Orchid Island Capital, Inc. (NYSE:ORC) ("Orchid” or the "Company"),
a real estate investment trust ("REIT"), today announced results of
operations for the three month period ended June 30, 2020.
Second Quarter 2020 Highlights
- Net income of $48.8 million, or $0.74 per common share, which
consists of:• Net interest income of $22.8 million, or $0.34 per
common share• Total expenses of $2.8 million, or $0.04 per
common share• Net realized and unrealized gains of $28.7
million, or $0.43 per share, on RMBS and derivative instruments,
including net interest income on interest rate swaps
- Second quarter total dividends declared and paid of $0.165 per
common share
- Book value per share of $5.22 at June 30, 2020
- Estimated book value per share as of July 29, 2020 between
$5.23 - $5.33 per share, an increase of 0.1% - 2.1% from June 30,
2020. This book value range gives effect to the payment of
the dividend payable August 27, 2020, with a record date of July
31, 2020
- Total return of 15.8%, comprised of $0.165 dividend per common
share and $0.57 increase in book value per common share, divided by
beginning book value per share
- Estimated third quarter-to-date total return of 1.3% - 3.3%,
comprised of $0.06 dividend per common share and $0.01 - $0.11
estimated increase in book value per common share divided by
beginning book value per share
- Company to discuss results on Friday, July 31, 2020, at 10:00
AM ET
- Supplemental materials to be discussed on the call can be
downloaded from the investor relations section of the Company’s
website at www.orchidislandcapital.com
Impact of the COVID-19 Pandemic
Beginning in March 2020, the global pandemic associated with the
novel coronavirus COVID-19 (“COVID-19”) and related economic
conditions began to impact our financial position and results of
operations. As a result of the economic, health and market turmoil
brought about by COVID-19, the Agency RMBS market experienced
severe dislocations. This resulted in falling prices of our assets
and increased margin calls from our repurchase agreement lenders.
Further, as interest rates declined, we faced additional margin
calls related to our hedge positions. In order to maintain
sufficient cash and liquidity, reduce risk and satisfy margin
calls, we were forced to sell assets at levels significantly below
their carrying values and closed several of our hedge positions. We
timely satisfied all margin calls. The Agency RMBS market largely
stabilized after the Federal Reserve (the “Fed”) announced on March
23, 2020 that it would purchase Agency RMBS and U.S. Treasuries in
the amounts needed to support smooth market functioning. Largely as
a result of actions taken by the Fed in late March, Agency RMBS
valuations have substantially increased since March 31, 2020.
Our manager has invoked its Disaster Recovery Plan and its
employees are continuing to work remotely. Prior planning resulted
in the successful implementation of this plan and key operational
team members maintain daily communication. We do not anticipate
incurring additional material costs, nor have we identified any
operational or internal control issues related to this remote
working plan.
Details of Second Quarter 2020 Results of
Operations
The Company reported net income of $48.8 million for the three
month period ended June 30, 2020, compared with net income of $3.5
million for the three month period ended June 30, 2019. The
second quarter net income included net interest income of $22.8
million, net portfolio gains of $28.7 million (which includes
realized and unrealized losses on RMBS and derivative instruments,
and net interest income realized on interest rate swaps),
management fees and allocated overhead of $1.6 million, audit,
legal and other professional fees of $0.3 million, and other
operating, general and administrative expenses of $0.9 million.
Capital Allocation and Return on Invested
Capital
The Company allocates capital to two RMBS sub-portfolios, the
pass-through RMBS portfolio, consisting of mortgage pass-through
certificates issued by Fannie Mae, Freddie Mac or Ginnie Mae (the
“GSEs”) and collateralized mortgage obligations (“CMOs”) issued by
the GSEs (“PT RMBS”), and the structured RMBS portfolio, consisting
of interest-only (“IO”) and inverse interest-only (“IIO”)
securities. As of March 31, 2020, approximately 88% of the
Company’s investable capital (which consists of equity in pledged
PT RMBS, available cash and unencumbered assets) was deployed in
the PT RMBS portfolio. At June 30, 2020, the allocation to
the PT RMBS portfolio increased by 2% to approximately 90%.
The table below details the changes to the respective
sub-portfolios during the quarter, as well as the returns generated
by each.
