Orchid Island Q3 2025 Earnings Call Transcript

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DATE

Friday, October 24, 2025 at 10 a.m. ET

CALL PARTICIPANTS

Chairman and Chief Executive Officer — Robert Cauley

Controller — Jerry Sintes

Chief Investment Officer — Hunter Haas

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TAKEAWAYS

Net Income -- 53¢ per share in Q3, a reversal from a loss of 29¢ per share in the previous quarter.

Book Value -- $7.33 per share at the end of Q3 2025, up from $7.21 at prior quarter-end.

Total Return -- 6.7% in Q3 compared to negative 4.7% in Q2

Dividend -- 36¢ per share dividend in Q3 2025, unchanged from the previous quarter.

Average Portfolio Balance -- $7.7 billion in Q3, up from $6.9 billion in Q2

Leverage Ratio -- 7.4 at the end of Q3 2025

Liquidity -- 57.1% at the end of Q3 2025, up from 54% at the previous quarter-end.

Prepayment Speeds -- Constant prepayment rate (CPR) of 10.1% in both Q3 and Q2.

Equity Capital Raised -- $152 million raised and fully deployed in Q3 2025.

Portfolio Composition -- 100% agency RMBS with a focus on call-protected specified pools; virtually no generic TBAs held at quarter-end.

New Pool Characteristics -- 70% backed by credit-impaired borrowers in Q3 2025, 22% from states with home price depreciation or structural refinance obstacles in Q3 2025, and 8% represented loan balance pools in Q3 2025.

Hedge Coverage -- $5.6 billion hedge notional outstanding at the end of Q3 2025, representing about 70% of repo funding liabilities.

Swap Hedging -- $3.9 billion of interest rate swaps, and average maturity of 5.4 years.

Unhedged Repo Borrowings -- 30% of repo borrowings unhedged at the end of Q3 2025, enabling more funding rate sensitivity.

Interest Rate Sensitivity -- Model estimates indicate a 50 basis point increase in rates would decrease equity by 1.7% in Q3 2025

Prepayment Outcomes -- Newly added pools with call protection provided lower prepayment rates than comparable TBAs, particularly in higher coupon segments; for example, 6.5s saw 13.9% CPR versus 42.8% on generics in the most recent month (September 2025).

Funding Costs -- Orchid typically borrows at SOFR plus 16 basis points for most of the year

SUMMARY

Orchid Island (NYSE:ORC) management reported a rapid rebound in operating metrics in Q3 2025, highlighting a shift from a loss in the prior quarter to positive net income, along with strengthening book value and returns. Deployment of freshly raised capital into high-carry, call-protected specified agency RMBS pools was a focal strategy, with a portfolio tilt towards credit-impaired and geographically constrained collateral to enhance prepayment protection. Liquidity and leverage both increased at the end of Q3 2025, supporting future operational flexibility. Hedging notional coverage was maintained near 70% of liabilities at the end of Q3 2025, with incremental increases in unhedged borrowings, amplifying sensitivity to anticipated funding rate declines. Exposure to atypically slow-paying and call-protected assets reduced prepayment risk versus benchmarks, reinforcing income stability. Management anticipates policy tailwinds from a likely end to quantitative tightening and potential Fed rate cuts, and signaled openness to further increasing leverage if rate declines materialize as expected.

Hunter Haas described recent funding market friction in Q3 2025, stating that "dynamics have led to spikes in overnight SOFR and the tri-party GC rates relative to the interest paid by the Federal Reserve on reserve balances."

Robert Cauley indicated approximately Almost 100% of the portfolio has some form of call protection.

The company was "net short TBAs at September 30, 2025." as cited by Hunter Haas.

Swap spreads have widened across the curve, which Robert Cauley said has been "beneficial to us" given current hedge positioning.

Future leverage increases may occur, with management specifying, "we do see that, as I mentioned, I think we'll probably look to lock that in. And if we do so, we probably would be taking the leverage up some." according to Robert Cauley.

INDUSTRY GLOSSARY

Agency RMBS: Mortgage-backed securities guaranteed by U.S. government-sponsored enterprises, such as Fannie Mae or Freddie Mac, creating minimal credit risk relative to non-agency MBS.

Specified Pool: RMBS pools selected for specific loan characteristics (e.g., low loan balance, geographic concentration, credit impairment) that mitigate prepayment and extension risk.

TBA (To-Be-Announced): Standardized forward contract for the purchase/sale of agency RMBS, typically representing generic, non-specified collateral pools.

CPR (Constant Prepayment Rate): Industry measure expressing the annualized percentage of a pool's principal which is expected to be prepaid before scheduled maturity.

Repo (Repurchase Agreement): Short-term funding mechanism whereby securities are sold with an agreement to repurchase them at a specified date and price, providing secured leverage for MBS portfolios.

SOFR (Secured Overnight Financing Rate): Risk-free reference rate for U.S. dollar-denominated derivatives and loans, based on overnight transactions in the U.S. Treasury repo market.

Full Conference Call Transcript

Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir.

