Orchid Island Capital(ORC)2025-04-25 18:42Financial Performance - Net income for Q1 2025 was $17.1 million, or $0.18 per share, compared to $19.8 million, or $0.38 per share in Q1 2024, reflecting a decrease of 13.4% in net income [133]. - Interest income increased to $81.1 million in Q1 2025 from $48.9 million in Q1 2024, representing a growth of 65.5% [133]. - Net interest income improved to $19.7 million in Q1 2025 from a net interest expense of $2.5 million in Q1 2024, a positive change of $22.2 million [133]. - Gains on RMBS and derivative contracts decreased significantly to $1.6 million in Q1 2025 from $26.0 million in Q1 2024, a decline of 93.7% [133]. - Total gains on RMBS and U.S. Treasury securities amounted to $76.3 million for the three months ended March 31, 2025, compared to a loss of $61.9 million in the same period of 2024, marking a change of $138.2 million [169]. - The company's total operating expenses increased to approximately $4.2 million for the three months ended March 31, 2025, from approximately $3.7 million in the same period of 2024, reflecting a change of $488,000 [178]. Share Issuance and Repurchase - The company issued a total of 24,675,497 shares under the March 2023 Equity Distribution Agreement, generating net proceeds of approximately $225.0 million [124]. - As of April 25, 2025, the remaining authorization under the stock repurchase program was 2,719,137 shares, representing approximately 10% of the outstanding shares [130]. - The company has entered into multiple equity distribution agreements, with the latest allowing for the sale of up to $350 million in shares [126]. - Total shares repurchased from inception of the stock repurchase program through March 31, 2025, amounted to 5,144,602 shares at an aggregate cost of approximately $77.5 million [130]. - Under the June 2024 Equity Distribution Agreement, the company issued 30,513,253 shares for net proceeds of approximately $245.8 million [212]. - As of March 31, 2025, the company had issued 14,470,882 shares under the February 2025 Equity Distribution Agreement for net proceeds of approximately $121.7 million [213]. Investment Strategy and Portfolio - The company operates to qualify as a REIT, generally avoiding U.S. federal income tax by distributing all REIT taxable income to stockholders [122]. - The company’s investment strategy focuses on Agency RMBS, with a portfolio that includes both traditional pass-through and structured Agency RMBS [120]. - The average RMBS held as of March 31, 2025, was $5,995.7 million, with an interest income of $81.1 million and a realized yield of 5.41% [162]. - As of March 31, 2025, the company's RMBS portfolio consisted of $6.7 billion of Agency RMBS at fair value, with a weighted average coupon of 5.30% [184]. - The company reported a total mortgage asset value of $6.738 billion as of March 31, 2025, with fixed-rate RMBS comprising 99.8% of the portfolio [189]. - The weighted average pass-through current price for the portfolio was $99.32 as of March 31, 2025, compared to $96.44 at December 31, 2024 [190]. Economic and Interest Rate Metrics - Economic interest expense for the three months ended March 31, 2025, was $40.5 million, compared to $23.8 million for the same period in 2024, resulting in economic net interest income of $40.6 million and $25.1 million, respectively [156]. - The economic net interest spread for the three months ended March 31, 2025, was 2.58%, compared to 2.47% for the same period in 2024 [159]. - The average cost of funds decreased to 4.29% for the three months ended March 31, 2025, down from 5.54% in the comparable period in 2024, reflecting a 125 basis points reduction [163]. - Economic interest expense rose to $40.5 million for the three months ended March 31, 2025, compared to $23.8 million in 2024, with an increase in the average economic cost of funds to 2.83% from 2.56% [164]. - Changes in interest rates can significantly impact the company's net interest income, affecting the spread between interest-earning assets and interest-bearing liabilities [245]. - As of March 31, 2025, a 200 basis point increase in interest rates could lead to a decline of 2.23% in portfolio value and 17.55% in market value [255]. Risk Management - The company employs various financial instruments, including interest rate swaps and options, to hedge against interest rate fluctuations, which are complex and may lead to volatile returns [246]. - The company maintains a hedged PT RMBS portfolio with an effective duration of less than 2.0, aiming to acquire low duration assets that provide protection from mortgage prepayments [248]. - Prepayment risk is significant, as faster-than-expected principal returns can affect net interest income and the average yield on assets [258]. - The company faces spread risk, where widening market spreads could lead to a decline in net book value if the value of Agency RMBS falls more than the gains from hedging instruments [260]. - Counterparty credit risk is present, as potential losses could arise if counterparties to repurchase agreements and derivative contracts fail to meet their obligations [264]. - The company uses hedging instruments to manage funding costs, but if prepayment rates decrease in a rising interest rate environment, it could negatively impact operations [263]. Liquidity and Capital Resources - Management believes that the company currently has sufficient short-term and long-term liquidity and capital resources for investment acquisitions and debt repayments [199]. - As of March 31, 2025, the company had cash and cash equivalents of $396.4 million and generated cash flows of $200.9 million from principal and interest payments on its RMBS portfolio [208]. - The average outstanding repurchase agreements during the three months ended March 31, 2025, amounted to $5.7 billion [208]. - The weighted average haircut on pledged collateral was approximately 4.3% as of March 31, 2025 [203]. - The company has established borrowing facilities in the repurchase agreement market with 24 counterparties, providing sufficient liquidity for its operations [193]. - As of March 31, 2025, the company had unrestricted cash and cash equivalents of $396.4 million and unpledged securities of approximately $50.1 million available for liquidity needs [261]. Market Conditions and Future Outlook - The Agency RMBS index generated a return of 3.0% for the first quarter of 2025, outperforming the investment grade corporate index and high yield debt [222]. - Conventional 30-year mortgages within Agency RMBS generated a total return of 2.7% for the first quarter of 2025 [223]. - The spread of the 30-year fixed rate current coupon to the 10-year T-Note traded between 120 and 130 basis points during the first quarter of 2025 [221]. - Following the Trump administration's tariff announcements, the spread of the current coupon expanded to over 140 basis points [221]. - The Fed reduced its balance sheet for Agency RMBS by approximately $551 billion from the peak to $2.2 trillion, representing a 40% reduction from the pandemic quantitative easing levels [224]. - The FHFA announced a final rule effective April 1, 2024, reducing the risk weight for guarantees on commingled securities to 5% and the credit conversion factor to 50% [225].