(in
thousands) |
Portfolio Activity for the Quarter |
|
|
|
Structured Security Portfolio |
|
|
|
Pass-Through |
Interest-Only |
Inverse Interest |
|
|
|
|
Portfolio |
Securities |
Only Securities |
Sub-total |
Total |
Market value - March 31, 2020 |
$ |
2,908,703 |
|
$ |
40,094 |
|
$ |
- |
$ |
40,094 |
|
$ |
2,948,797 |
|
Securities
purchased |
|
651,406 |
|
|
- |
|
|
- |
|
- |
|
|
651,406 |
|
Securities
sold |
|
(214,467 |
) |
|
- |
|
|
- |
|
- |
|
|
(214,467 |
) |
Gains on
sales |
|
3,360 |
|
|
- |
|
|
- |
|
- |
|
|
3,360 |
|
Return of
investment |
|
n/a |
|
|
(3,350 |
) |
|
- |
|
(3,350 |
) |
|
(3,350 |
) |
Pay-downs |
|
(115,225 |
) |
|
n/a |
|
|
- |
|
n/a |
|
|
(115,225 |
) |
Premium lost due
to pay-downs |
|
(9,268 |
) |
|
n/a |
|
|
- |
|
n/a |
|
|
(9,268 |
) |
Mark to
market gains (losses) |
|
43,993 |
|
|
(485 |
) |
|
- |
|
(485 |
) |
|
43,508 |
|
Market value - June 30, 2020 |
$ |
3,268,502 |
|
$ |
36,259 |
|
$ |
- |
$ |
36,259 |
|
$ |
3,304,761 |
|
The tables below present the allocation of capital between the
respective portfolios at June 30, 2020 and March 31, 2020, and the
return on invested capital for each sub-portfolio for the three
month period ended June 30, 2020. The return on invested
capital in the PT RMBS and structured RMBS portfolios was
approximately 17.3% and (0.6)%, respectively, for the second
quarter of 2020. The combined portfolio generated a return on
invested capital of approximately 15.2%.
($ in
thousands) |
Capital Allocation |
|
|
|
Structured Security Portfolio |
|
|
|
Pass-Through |
Interest-Only |
Inverse Interest |
|
|
|
|
Portfolio |
Securities |
Only Securities |
Sub-total |
Total |
June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
Market value |
$ |
3,268,502 |
|
$ |
36,259 |
|
$ |
- |
$ |
36,259 |
|
$ |
3,304,761 |
|
Cash |
|
236,031 |
|
|
- |
|
|
- |
|
- |
|
|
236,031 |
|
Borrowings(1) |
|
(3,174,739 |
) |
|
- |
|
|
- |
|
- |
|
|
(3,174,739 |
) |
|
Total |
$ |
329,794 |
|
$ |
36,259 |
|
$ |
- |
$ |
36,259 |
|
$ |
366,053 |
|
|
% of
Total |
|
90.1 |
% |
|
9.9 |
% |
|
- |
|
9.9 |
% |
|
100.0 |
% |
March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
Market value |
$ |
2,908,703 |
|
$ |
40,094 |
|
$ |
- |
$ |
40,094 |
|
$ |
2,948,797 |
|
Cash |
|
201,450 |
|
|
- |
|
|
- |
|
- |
|
|
201,450 |
|
Borrowings(2) |
|
(2,810,250 |
) |
|
- |
|
|
- |
|
- |
|
|
(2,810,250 |
) |
|
Total |
$ |
299,903 |
|
$ |
40,094 |
|
$ |
- |
$ |
40,094 |
|
$ |
339,997 |
|
|
% of
Total |
|
88.2 |
% |
|
11.8 |
% |
|
- |
|
11.8 |
% |
|
100.0 |
% |
(1) At June 30, 2020, there were outstanding repurchase
agreement balances of $25.7 million secured by IO securities.
We entered into these arrangements to generate additional cash
available to meet margin calls on PT RMBS; therefore, we have not
considered these balances to be allocated to the structured
securities strategy.(2) At March 31, 2020, there were outstanding
repurchase agreement balances of $31.9 million secured by IO
securities. We entered into these arrangements to generate
additional cash available to meet margin calls on PT RMBS;
therefore, we have not considered these balances to be allocated to
the structured securities strategy.