Robert Cauley: Thanks, Melissa. Good morning. Hope everybody's doing well. I hope everybody's had a chance to download our deck. As usual, that's what we will be focusing on this morning. And, also, as usual, I'll throw it to page three just to give you an outline of what we'll do. The first thing we'll do is have our controller, Jerry Sintes, go over our summary financial results. I'll then walk through the market developments and try to discuss what happened in the quarter and how that affected us as a levered mortgage investor. Then I will turn it over to Hunter Haas.

He'll go through the portfolio characteristics and our hedge positions and trading activity, and then we'll go over our outlook going forward. And then we'll turn it over to the operator and you for questions. So with that, turn to Slide five, Jerry.

Jerry Sintes: Thank you, Bob. So on slide five, we'll go over financial highlights real quickly. For Q3, we reported net income of 53¢ a share compared to a 29¢ loss in Q2. Book value at September 30 was $7.33 compared to $7.21 on June 30. Q3 total return was 6.7% compared to negative 4.7% in Q2. And we had a 36¢ dividend for both quarters. On page six, our order average portfolio balance was $7.7 billion in Q3 compared to $6.9 billion in Q2. Our leverage ratio at September 30 was 7.4 compared to 7.3 at June 30. Prepayment speeds were at 10.1% for both Q3 and Q2.

And our liquidity was 57.1% at September 30, up from 54% at June 30. If I turn it back over to Bob.

Robert Cauley: Thanks, Jerry. I'll start on slide nine with market developments. What you see here on the top left and right are basically the cash treasury curve on the left and the silver swap curve on the right. There are three lines in each. The red line just represents the curve at June 30. The green line is as of September 30, and then the blue line is as of last Friday. And on the bottom, we just have the three-month treasury bill versus the ten-year note. So what I want to point out, basically, the curve is just slightly steeper for the quarter.

Just reflecting the fact that with the deterioration in the labor market, the market's pricing in Fed cuts and so the front end of the curve hasn't moved. If you look at basically the movements on these two lines, it's the same for both, from the red to the green line, that just reflects the deterioration of the labor market. Ironically, when the quarter started, the first event of the quarter was really on July 4 when President Trump signed a new law, One Big Beautiful Bill Act, and initially, the market sold off, ten years point slipped. Sold off by about 25 basis points.

And at the July, the Federal Open Market Committee meeting, the chairman was actually fairly hawkish. That was on July 30. But then quickly, on August 1, the non-farm payroll number came up, and weak, but also it was very meaningful. Downward revisions and that kind of started a string of events which started to paint a very clear picture of a deteriorating labor market. The QCEM, which are the revisions to prior payroll numbers through 2025, were much more negative than expected. And then in fact, ADP the last two months were negative. So that changed the picture. That changed the way the Fed looked at the world.

And then the market started to price in Fed easing, and that's what you've seen here. What you've seen between the green and the blue line, so to speak, is what's happened since the end of the quarter. Basically, the government shutdown, absent today's data, we basically have had very little data to go on. And based you see really what would be described as just a graph for yield. There are a few securities that offer a yield north of 4%. And the long end of the treasury curve has seen pretty good performance quarter to date. The bid continues.

In fact, that's even present in the investment-grade corporate market where in spite of the fact that credit spreads are very tight, you're still seeing strong demand. And it's probably just because there's a lack of alternative investments that you can buy with that kind of a yield. But I guess if I had to summarize it, from our perspective, it was actually a net, a very quiet quarter. Rates were essentially unchanged and importantly, vol was down, and I'll get to that more in a minute. And then, of course, the Fed's in place. So a steepening curve, low interest rate volatility, always good for mortgage investors. Turning to slide 10.

On the top, you see the current coupon mortgage spread in a ten-year. And then on the bottom, we have two charts that just kind of give you some indication of mortgage performance. The ten-year treasury is the typical benchmark people look at when they think of a current on mortgage or kind of appraise mortgage attractiveness. And this makes it look like the Lester's off the road to a large extent because it instance, if you look at where we were in May 2023, that spread was 200 basis points and it's halved since then. It's 100.

But I think you have to keep in mind that the ten-year treasury is a great benchmark over a very long period of time, but the current coupon mortgage does not have a duration anywhere close to the ten-year. In fact, it's about half. Most street shops use a hedge ratio for the current coupon, somewhere around in the area of a five-year or five or half of the ten-year. So a more appropriate benchmark might actually be a five-year treasury and, of course, swaps. We have some charts in the appendix. For instance, if you look on page 27, and you look at the spread of the current coupon mortgage to the seven-year swap in particular.

And I'm just gonna go there now, if you don't mind. But on Slide 27, I just want to give you a more accurate picture of what we're looking at. The blue line there just represents the spread of the seven-year swap. That's kind of the center point for our hedges. And this is a three-year look back. And I just wanna point out that if you look at this chart, you see that we're currently at the low end of the range, but we're still in the range. Whereas with respect to the ten-year, we've broken through that.

