Orchid Island Capital Q1 Earnings Call Highlights

Key Points

• Orchid Island reported a Q1 net loss of $0.11 per share and book value declined to $7.08, even as portfolio size expanded to about $11 billion and leverage increased to 7.9x; total return for the quarter was -1.3%.
• The company raised roughly $136 million and deployed approximately $1.6 billion into agency specified pools, shifting toward 5%–6% production coupons and emphasizing call‑protected collateral (about 92% specified pools) to improve carry and reduce volatility.
• Funding and hedging conditions improved—repo funding tightened to ~11–13 bps over SOFR with about 65% hedge coverage of repo balances—and management models portfolio returns near 15%–17% ROE, while cautioning the war in the Middle East remains the main uncertainty.

Orchid Island Capital NYSE: ORC reported a first-quarter 2026 net loss of $0.11 per share as mortgage spreads and interest-rate volatility moved sharply during the period, while management highlighted improved funding conditions and what it described as an attractive forward setup for levered agency MBS investing.

First-quarter results and portfolio metrics

Jerry Sintes, VP and Treasurer, said the company posted a net loss of $0.11 per share for the first quarter, compared with net income of $0.62 per share in the fourth quarter of 2025. Book value declined to $7.08 per share as of March 31 from $7.54 at Dec. 31.

Total return for the quarter was negative 1.3%, versus 7.8% in the prior quarter, while the company declared dividends of $0.36 in both periods, Sintes said.

Portfolio size increased, with average balance of approximately $11 billion in Q1 versus $9.5 billion in Q4. Leverage rose to 7.9 at quarter-end from 7.4 at Dec. 31. Three-month CPR was 14.7% versus 15.7% in Q4, and liquidity was 54.5% at March 31 compared with 57.7% at year-end, Sintes added.

Market backdrop: war-driven headlines, stable rates, and mortgage spread volatility

Chairman and CEO Robert Cauley framed the quarter around “competing forces” in markets, citing war-related headlines as a major driver of interest rates and broader risk assets. He described economic data as “fairly resilient” but “mixed,” and noted much of the data had been collected before the war, limiting visibility into its impact.

Cauley also pointed to fiscal support, including the “One Big Beautiful Bill Act” passed last year and what he called a “very significant fiscal deficit,” as factors he believes helped explain economic resilience. He said Q1 earnings season results had been “very strong” and that, at least so far, the war’s impact appeared modest.

On rates, Cauley said the curve flattened as the market “pricing out most Fed cuts” that had been expected “three months ago or pre-war,” with “virtually nothing priced in” for the remainder of 2026. He described rates as “very stable,” with inflation concerns pushing expected cuts out and growth concerns helping keep longer-term rates stable.

Mortgage spreads tightened sharply early in the quarter following a January announcement from President Trump that Fannie Mae and Freddie Mac would buy up to $200 billion in mortgages this year, Cauley said, before widening after the war began and then tightening again. He also emphasized the role of volatility, noting that implied rate volatility spiked with the onset of war but “we’ve come pretty much all the way back,” calling the current combination of stable rates and lower volatility “very conducive for our business model.”

Portfolio repositioning, capital raised, and hedging changes

In prepared remarks during the portfolio section, management said mortgage spread tightening that began after volatility last April accelerated after the Jan. 8 GSE purchase announcement. Management said spreads tightened roughly 20-25 basis points versus swaps “almost instantaneously,” then widened sharply during geopolitical events in the Middle East, reaching as much as 40 basis points wider at the quarter’s peak versus the tightest levels. Management said spreads closed Q1 near the wides, then retraced roughly 20 basis points in April.

Against that backdrop, management said it remained focused on a “highly liquid 100% agency portfolio” and deploying capital through volatility. The company raised approximately $108 million during the quarter and an additional $28 million in early April. Management said it purchased about $1.6 billion of agency specified pools and TBAs with an emphasis on call-protected collateral, including loan-balance characteristics and borrower attributes. Purchases cited on the call included:

• $182 million of loan balance 4.5% pools
• $624 million of 5% pools
• $425 million of FICO and LTV 5.5% pools
• $138 million of 6% pools, “mostly in the form of geo pools and FICO”
• $250 million of 15-year 4.5% pools

Management said the portfolio continued to shift toward “production coupons” in the 5%-6% range, where it sees a balance of carry, duration, and convexity, and away from lower coupons that can create volatility during risk-off periods.