($ in
thousands) |
Returns for the Quarter Ended June 30, 2020 |
|
|
|
Structured Security Portfolio |
|
|
|
Pass-Through |
Interest-Only |
Inverse Interest |
|
|
|
|
Portfolio |
Securities |
Only Securities |
Sub-total |
Total |
Income / (loss)
(net of borrowing cost) |
$ |
22,525 |
|
$ |
254 |
|
$ |
- |
$ |
254 |
|
$ |
22,779 |
|
Realized and
unrealized gains / (losses) |
|
38,085 |
|
|
(485 |
) |
|
- |
|
(485 |
) |
|
37,600 |
|
Derivative losses |
|
(8,851 |
) |
|
n/a |
|
|
- |
|
n/a |
|
|
(8,851 |
) |
|
Total Return |
$ |
51,759 |
|
$ |
(231 |
) |
$ |
- |
$ |
(231 |
) |
$ |
51,528 |
|
Beginning Capital Allocation |
$ |
299,903 |
|
$ |
40,094 |
|
$ |
- |
$ |
40,094 |
|
$ |
339,997 |
|
Return
on Invested Capital for the Quarter(1) |
|
17.3 |
% |
|
(0.6 |
)% |
|
- |
|
(0.6 |
)% |
|
15.2 |
% |
Average
Capital Allocation(2) |
$ |
314,849 |
|
$ |
38,177 |
|
$ |
- |
$ |
38,177 |
|
$ |
353,026 |
|
Return
on Average Invested Capital for the Quarter(3) |
|
16.4 |
% |
|
(0.6 |
)% |
|
- |
|
(0.6 |
)% |
|
14.6 |
% |
(1) Calculated by dividing the Total Return by the Beginning
Capital Allocation, expressed as a percentage.(2) Calculated using
two data points, the Beginning and Ending Capital Allocation
balances.(3) Calculated by dividing the Total Return by the Average
Capital Allocation, expressed as a percentage.
Prepayments
For the quarter ended June 30, 2020, Orchid received $118.6
million in scheduled and unscheduled principal repayments and
prepayments, which equated to a 3-month constant prepayment rate
(“CPR”) of approximately 16.3%. Prepayment rates on the two RMBS
sub-portfolios were as follows (in CPR):
|
|
Structured |
|
|
PT RMBS |
RMBS |
Total |
Three Months Ended |
Portfolio (%) |
Portfolio (%) |
Portfolio (%) |
June 30, 2020 |
13.9 |
35.3 |
16.3 |
March 31, 2020 |
9.8 |
22.9 |
11.9 |
December 31, 2019 |
14.3 |
23.4 |
16.0 |
September 30, 2019 |
15.5 |
19.3 |
16.4 |
June 30, 2019 |
10.9 |
12.7 |
11.4 |
March
31, 2019 |
9.5 |
8.4 |
9.2 |
Portfolio
The following tables summarize certain characteristics of
Orchid’s PT RMBS and structured RMBS as of June 30, 2020 and
December 31, 2019:
($ in
thousands) |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
Percentage |
|
Average |
|
|
|
|
of |
Weighted |
Maturity |
|
|
|
Fair |
Entire |
Average |
in |
Longest |
Asset Category |
|
Value |
Portfolio |
Coupon |
Months |
Maturity |
June 30, 2020 |
|
|
|
|
|
|
Adjustable Rate RMBS |
$ |
957 |
0.0 |
% |
4.51 |
% |
170 |
1-Sep-35 |
Fixed Rate RMBS |
|
3,105,028 |
94.0 |
% |
3.62 |
% |
346 |
1-Jun-50 |
Fixed
Rate CMOs |
|
162,517 |
4.9 |
% |
4.00 |
% |
320 |
15-Dec-42 |
Total
Mortgage-backed Pass-through |
|
3,268,502 |
98.9 |
% |
3.64 |
% |
344 |
1-Jun-50 |
Interest-Only Securities |
|
36,259 |
1.1 |
% |
4.00 |
% |
274 |
25-Jul-48 |
Total
Structured RMBS |
|
36,259 |
1.1 |
% |
4.00 |
% |
274 |
25-Jul-48 |
Total
Mortgage Assets |
$ |
3,304,761 |
100.0 |
% |
3.68 |
% |
337 |
1-Jun-50 |
December 31, 2019 |
|
|
|
|
|
|
Adjustable Rate RMBS |
$ |
1,014 |
0.0 |
% |
4.51 |
% |
176 |
1-Sep-35 |
Fixed Rate RMBS |
|
3,206,013 |
89.3 |
% |
3.90 |
% |
342 |
1-Dec-49 |
Fixed
Rate CMOs |
|
299,205 |
8.3 |
% |
4.20 |
% |
331 |
15-Oct-44 |
Total
Mortgage-backed Pass-through |
|
3,506,232 |
97.6 |
% |
3.92 |
% |
341 |
1-Dec-49 |
Interest-Only Securities |
|
60,986 |
1.7 |
% |
3.99 |
% |
280 |
25-Jul-48 |
Inverse
Interest-Only Securities |
|
23,703 |
0.7 |
% |
3.34 |
% |
285 |
15-Jul-47 |