I think that just reflects the fact that the curve is modestly steep and you're basically benchmarking a five-year asset against a ten-year benchmark. So it looks like it's tightening when in fact it really, really. And the other thing I would point out, too, and we've talked about this in the past as well, if you look at Slide 28, think this is important because what this shows are the dollar amount of holdings of mortgages. The red line represents the Federal Reserve, and of course, the going through QT. So that number just continues to decline. But the blue line is the holdings by bank, and they are the largest holder of mortgages that there are.

You can see this line, while it's increasing, is very, very modest. In fact, what we hear most of their purchases are just in structured product floater and the like. And I think until they get meaningfully involved mortgages are not going to screen tighter. So there is still some attractiveness, if you will, in the mortgage market. And I suspect that's going to stay, as I said, until the banks get involved. If you look at the bottom left, you kind of see the performance. And as you saw, we did tighten. And if you look at this chart on the left, what is this one I show every time, it's normalized prices for select coupons.

So all you do is you take the price at the beginning of the period, you set it to 100. And you can see most of the move upward was in early September. And the reason I point this out, if you think of it this way, the with the banks absent, the marginal buyer mortgages are basically either money managers or REITs. And what we saw around that period were, in addition to the prolific ATM issuance by REITs, we also saw two preferred offerings by some of our peers and a secondary by another of ours. So those were kind of chunky issuances.

And I think that's what drove that kind of spike tighter you were to look at the spread of our current coupon mortgage to the five-year treasury, you see a spike down right around that day. It was over about a two-week period. But same time, it kinda plateaued. And so mortgages have still retained some attractive carry. Hunter's gonna get into that in more detail. I wanna ring on parade, but I just wanna point out that, you know, mortgages, while we had good quarter, they're still reasonably attractive. On the right, you see the dollar roll market. Generally, dollar rolls are impacted by anticipated speeds with the rally in the market. That's become a big issue.

And I will just point out one of these. If you look at that little orange line, again, this is like a one-year look back. That orange line represents the Fannie six role. And you can see towards the end, as we enter September with the rally that rules cut way off and the market's pricing in extremely high speeds. And as a result, spec poles, are the beneficiary of their call protection and perform well in O'Reilly, have done extremely well. The cache window list that would come out every month in October this month, they did very, very well. I mean, I suspect they will probably continue to do so going forward.

The next chart on Page 11, again, is very relevant for us. Is a levered mortgage investor since we're short prepayment options. And you can see on the top, this is just normalized all is a proxy for volatility in the interest rate market. The spike there, which was in early April, that was Liberation Day, And you can see since then, it's done nothing but come down. Continue to come down. In fact, if you look at the bottom chart, this is the same thing but with a much longer look back period. And you can see the spike there around March 2020. That the onset of COVID. It's always a very volatile event.

Then you meet it after that. You had extremely strong chewy on the part of the Fed bond treasuries and mortgages. So it's kind of like a rate suppression environment. Where they're buying up everything and driving rates down is a byproduct of that is that they drive volatility down. And as you can see on the right, we're getting near those levels. Now, I don't think that means rates are going to zero, but what we are seeing is interest rate fall pushed down. I think part of what's behind this is the fact that we all know that next year the Fed chairman's gonna be replaced when his term ends in May.

In all likelihood, that's gonna be by someone who's pretty dovish. So the market expects, kind of a very dovish outlook for Fed funds and rates in general. And of course, the extent that happens, and who's to say that it will, but it would also continue to be supportive for us as a levered agency MBS market because mortgages you would think would continue to do well in that environment. Turning to Slide 12, This is a relatively important slide because this really is focused on the funding markets. And this is what's really become a hot topic, if you will, So what you see on the left are just swap spreads by tenor.

And if you'll notice in the case of the purple one, which the ten year, and the green one, which is the seven year, they've all kind of turned up. In other words, they're less negative. So we would say they're widening even though it seems counter to if there's the spread to the cash treasury is actually getting narrower, but it is what it is. What happened here was that the chairman recently in a public his comments mentioned that the end of QT was in the next few months.

Most market participants were expecting that in the first, if not the 2026, so that was news And more importantly, what we've seen since, especially this month, is that sulfur has traded outside of the 25 basis point range or Fed funds, which is between 44.5% factor it's been consistently well outside that range, which address that and points to potential funding issues and the Fed will, in all likelihood, quite possibly at their meeting next week. What that means, if they end Q3 is that the runoff in their portfolio, which we saw in that chart in the appendix, is going to stop. It'll just plateau.

What they'll likely do, and I don't know this, of course, with certainty, but I suspect it's the case that treasury pay downs will be reinvested back in the treasuries And mortgage pay downs, since they don't wanna hold mortgages long term, will also be invested reinvested in the treasuries, probably more so in bills. And what that means then is going forward, given that the government is running large deficits, is that the treasurer, that the Fed will become a buyer of treasuries. As a result, the cash treasuries will not continue to cheapen as they have in swap spreads, which have gotten really negative, have gone the other way.

And that just reflects the anticipation by the market that the Fed is a buyer of treasuries. It's gonna keep issuance in check and keep issuance from flooding the market and driving spreads wider and term premium higher. That significant for us because if you look at the right hand chart, this is our hedge positions, pie chart obviously, by DVO one. In other words, the sensitivity of our hedges to movements and rates. And as you can see, 3.1% of our hedges are in swaps by DV01. So obviously, this movement has been beneficial to us. To the extent it continues of course, will continue to be beneficial.

