo ~4.45–4.46% Improving
Dollar roll/TBA hedgingTBA shorts in 3.0s; rolls negative/volatile Dollar rolls elevated/positive; moved hedges to short Treasury futures Shift to futures
Prepayment speeds / convexityCPR 7.6%; managing pay-up spread duration CPR 10.5%; convexity risk monitored in higher coupons Rising CPR
Dividend stanceMaintained $0.12; exploring under-/over-distribution dynamics Maintained $0.12; 96% of 2024 dividend paid out of taxable income Stable
Bank demand for MBSPotential buyer on Fed easing; limited activity Banks still not major buyers; basis remains wide vs swaps Uncertain/limited
Regulatory (GSE reform)Not highlightedLow probability; reforms would strain banks/Basel III compliance Low-risk baseline
ATM issuance~$100.7M raised Q2; continued Q3 ~$36M sold Q4; minimal book value impact (<$0.01) Slowing
Liquidity~$265M (48% of equity) $353.6M (53% of equity) Improving

Management Commentary

  • “Orchid generated a positive return of 0.6% for the fourth quarter… book value decline of $0.31 was offset by $0.36 of dividends” .
  • “We have retained a bar-bell strategy… up-in-coupon bias and leverage near the lower end of our typical range… moved our TBA hedge positions to short Treasury future positions” .
  • “With the economy remaining quite strong, inflation sticky… upward pressure on longer-term rates may persist and additional interest rate cuts by the Fed will be modest” .
  • “Funding levels lower, our cash interest expense has come down… we now have positive net interest spread” .

Q&A Highlights

  • ROE and dividend sustainability: Management targets mid-teens ROE on marginal capital (~16%) at ~7–7.5x leverage; aims to maintain $0.12 monthly dividend funded largely by taxable income (96% in 2024) .
  • ATM issuance and book value: ~$36M stock sold in Q4 with < $0.01 book value impact; issuance generally near book to minimize dilution .
  • Hedge repositioning: Unwound legacy front-end hedges; pushed hedges out to 5–10 years; flat duration gap; leaning against bear steepener risk .
  • Macro risk discussion: If hawkish turn spurs higher vol, near-term negative for mortgages; longer-term steep and stable curve would be attractive; banks not yet meaningful buyers .
  • Regulatory outlook: Low probability of GSE privatization/reform given affordability and bank capital constraints; potential chaos if agency risk-weights changed .

Estimates Context

Consensus estimates from S&P Global for Q4 2024 were unavailable due to API limits at the time of retrieval. As a result, comparison to Wall Street consensus is not provided here. We will update when SPGI data becomes accessible.

Consensus Metric (S&P Global)Q4 2024
Primary EPS Consensus MeanN/A – SPGI consensus unavailable
Revenue Consensus MeanN/A – SPGI consensus unavailable

Key Takeaways for Investors

  • Spread inflection: Average interest rate spread turned positive to 0.40% while the economic spread improved to 2.57%; coupled with falling funding costs, this supports forward earnings power even with modest leverage (potential near-term tailwind) .
  • Book value versus yield: Dividend yield remains high relative to peers, but Q4 book value fell; portfolio ROE and improved carry suggest sustainability at current dividend absent a sharp rally in rates (monitor convexity risk) .
  • Liquidity and funding diversification: $353.6M liquidity and 25 funding counterparties provide flexibility through volatility and support opportunistic asset rotation (risk mitigation) .
  • Hedge posture adjustment: Shift from TBA shorts to short Treasury futures and longer-tenor swaps better aligns with bear-steepener risk; maintains a very flat duration gap (defensive positioning) .
  • Barbell with up-in-coupon bias: Continued migration to higher coupons with specified pools to manage prepayments; CPR rose to 10.5%, requiring ongoing convexity management (carry supportive if rates remain elevated) .
  • Watch catalysts: Additional modest Fed cuts (lower funding costs), potential bank participation (basis tightening), and volatility regime shifts (mortgage performance) are key drivers of book value and income trajectory .
  • Trading implication: In the near term, dividend support plus improving carry could underpin the stock; medium-term thesis hinges on curve shape, vol, and mortgage basis tightening potential, with hedge and liquidity positioning offering downside resilience .

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