Total
Structured RMBS |
|
84,689 |
2.4 |
% |
3.79 |
% |
281 |
25-Jul-48 |
Total
Mortgage Assets |
$ |
3,590,921 |
100.0 |
% |
3.90 |
% |
331 |
1-Dec-49 |
($ in
thousands) |
|
|
|
|
|
|
|
|
|
|
June 30, 2020 |
|
December 31, 2019 |
|
|
|
|
Percentage of |
|
|
|
Percentage of |
Agency |
|
Fair Value |
|
Entire Portfolio |
|
Fair Value |
|
Entire Portfolio |
Fannie Mae |
$ |
2,129,745 |
|
64.4 |
% |
$ |
2,170,668 |
|
60.4 |
% |
Freddie Mac |
|
1,175,016 |
|
35.6 |
% |
|
1,420,253 |
|
39.6 |
% |
Total Portfolio |
$ |
3,304,761 |
|
100.0 |
% |
$ |
3,590,921 |
|
100.0 |
% |
|
|
June 30, 2020 |
|
December 31, 2019 |
Weighted Average Pass-through
Purchase Price |
$ |
106.37 |
$ |
105.16 |
Weighted Average Structured
Purchase Price |
$ |
20.14 |
$ |
18.15 |
Weighted Average Pass-through
Current Price |
$ |
109.20 |
$ |
106.26 |
Weighted Average Structured
Current Price |
$ |
10.51 |
$ |
13.85 |
Effective Duration (1) |
|
2.010 |
|
2.780 |
(1) Effective duration of 2.010 indicates that an interest rate
increase of 1.0% would be expected to cause a 2.010% decrease in
the value of the RMBS in the Company’s investment portfolio at June
30, 2020. An effective duration of 2.780 indicates that an
interest rate increase of 1.0% would be expected to cause a 2.780%
decrease in the value of the RMBS in the Company’s investment
portfolio at December 31, 2019. These figures include the
structured securities in the portfolio, but do not include the
effect of the Company’s funding cost hedges. Effective
duration quotes for individual investments are obtained from The
Yield Book, Inc.
Financing, Leverage and Liquidity
As of June 30, 2020, the Company had outstanding repurchase
obligations of approximately $3,174.7 million with a net weighted
average borrowing rate of 0.27%. These agreements were
collateralized by RMBS with a fair value, including accrued
interest, of approximately $3,304.5 million and cash pledged to
counterparties of approximately $35.6 million. The Company’s
leverage ratio at June 30, 2020 was 9.7 to 1. At June 30, 2020, the
Company’s liquidity was approximately $186.0 million, consisting of
unpledged RMBS (excluding the value of the unsettled purchases) and
cash and cash equivalents. To enhance our liquidity even
further, we may pledge more of our structured RMBS as part of a
repurchase agreement funding, but retain the cash in lieu of
acquiring additional assets. In this way we can, at a modest
cost, retain higher levels of cash on hand and decrease the
likelihood we will have to sell assets in a distressed market in
order to raise cash. Below is a list of our outstanding
borrowings under repurchase obligations at June 30, 2020.
($ in
thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
Total |
|
|
|
Average |
|
|
Average |
|
|
Outstanding |
|
% of |
|
Borrowing |
|
Amount |
Maturity |
Counterparty |
|
Balances |
|
Total |
|
Rate |
|
at Risk(1) |
in Days |
Mirae Asset Securities (USA) Inc. |
$ |
382,893 |
|
12.0 |
% |
|
0.25 |
% |
$ |
19,502 |
|
24 |
Wells Fargo Bank, N.A. |
|
340,088 |
|
10.7 |
% |
|
0.25 |
% |
|
17,566 |
|
12 |
Merrill Lynch, Pierce, Fenner
& Smith Inc |
|
288,424 |
|
9.1 |
% |
|
0.29 |
% |
|
10,812 |
|
14 |
J.P. Morgan Securities
LLC |
|
265,699 |
|
8.4 |
% |
|
0.29 |
% |
|
15,592 |
|
74 |
Mitsubishi UFJ Securities
(USA), Inc. |
|
259,269 |
|
8.2 |
% |
|
0.26 |
% |
|
15,456 |
|
16 |
ABN AMRO Bank N.V. |
|
236,797 |
|
7.5 |
% |
|
0.28 |
% |
|