In fact, I just looked at swap spreads before I came in on the call today. And if you look at pretty much every tenor outside of three years, every one of them on a one, three, and six month look back is that they're wides. Absolutely. Pigs are 100% of the wides. That's a significant movement That being said, we did mention, there has been some issues with the funding market with the sulfur being outside of the range and funding spreads to SOFR have been a little bit elevated. We typically used to be in the mid teens. It's there to the high teens now.

But, the fact that the Fed is very much on top of this, is good for us because it means they're gonna be attentive to it and keep us from repeating what we saw, for instance, in 2019. The next slide is 13, refinancing activity. And this kind of paints a very benign picture, frankly. Just wanna talk about it. If you look at the top left, you could the mortgage rates and the red line and the refi index and while rates have come down some, the refi index has bumped up. It's not much.

In fact, if you look at the left axis, you can see we were at a 5,000 level in December 2020, and we're far below that. The second chart on the right just shows primary and secondary spreads, and they've just been very choppy. There's really not a story to be told from that. But what I wanna focus on is the bottom chart. And what this shows is the percentage of the mortgage universe that's in the money. That's the gray shaded area. Then you have the refinance. And as you can see on the right hand side of this chart that there's some gray area there, but it's very modest.

So, again, it paints a very benign but it's misleading. And the reason it is so is because this is the entire mortgage universe. Most of the mortgages in existence today or a large percentage of them were originated in the immediate years after COVID. So they have very low coupons, 1.5, two, 2.5, three. And they're out of the money. But if you were to do the same chart for just twenty four and twenty five originated mortgages, it would be an entirely different picture It would be a much higher percentage of the mortgage universe in the money, probably be north 50.

And since we as investors in the space and like our peers, we own a fair number of twenty four and twenty five provisionary mortgages. In fact, we own to some extent, somewhat of a barbell in the sense that most of our discounts are very old. And most of our newer mortgages, the higher coupons are lower wall. And so that really means security selection is important. And in a moment here, I will turn the call over to Hunter, and he will talk about what we've done in that regard in great depth. But I just wanna point out this picture that this chart is somewhat misleading.

Before I turn it over to her, as always, I'd like to just say a bit about slide 14. It's a very simple picture. There are two lines on this chart. The blue line just represents GDP in dollars. And the red line is the money supply. And what it points out is the continuing fact that the government or fiscal policy, if you will, is still very sensitive. The government is running deficits between one and a half and $22 trillion. That's in excess of 5% of GDP. And the takeaway is that in spite of what might be happening with respect to tariffs, or the weakness in the labor market or geopolitical events.

The government is supplying a lot of stimulus to the economy and you can't forget that looking forward. That's probably why in spite of the tariffs, among other reasons, obviously, but why the economy really has not weakened materially. And with that, I will turn it over to Hunter Haas.

Hunter Haas: Thanks, Bob. I'd like to talk to you a little bit about how our portfolio of assets evolved over the course of the quarter. Our experience in the funding markets, our current risk profile, how our portfolio is impacted by uptick in prepayments and give a little bit of an my outlook, I suppose, going forward. So coming out of Volvo's second quarter, we took advantage of attractive entry point raising $152 million in equity capital and deploying it fully during the quarter. Investing environment allowed us to buy Agency MBS at historically widespread levels.

During second the second half of the quarter, equity rate has slowed, but the assets we purchased in the third quarter were at tightened sharply during that second half of the of the of the third quarter. As discussed on our last earnings call, our focus been on thirty year 5.5s, 6s and to a lesser extent 6.5 coupons. And those didn't tighten quite as much as the belly coupons. But we feel like they offer superior carrier potential going forward. The portfolio remains a 100% agency RMBS with a heavy tilt towards call protected specified pools. These pools help insulate the portfolio from adverse prepayment behavior and reinforce the stability of our income stream.

Newly acquired pools this quarter all had some form of prepayment protection. 70% were backed by credit impaired borrowers like low FICO scores or loans with high GSE mission density scores. 22% from were from states experiencing home price depreciation or where refi activity is structurally hindered. Those pools were predominantly Florida and New York. Geographies. 8% were loan balance pools of some flavor. As a result of these investments, our weighted average coupon increased from $5.45 to $5.53. Effective yield rose from $5.38 to $5.51. And our net interest spread expanded from $2.43 to $2.59. Across the broader portfolio, pool characteristics remain very diverse and defensive towards prepays. Exposure.

20% of the portfolio now is backed by credit impaired borrowers. 23%, Florida, Florida pools, 16% New York pools, 13 investor property pools, and 31% have some form of low and bowel story, if you will. We had virtually no exposure to generic or worse to deliver mortgage securities, and we were net short TBAs at September 30. Overall, we improved the carry of our the carry and prepayment stability of our portfolio while maintaining conservative leverage posture and staying entirely within the agency MBS universe. Turning to Slide 17. You can see a sort of visual representation of what I just discussed.

