Orchid Island Capital(US:ORC)2022-08-05 17:42Financial Data and Key Metrics Changes - The company reported a net loss per share of $0.34, which included net earnings per share of $0.12 when excluding realized and unrealized gains and losses on RMBS assets and derivative instruments [7] - Book value per share decreased to $2.87 as of June 30, 2022, down from $3.34 at March 31, 2022 [8] - The total economic loss for the quarter was $33.05 million, representing a 10% loss [8] Business Line Data and Key Metrics Changes - The company maintained a high concentration in 30-Year fixed rates, particularly in the 3s and 3.5s, which are expected to perform well in a market rally [23][56] - The portfolio has seen a shift with an increase in allocation to 4s, now at 6.9%, while the small position in 2.5s has been eliminated [51] Market Data and Key Metrics Changes - The Treasury nominal curve and swaps curve have shown significant movement, particularly at the front end, indicating aggressive rate hikes by the Fed due to high inflation [9][11] - The spread of current coupon mortgages to the 10-year Treasury is around 120 basis points, which is attractive compared to the long-term range of 60 to 80 basis points [21] Company Strategy and Development Direction - The company plans to adjust its dividend to align with book value and leverage ratio, indicating a focus on financial stability amid market volatility [48][59] - The company is considering a reverse stock split due to the stock trading down to the low $3 range, reflecting a strategic move to enhance stock value perception [60] Management's Comments on Operating Environment and Future Outlook - Management expressed concerns about the economy slowing down despite strong job data, indicating a cautious outlook for future Fed rate hikes [63][64] - The mortgage market is expected to perform well, with management confident in the positioning of the portfolio for the remainder of 2022 and into 2023 [22][56] Other Important Information - The leverage ratio was reported at 7.8 as of the end of the quarter, with plans to reduce it to the low 7s to mitigate book value volatility [45][75] - The company has not reinvested paydowns recently, leading to a smaller portfolio size, but aims to stabilize expenses and improve the expense ratio [73][74] Q&A Session Summary Question: Where does the company see terminal Fed funds ending up in this environment? - Management anticipates terminal Fed funds to be in the mid-3s or slightly higher, but acknowledges the difficulty in predicting beyond this year due to economic slowing [63][64] Question: What is the view on the mortgage origination industry's capacity and its impact on prepayments? - Management believes the industry is struggling to maintain capacity, with evidence of declining refinancing activity and rising inventory levels in the housing market [67] Question: What is the current book value recovery thus far in Q3? - Book value recovery was reported in the high single digits until recent underperformance brought it closer to 6% or 6.5% [70] Question: Are there any one-time items contributing to the increase in expenses? - Management noted that expenses are on the high end of the desired range, with some one-off costs related to repo operations and back office adjustments [71] Question: What leverage range is the company targeting? - The company is targeting a leverage ratio in the low 7s to reduce volatility and align with market conditions [75]