Release Date: October 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Orchid Island Capital Inc (ORC, Financial) reported a net income of $0.24 per share for the third quarter of 2024, a significant improvement from a $0.09 loss in the previous quarter.
- The company declared dividends totaling 312¢, reflecting a strong commitment to returning value to shareholders.
- ORC successfully raised $110 million through its ATM program, increasing its share count by 20% and expanding its portfolio by a similar margin.
- The portfolio's weighted average coupon increased by 22 basis points, enhancing the yield from 505 to 543 basis points.
- The company has strategically positioned its portfolio with a bias towards higher coupon mortgages, which are expected to perform well in the current market environment.
Negative Points
- Book value declined modestly from $8.58 to $8.40, indicating some pressure on asset valuations.
- The leverage ratio expanded slightly, which could indicate increased risk exposure.
- Market uncertainty, particularly around the upcoming election and economic data, poses challenges for future performance.
- Mortgage spreads have widened, leading to a challenging environment for mortgage investments.
- Funding pressures are emerging, with evidence of increased spreads over quarter-end and year-end periods, potentially impacting cost efficiency.
Q & A Highlights
Q: Does the recent purchase of higher coupon mortgages reflect a view that you expect little relief in benchmark mortgage rates over the next 12 months?
A: Robert Cauley, President and CEO, explained that while they have a bias towards higher coupons, it's difficult to have a firm view on rates due to volatile data. He noted that rates could potentially go higher if the economy remains strong, but the potential for rates to go significantly lower is limited. The strategy is to maintain a balance between higher and lower coupons to manage uncertainty.
Q: Can you provide more insight into the swap position and hedge ratio, especially considering the expected volatility ahead?
A: Robert Cauley noted that while the portfolio grew by 20%, swap positions did not increase proportionately. They added to SOFR futures to lock in funding, and volatility is expected to remain high, impacting mortgage performance. The strategy involves fine-tuning hedges without significant changes to core positions.
Q: Could you update us on the book value since the end of the quarter?
A: Robert Cauley stated that the book value is down 3.7% quarter-to-date, with most of the decline occurring in the last five or six days due to spread widening in the mortgage market.
Q: How do you view the risk of bear steepening of the yield curve, and how would it affect your portfolio and hedges?
A: Robert Cauley expressed concern that bear steepening could extend higher coupon mortgages, impacting their value. The strategy includes using longer-duration swaps for hedging and potentially reducing leverage to maintain yield without stretching for higher returns.
Q: How do you approach the decision of dividend payout versus retaining capital for book value growth?
A: Robert Cauley mentioned that this is a topical discussion with the board. Historically, they have paid out earnings, but there is consideration for retaining capital, especially in a rising rate environment. The decision will depend on tax obligations and market conditions.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