You can clearly see the shift in the graphs, the concentration building in the five and a half's six coupon buckets across the three graphs. These production coupons remain the core of our portfolio. And continue to offer the best carry profile in the current environment. Now I'd like to discuss a little bit about the funding markets Repo lending market continues to function very well, and Orchid maintains capacity well in excess of our needs.

That said, we observed friction building in the funding markets, particularly in the during the weeks of heavy treasury bill issuance and settlement These dynamics have led to spikes in overnight SOFR and the tri party GC rates relative to the interest paid by the Federal Reserve on reserve balances. Particularly around settlement dates. This is largely attributable to declining reserve balances and continued heavy bill issuance. Orchid typically funds through the term markets, which has helped insulate us from some of the overnight volatility, but still term pricing has been impacted. We borrow roughly SOFR plus 16 basis points for most of the year, but in recent weeks, that spread has drifted up a couple of basis points.

Say so for plus eight more recently. Looking ahead, we expect the fed to end QT potentially as early as next week's meeting and begin buying treasury bills through renewed temporary market operations. If and when this occurs, it should provide positive tailwind for our repo funding costs especially if it's paired with further rate cuts by the FOMC. Would help, with the continued expansion of our net interest margin. Just wanted to make a brief note about this chart on this page. It might seem a little bit counterintuitive. The blue line on the chart represents our economic cost of funds.

This metric, as you can see, is kicked slightly higher in spite of the fact that rates are coming down. And this is really due to the fact that, as we've grown, there's 's a diminishing impact of our legacy hedges on the broader portfolio. So recall that the this metric economic cost of funds, includes the cumulative mark to market effect of legacy hedges. So it's sort of akin to the rate paid on taxable interest expense. With the with the deferred hedge deductions factored in. On the other hand, the red line, which has been moving lower, represents our actual repo borrowing costs with no hedging effects.

As the Fed cuts raise any unhedged repo balances will benefit directly from this decline. As of June 30, 27% of our repo borrowings were unhedged, and that increased to 30%, more recently. Modestly enhancing the benefit to lower fund or potential benefit to lower funding rates. Turning to slides nineteen and twenty, speaking of hedges, On September 30, Orchid's total hedge notional stood, as I said, $5.6 billion. Covering about 70% of our repo funding liabilities. Interest rate swaps totaled $3.9 billion, covering roughly half the repo balance with a weighted average pay fixed rate of 33.31%. And an average maturity of five point four years. Swap exposure is split between intermediate and longer dated maturities.

Allowing us to maintain protection further out the curve while taking advantage of lower short term funding costs. Short futures positions totaled $1.4 billion comprised primarily of SOFR five year seven year and ten year treasury futures as well. I'm sorry. So for five year, ten year, seven year. Treasury futures as well as a very small position and Eir swap futures. On a mark to market basis, our blended swap and futures hedge rate was 3.63 at six thirty, and 3.56 at nine thirty. You think of this metric as the rate we would pay if all of our hedges, had a market value of zero at each respective quarter end. A par rate, if you will.

A short TBA positions totaled $282 million. All of which were, I think, seventy five and a halfs. A portion of this short is really part of a bigger trade where we're a long fifteen year fives and short thirty year five and a halfs. So a fifteen thirty swap structured to provide production against rising rates in a spread widening environment. The remainder of the short position was just executing in conjunction with some pool purchases late in the quarter. Following a period where spreads have tightened materially. So we didn't wanna take the basis quite yet. Orbit held no swaptions during the quarter, which was fortuitous. Because there was a sharp decline in volatility.

At June 30, approximately, as I mentioned, price of 27% of our repo borrowings were unhedged. That figure increased to 30% by September 30. This increase reflects the impact of the market rally and the corresponding shorter asset durations. Which allowed ORCA to carry a higher unhedged balance while maintaining minimal, interest rate exposure. In other words, this shift doesn't not indicate the portfolio is less hedged. In fact, at, June 30, our duration gap was negative point two six years. And by September 30, it had grown to negative point zero seven years. So still highlights a very flat interest rate profile.

Speaking of which, slides twenty one and twenty two get a real pitch sense of our interest rate sensitivity. Orchid's agency RMBS portfolio remains well balanced from a duration standpoint. With overall rate exposure very tightly managed. Our man excuse me. Our model rate shock showed that a fifth plus 50 basis point, increase in rates would estimate would result in a 1.7% decline in equity while a 50 basis point decrease would reduce equity by 1.2%. So, again, it's very low interest rate sensitivity at least on a model basis. The combination of higher coupon assets and intermediate to long term longer dated hedges reflect our continued positioning that guards against rising rates and a steepening curve.

This positioning is grounded in our view that a weakening economy and lower rates across the curve while potentially introducing short term volatility should be positive for Agency MBS and the broader sector in general. As such environments are offered often accompanied by stress in equity and credit markets, and investors often seek safety and fixed income and REIT stocks. Conversely, if the economy remains strong or inflation proves sticky, we would expect a corresponding rise in rates and basis widening in the belly. Of the coupon stack without performance shifting to shorter duration high coupon assets. Which are currently lagging due to prepayment exposure. And that's perfect segue to slides. 23 where we talk about our prepayment experience.

