Orchid Island Capital (NYSE:ORC) reported fourth-quarter 2025 results that management said benefited from a benign rate environment, tightening mortgage spreads, and improved funding costs, while the company continued repositioning its portfolio toward higher-coupon specified pools with call protection.
Fourth-quarter results and book value
Controller Jerry Sintes said the company generated net income of $103.4 million, or $0.62 per share, in the fourth quarter, compared with $0.53 per share in the third quarter. Book value ended the quarter at $7.54 per share, up from $7.33 at the end of the third quarter, and stockholder equity was approximately $1.4 billion.
Asked about current book value, management said it does not provide intra-quarter book value updates. However, the team said it had accrued and reflected the dividend in its current book value and that, after dividend accrual, book value was up about 1.6%.
Portfolio growth, leverage, liquidity, and prepays
Sintes highlighted that average mortgage-backed securities (MBS) holdings increased to $9.5 billion in the fourth quarter from $7.7 billion in the third quarter. End-of-year MBS balance was $10.6 billion, which he described as roughly 27% growth during the quarter.
Leverage was reported at 7.4%, unchanged from the third quarter. Liquidity ended the quarter at 57.7%, compared with 57.1% at the end of the prior quarter, and Sintes said liquidity remained above the company’s historical level of around 50% primarily because repo haircuts were lower, around 4% at year-end.
Prepayment speeds rose to 15.7% in the fourth quarter from 10.1% in the third quarter, a move management revisited later in the call in the context of higher-coupon market pricing and policy headlines.
Market backdrop: tight rate ranges, tightening MBS spreads, and falling volatility
Chairman and CEO Robert Cauley said interest rates traded in a “very tight range” during the quarter, contributing to low realized rate volatility and a continued decline in implied volatility in the swaption market. He attributed the muted rate environment in part to disruptions and uncertainty in economic data following a government shutdown on Oct. 1 and delayed releases afterward, leaving fewer catalysts for rates beyond geopolitical and political events.
Cauley also focused on agency MBS valuation, pointing to a chart showing the spread of current coupon mortgages to the 10-year Treasury tightening to around 80 basis points by late January. He compared the level to a pre-pandemic range centered around roughly 75 basis points.
Management discussed performance differences across coupons following a January policy announcement. Cauley said that around Jan. 8, the administration announced that the GSEs would be buying up to $200 billion of mortgages, which he said contributed to stronger performance in lower-coupon TBAs and weaker performance in higher coupons amid expectations the policy goal was to lower mortgage rates and increase housing affordability, potentially accelerating prepayments. He also described particularly strong TBA roll dynamics in coupons such as 3.5s and 4s during the period, while cautioning that if lower rates lead to increased production, supply could ultimately overwhelm demand and reduce that relative performance.
On funding and hedging-related market developments, Cauley said swap spreads moved higher (less negative) after the Federal Reserve’s October guidance on ending quantitative tightening and a December reserve management program that included up to $40 billion in bill purchases. He noted potential implications for repo funding availability as bills are removed from the market. He also said volatility had fallen back toward levels last seen during the era of quantitative easing and “rate suppression,” which can support mortgages by reducing option values embedded in MBS pricing.
Portfolio repositioning, purchases and sales, and funding-cost improvement
CFO and CIO Hunter Haas said the company purchased $3.2 billion of agency specified pools during the quarter, consisting of:
- $892 million in Fannie 5s
- $1.5 billion in Fannie 5.5s
- $600 million in Fannie 6s
- $283 million in Fannie 6.5s
Haas said the pools had call protection characteristics such as lower loan balances, borrowers in refinance-challenged states, and loans associated with weaker borrower credit attributes (including high LTVs, high DTIs, or low credit scores) that could make refinancing more difficult. He said acquisitions were modeled to yield in the low 5% range, while the company sold assets yielding in the mid-4% range, describing the repositioning as improving carry while reducing exposure to higher rates and spread widening.
Haas also said that across 2025 the company substantially expanded, doubling both equity and the MBS portfolio during what he described as historically wide MBS spreads that created opportunities to build long-term return potential. He said more than 75% of the company’s $7.4 billion in acquisitions over the past year-plus occurred when a referenced Morgan Stanley index was above 100 basis points, and the weighted-average index level at the time of purchases was 108 basis points.
On funding, Haas said repo costs improved meaningfully during the quarter due to Federal Reserve policy actions, including two rate cuts. He said Orchid’s average repo rate declined from 4.33% at the beginning of the quarter to 3.98% by quarter end. He also described a temporary year-end increase in SOFR and widening of repo spreads to SOFR, followed by improvement after year-end, with SOFR settling around 3.63%-3.65% and repo spreads trending to roughly 14 basis points. Haas said the company expected repo funding to turn over around the 3.8% range in coming months and did not expect additional Fed cuts before the next governor is sworn in.
Hedging, duration positioning, and management’s outlook
Haas said hedge notional remained relatively stable, with hedges at 69% of outstanding repo at quarter end (slightly below 70% at the end of the third quarter). He said the unhedged portion could benefit from a material decline in short-term rates and tighter repo spreads as policy eases. As mortgage spreads tightened and TBA rolls weakened, Haas said the company increased TBA shorts primarily in 5s through 6.5s and added pay-fixed swaps on the front end of the curve.
He reported portfolio duration of 2.08, which he attributed to the higher-coupon tilt and described as a key risk-management feature that could be more defensive in a sell-off or spread-widening event. He noted, however, that such positioning may benefit less from further tightening, which he said was consistent with modestly lagging performance versus some peers following the January GSE purchase headlines.
In Q&A, management said the portfolio targets par to slight premiums and avoids paying for the “highest forms” of prepayment protection. They cited a weighted average current price of about 102.5 at year-end and contrasted it with a little over 101 at the end of September. They also discussed a perceived disconnect between very high prepayment speeds implied in the dollar roll market for certain coupons and management’s view that the economy remains strong and the market may be overpricing the pace of future rate cuts.
In closing remarks, Cauley said the company believes mortgages could continue to tighten given relative value versus other fixed-income sectors, citing very tight corporate and high-yield spreads and the prospect of increased GSE activity. He also emphasized that as the company scaled during 2025, expenses increased far less than assets and equity, and he pointed to a reported expense ratio run rate of 1.7% at year-end 2025. He also highlighted dividend tax characterization on an appendix slide, stating that about 95% of 2024 and 2025 dividends were derived from taxable income and that the company was distributing essentially all taxable income with a small overdistribution.
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.