Management also said the portfolio remained heavily concentrated in specified pools with call protection. At quarter end, approximately 92% of the portfolio was backed by specified pools with at least 10 ticks of pay-up.

On hedging, management said it maintained hedge coverage of about 65% of repo balances and continued to emphasize interest rate swaps. As of March 31, duration gap was approximately 0.07 years, equating to a net long DV01 of roughly $375,000 (management also referenced $372,000 in the deck). Cauley highlighted that the company moved hedges out of TBA shorts into swaps after spreads widened, saying the trade “worked quite well.”

Funding conditions and prepayment outlook

Management said funding conditions improved during the quarter, allowing the company to more fully realize the benefit of the Dec. 10 rate cut. It attributed tightening in repo spreads to SOFR and improved SOFR-versus-fed-funds dynamics to Federal Reserve reserve management operations. Management said it was funding in the 11-13 basis point range over SOFR, a “drastic improvement” from the fourth quarter.

Prepayment speeds increased during the quarter as rates reached local lows, with management citing speeds rising from 10.9 CPR in January to 16.3 CPR in March. Looking ahead, management said it expects speeds to ease in coming months, referencing street projections for the broader universe to slow by around 15% and adding that the impact could be as much or greater for Orchid Island given its concentration in more recent production.

Management also said the portfolio remained positioned defensively against inflation re-accelerating, noting that 6% and higher coupons represented more than 40% of total mortgage assets and performed well during the most recent sell-off. Over time, however, management said incremental capital is expected to continue moving toward production coupons to reduce exposure to higher-premium assets.

Expense ratio and management’s view of returns

Cauley said the company has “more than doubled in size” over the past four to five quarters, and that scale helped lower its cost structure. He pointed to a slide showing 10 years of data, saying stockholders’ equity grew 442% since 2015 (an 18.4% annualized growth rate), while expenses rose 159% (10% annualized). He said the company’s expense ratio fell from “just under 3%” to 1.7% for calendar year 2025, which he described as low versus peers.

Management also discussed sector return expectations. It said modeled returns for the combined portfolio, inclusive of hedges and current funding levels, were in the 15%-17% return-on-equity range at quarter end. Management said returns could rise if prepayment speeds trend lower or if the outlook for additional Fed easing re-emerges.

Cauley added that the company’s current dividend yield, given a $0.10 per month dividend and current book value, was “in that exact same range,” and said unlike last year, dividend yield and market returns on marginal capital are now “very much in line.” In response to a question about dividend coverage, Cauley said the company’s $0.12 dividend in 2024 and 2025 was 95% covered by taxable income, with coverage influenced by hedge-related taxable income dynamics, and said the company reevaluates taxable earnings run rates as it enters a new calendar year.

Book value update and outlook

On the Q&A, Cauley said book value was up about 2.5% as of the day before the call, though he noted the company had “given back some” that week and that it had been higher the prior Friday.

Looking forward, Cauley said the company was “quite bullish” on the market given what he characterized as supportive conditions across key variables including rates, implied volatility, swap spreads, and funding markets, while emphasizing that the war remains the major uncertainty. He said his view was that the “big tail risk” at the outset—significant and lasting damage to production capacity in the Middle East—now appears “much lower,” which he suggested helped explain relatively more benign markets in recent weeks despite continued sensitivity to headlines.

About Orchid Island Capital NYSE: ORC

Orchid Island Capital is a real estate investment trust that specializes in investing in residential mortgage‐backed securities (RMBS), with a primary focus on mortgage pass‐through securities guaranteed by the Government National Mortgage Association (Ginnie Mae). Structured to elect and maintain status as a REIT under the U.S. Internal Revenue Code, the company's principal business strategy involves acquiring pools of U.S. residential mortgages in the secondary market and holding them to generate interest income.

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