This has been something that we've largely glossed over for the past couple of years. Other than a brief period of time following a ten years brief run at March, In the third quarter, speeds released in the third quarter, including the September speeds released in early October, Orbit experienced a very favorable prepayment outcome across the portfolio. Lower coupons continue to perform exceptionally well. 3s, 3.5s and 4s paying at 7.2, eight point three and eight point one CPR. Compared to the TBA deliverables, significantly slower at four and a 2.9, and 0.7. 4.5s and fives paid eleven and seven point five CPR. For the quarter versus two point three and one point nine on comparable deliverables.

Among our low premium assets, which are 5.5 is largely throughout most of the quarter. These were largely in line with the deliverables, 6.2 was our experience. 6.2 CPR versus 5.9. However, in the most recent month, generic five and a half jumped up to nine CPR, our portfolio held steady at 6.3. Really underscoring the benefit of pool selection and the relatively low wall of the portfolio. In premium space, six and a half sixes and six and a halfs. Paid nine point five and twelve point two CPR for the quarter. Compared to thirteen point eight and twenty nine point five on TBA deliverables.

As refi activity spiked in September, the various forms of call protection embedded in our portfolio produced very sharp divide, though. In the most recent month, six is paid our six is paid 9.7 versus 27.8% for the generics. And a six and a half's paid 13.9 versus a 42.8 CPR on the generics. So you can really see the benefit, and potential carry above and beyond TBA for those coupons. Overall, the quarter was results highlight, our disciplined pool selection. Where call protection what were call protected specified collateral continues to deliver materially better prepaid behavior than the TBA deliverable, as I mentioned. Just a few concluding remarks from me.

Summary, we experienced sharp rebound in the third quarter, more than offsetting the mark to market damage done during the volatile Liberation Day widening in the second quarter. Orchid successfully raised $152 million during the quarter. Deployed the proceeds into approximately $1.5 billion of high quality specified pools. The pools were acquired at historically widespread levels and will certain meaningful driver of increased earning power for the portfolio in the coming quarters. While our skew towards high coupon specified pools and bear steepening bias resulted in slight underperformance relative to our peers. With more exposure to belly coupons, remain highly conservative constructive on our current asset and hedge blend.

We believe our positioning will continue to deliver great carry and be more resilient in a sell off, particularly given our call protection and limited convexity exposure. Looking ahead, we're very positive on the investment strategy. So I have mentioned, several factors that could provide significant tailwinds to agency RMBS market. And our portfolio for the quarters ahead are continued Fed rate cuts, the anticipate anticipated end of QT, a renewed treasury open market operations to help stabilize the repo and bill markets, potential expansion of GSE retained portfolios, a White House and Treasury Department, that are openly supportive of tighter mortgage spreads. We also continue to see strong participation from money managers and the REITs as Bob alluded to.

There's potential for banks to reenter the markets more meaningfully as funding and regulatory capital conditions improve. Taken together, we believe the current opportunity in Agency RMBS is still among the most attractive in recent memory, and, we're well positioned to capitalize on that. With that, I'll turn it over to Bob.

Robert Cauley: Thanks, Hunter. Great job. Just a couple of concluding remarks, and then we'll turn it over to questions. Basically just to reiterate kind of our outlook I think that it's kind of hard to say where we go from here from of the market and the economy. I think that we're possibly at a crossroads On the one hand, we've seen a lot of labor market weakness and it's gotten the Fed's attention and they appear ready to cut rates, which could lead to a prolonged low rate environment. We also see a lot of resiliency in the economy, very strong growth. Consumer seems to be in decent shape.

And as I mentioned, the government's running large deficits, plus you have the benefits of AI and the CapEx build out all that tied into the one big beautiful bill and the very favorable tax components of that. So I think the market could in the economy go either way. But the important thing is, as Hunter alluded to, is that the way the portfolio is constructed with the high coupon bias with hedges that are a little further off the curve, and the call protected nature of the securities we own, I think that we can do well in either.

So for instance, if we do stay in a low rate environment and speed stay high, we have very adequate call protection. And to the extent that the opposite occurs in the economy re strengthens and we start going into a higher rate environment we have most of our hedges further up the curve. And we have higher coupon securities that would do well in the sense they have enhanced carry in that environment.

So I guess one final comment is that we do expect now after the day of today, that the Fed will likely cut a few times And over the course of the next few months, we're probably gonna potentially adjust our hedges to try to lock in some of that lower funding. And maybe add a little upgrade protection because we think if the fact the Fed does ease a few times, that in all likelihood, the move after that's a hike. So with all that said, we will now turn the call over to questions.

Operator: Thank you. As a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question is going to come from the line of Jason Weaver with Jones Trading. Your line is open. Please go ahead.

Jason Weaver: Congrats on the results you in this quarter and the growth I guess first, given the relatively consistent leverage and even greater liquidity now as well as sort of the positive results that you mentioned in the prepared remarks, especially lower vol. Is there anything particular on the horizon macro wise that you'd be looking for to change overall risk positioning? Maybe like, notably, like, maybe leaning more into leverage.

Robert Cauley: Well, as I kinda said at the end, I remember the we could with leverage. I mean, like I said, if there's two paths I see the market following, One is where we kind of stay where we are. The Fed continues to cut. Rates stay low. In that environment, we're going to benefit obviously from the first few rate cuts because the percentage of our funding that is hedged is on the low side. I think in the event that we do see that, as I mentioned, I think we'll probably look to lock that in. And if we do so, we probably would be taking the leverage up some.

To the extent the market and the economy rebound, that we see a strengthening, which I think is very possible. I've Frankly, I would say I would take the under on the number of rate cuts between now and the end of next year. Then I would say we would not be taking leverage up. We would be looking to kind of protect ourselves, one lock in funding and then look to protect ourselves on the asset side from extension and, you know, rate sell off. Impact on mortgage prices?

Jason Weaver: Got it. That's helpful. And then second, referencing the remarks on the high coupon spec pools you purchased just as of late, do you have any view on pay ups upside potential here, especially if we see more refi momentum growing?

Robert Cauley: We've really seen pay ups ratchet and hire and in beginning part of this quarter, this most recent cycle, the GSEs, you know, saw perhaps increase sharply. A lot of that's attributable to the fact that there were people who were long TBAs as kind of strategy when the when the role markets were more healthy. And that you know, those that carry from those roles has just completely evaporated. And so you've seen people who might have had heavier concentrations in TBAs really be forced to dive in and just, you know, start buying everything they could find to supplement that income. We fortunately didn't have that problem.

And most of the spec schools we bought was really were kind of the first half of the quarter. So yeah. That's just to reiterate that point. I mentioned we had the spike tighter in mortgages in early September. I forgive you if you mentioned this, I'd miss it. But of the capital we raised in the quarter, 70% of that was deployed before then. So benefited from that. And then also, just, you know, we talked about this at the end of the second quarter. At that time, the weighted average price of the portfolio was basically par. It was like 99.98 And most of what we added all of what we added were to higher coupons.

But that being said, average price of this portfolio now is a little over 101, 101 and 7. And our average payoff is 33 ticks. So while we've been adding call protection, we're not paying up for the highest quality. Frankly, we don't think that it's been warranted. I'll get too into the weeds of what we've done, but we've gotten, as you saw in our realized prepayment speeds, very good performance out of those securities. Without having to pay, you know, extremely exorbitant, payouts. I don't know that we're ever gonna get back to where we were off in twenty or twenty one, just by comparison.

You know, back then, our higher coupon New York, whatever coupon they were, the pay ups were multiple, four and five points. I don't know that we're gonna see that any time soon, but it's we've done quite well without having to go anywhere near those kind of levels.

Jason Weaver: Thanks for that. Appreciate the time, guys.

Robert Cauley: Yep. Thank you. And one moment for our next question.

Operator: Next question will come from the line of Eric Hagen with BTIG. Your line is open. Please go ahead.

Eric Hagen: Hey. Thanks. Good morning, guys. Eric, how are You guys have

Robert Cauley: Hey. Good morning. I think you guys have kinda talked a little bit around it, but you know, are there scenarios where dollar roll specialists would return to the market in a more meaningful way? How do you feel like specialness would have affect, like, trading volume and kinda market dynamics over overall? Going forward?

Robert Cauley: Excuse me. Sorry about that. I don't know that I mean, we saw that in really in space back in the early days of QE when the Fed was buying everything. I don't think we're going to see QE In fact, it's been made pretty clear by the Fed that when they reinvest pay downs with respect to mortgages, they're only gonna be buying treasuries probably bills. So I don't know. I don't really see the specialist of the rural market coming back in a big way. You know, we've historically not been big players in that regard. As you probably know, So I don't see it as a core one, I don't think it's likely to happen.

And two, I don't it's never been a core element of our strategy. No. It's I if I think as long as they're, you know, especially in the upper coupons, that's really being driven by fear of prepayments, and they're speeds that are being delivered into these that are the worst to deliver pools that are being delivered in the PBAs are pretty bad here. So and then I expect them to continue to be so for the next couple of months. So I think it's, gonna stay depressed, at least in that space, until we pop out of this.

You'll be the pop out of this rate environment that we're in now, so trim back towards the bottom, top or middle of the recent rate range or you know, until rates move meaningful lower. But we're kind of at a spot here where it's we you're not gonna see too much in the role space.

Eric Hagen: Okay. Yep. That's interesting. Can you talk through some of the you know, what the supply and availability for longer dated repo looks like right now? I mean, do you see that as, like, an effective hedge for the Fed not cutting as much as what currently anticipated?

Robert Cauley: Would we like to be doing We've looked into it a lot. Unfortunately, the spreads are just too wide. We've done some, and we will continue to do so. But the as Hunter mentioned, you know, we were historically in the mid teens. We're approaching the higher teens. But you're getting above that when you start going out terms. So we have done some, just to try to lock in as much as we can. And we do it opportunistically. So for instance, you know, if we were to see let's say the government reopens and you get some heinous non farm payroll number and the market prices in seven or eight cuts.

That's when we try to do those things. So I would opportunistically. Yeah. It's been it's been Eric, it's been more effective to do in future space for us, and we do so from time to time. I think I alluded to fact that we have a pretty good chunk of the portfolio that is on hedged right now. So we can certainly have room to move in and do some shorter dated short futures you know, in the first year or two of the first couple years of the curve or, you know, some kind of a swap or something like that with a relatively low duration.

But we joke around that repo lenders are always very quick to price in hikes and very reluctant to price their cuts. So that's been kind of the experience that's kept us from and just think about it, you know, the dynamics of what usually happens when the Fed gets involved and, you know, has to cut five or six times. It's usually coincides with a with a credit market rolling over or a weakening economy and you know, those are not particularly comfortable environments for repo lenders.

Eric Hagen: I got you guys. You so much.

Robert Cauley: You too. Thank you. And one moment for our next question.

Operator: Our next question will come from the line of Mikhail Goberman with Citizens JMP. Your line is open. Please go ahead.

Mikhail Goberman: Hey. Good morning, guys. Hope everybody's doing well.

Robert Cauley: Hey. You too.

Mikhail Goberman: Hey. You guys talked about call protection. About what percentage would you save your portfolio is covered with call protection in if rates were to go down, say, 50 basis points in a sharp manner.

Robert Cauley: Almost a 100% of the portfolio is has some form of call protection. We have little pockets of low what we call our kind of lower pay up stories, to, like, LTV, that sort of thing. We're still constructive on those in spite of the fact that they're relatively low pay low in terms of pay up. But, you know, we have a housing market that's under pressure, and, you know, borrowers going out. It's difficult for borrowers with high LTVs to turn around and refi at every opportunity. They will ultimately be able to do so, but, it's it's not very cost effective for them. So it'll know, it's not the lowest hanging fruit, I guess.

The generic more generic stuff is. So yeah. But almost all of it is. We have a some stuff that we keep around just in case we have a dramatic spread wiping, some really low pay ups pools that we use, you know, if we ever have to get a situation where we need to quickly reduce leverage. By just delivering something in the TBA. But, the rest of the portfolio has got some form. And most of it's been working out really well for us. And as far as the rally, as I mentioned, our weighted average price at the end of the quarter was a little over 101. I think the average coupon is still high fives.

So we're it's premium. It's in the money, but it's not it's not so extreme. So another 50 basis point rally gets you know, obviously, like a north of the six, which is like a one zero two or three price. They're gonna be faster, but with the call protection we have, I don't think the premium amortization is gonna be so detrimental. In fact, I think our premium amortization for this quarter was very, very modest. So it was an uptick, obviously, from there, but it's it's nothing like, for instance, what we saw in the immediate aftermath of COVID when, you know, those numbers were very, very large. Yep.

As we bounced around kind of this rate range, where we have you know, bought the more expensive, I guess, or the higher quality stories has been kind of in that first discount space. And the rationale there is just they're relatively cheap at that point in time. So, like, when rates were a little bit higher, fives were, you know, 98, 99 handle. We bought a lot of New York fives in the very beginning part of the quarter where rates were a little bit higher. And so those will do very well as if we continue to rally.

Mikhail Goberman: That's helpful. Thank you very much. And if I can ask one about the flesh out your comments a bit about the hedge portfolio. If swap spreads were to widen back out, how much benefit do you guys see to the portfolio?

Robert Cauley: He said why not? Like, they've been widening. Right? I know it's unusual. If they continue

Mikhail Goberman: We'll They continue to widen. Yeah.

Robert Cauley: Yes. Yes. Continue to benefit from that. I don't know if we have a dollar amount on it, but it was you know, if you look at around two million DVO one, so you can think of it in those terms. Yeah. So like, for instance, like, the long end is, like, at negative 50. So let's say you went to 40. Obviously, you know, something like that or I don't know how much how much further you can go, though, because you could argue that the market's really priced in. The end of QT and the Fed stepping in to reinvest pay downs in the treasuries.

I think in order for that to happen, you'd almost have to take QE meaningful QE, not just not just reinvesting pay downs, but I would give you what a 100%. So $2 million EVO once. So if you get, like, another 10 bps, know, what is that in it's, you know, something like 15¢ or something like that or 12¢ Yeah.

Mikhail Goberman: A book. Fair enough. And if I could just squeeze in, any update on, current book value? Month to date.

Robert Cauley: It is up a hair. Basically. You know, we don't audit that number every day because we get a dollar an amount every day. It's up very, very modestly from quarter end.

Mikhail Goberman: Got you. Thanks so much, guys, as always.

Robert Cauley: Take care. Yep. Yes. Thank you.

Operator: Thank you. And I would now like to hand the conference back over to Robert Cauley for any further remarks.

Robert Cauley: Thank you, operator. Thank you, everybody, for taking the time. As always, to the extent anybody has any questions that come up after the call or you don't get a chance to listen to the call live and you wish to reach out to us, we are always available. The number here is (772) 231-1400. Otherwise, we look forward to speaking to you at the end of the fourth quarter. And have a great weekend. Thank you. Bye.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.

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