8,437 |
|
25 |
Cantor Fitzgerald &
Co. |
|
235,396 |
|
7.4 |
% |
|
0.28 |
% |
|
11,924 |
|
20 |
Citigroup Global Markets,
Inc. |
|
216,204 |
|
6.8 |
% |
|
0.27 |
% |
|
13,102 |
|
15 |
ASL Capital Markets Inc. |
|
210,888 |
|
6.6 |
% |
|
0.25 |
% |
|
10,629 |
|
17 |
RBC Capital Markets, LLC |
|
202,389 |
|
6.4 |
% |
|
0.28 |
% |
|
11,470 |
|
39 |
ING Financial Markets LLC |
|
115,493 |
|
3.6 |
% |
|
0.29 |
% |
|
6,268 |
|
19 |
Daiwa Capital Markets America,
Inc. |
|
83,184 |
|
2.6 |
% |
|
0.32 |
% |
|
4,437 |
|
27 |
BMO Capital Markets Corp. |
|
81,544 |
|
2.6 |
% |
|
0.26 |
% |
|
4,863 |
|
14 |
South Street Securities,
LLC |
|
77,817 |
|
2.5 |
% |
|
0.29 |
% |
|
3,667 |
|
216 |
ED&F Man Capital Markets
Inc. |
|
62,832 |
|
2.0 |
% |
|
0.23 |
% |
|
3,650 |
|
39 |
Lucid Cash Fund USG LLC |
|
52,172 |
|
1.6 |
% |
|
0.31 |
% |
|
4,002 |
|
16 |
J.V.B. Financial Group,
LLC |
|
26,270 |
|
0.8 |
% |
|
0.30 |
% |
|
1,632 |
|
107 |
Barclays Capital Inc |
|
25,863 |
|
0.8 |
% |
|
0.33 |
% |
|
812 |
|
10 |
Austin Atlantic Asset
Management Co. |
|
11,428 |
|
0.4 |
% |
|
0.30 |
% |
|
495 |
|
1 |
Mizuho Securities USA,
Inc. |
|
89 |
|
0.0 |
% |
|
0.00 |
% |
|
(89 |
) |
1 |
Total / Weighted Average |
$ |
3,174,739 |
|
100.0 |
% |
|
0.27 |
% |
$ |
164,227 |
|
30 |
(1) Equal to the sum of the fair value of securities sold,
accrued interest receivable and cash posted as collateral (if any),
minus the sum of repurchase agreement liabilities, accrued interest
payable and the fair value of securities posted by the
counterparties (if any).
Hedging
In connection with its interest rate risk management strategy,
the Company economically hedges a portion of the cost of its
repurchase agreement funding against a rise in interest rates by
entering into derivative financial instrument
contracts. The Company has not elected hedging treatment
under U.S. generally accepted accounting principles (“GAAP”) in
order to align the accounting treatment of its derivative
instruments with the treatment of its portfolio assets under the
fair value option election. As such, all gains or losses on these
instruments are reflected in earnings for all periods
presented. At June 30, 2020, such instruments were comprised
of Eurodollar and Treasury note (“T-Note”) futures contracts,
interest rate swap agreements, interest rate swaption agreements,
to-be-announced “TBA” securities and U.S. Treasury security short
positions.
The table below presents information related to the Company’s
Eurodollar and T-Note futures contracts at June 30, 2020.
($ in
thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Weighted |
|
Weighted |
|
|
|
|
|
|
Contract |
|
Average |
|
Average |
|
|
|
|
|
|
Notional |
|
Entry |
|
Effective |
|
|
Open |
Expiration Year |
|
Amount |
|
Rate |
|
Rate |
|
|
Equity(1) |
Eurodollar Futures Contracts (Short
Positions) |
|
|
|
|
|
|
|
|
|
2020 |
$ |
50,000 |
|
3.25 |
% |
|
0.28 |
% |
|
$ |
(742 |
) |
2021 |
|
50,000 |
|
1.03 |
% |
|
0.19 |
% |
|
|
(419 |
) |
Total /
Weighted Average |
$ |
50,000 |
|
1.77 |
% |
|
0.22 |
% |
|
$ |
(1,161 |
) |
Treasury Note Futures Contracts (Short
Positions)(2) |
|
|
|
|
|
|
|
|
|
September 2020
5-year T-Note futures |
|
|
|
|
|
|
|
|
|
|
(Sep 2020 - Sep 2025 Hedge Period) |
$ |
69,000 |
|
0.81 |
% |
|
0.75 |
% |
|
$ |
(190 |
) |
(1) Open equity represents the cumulative gains (losses)
recorded on open futures positions from inception.(2) T-Note
futures contracts were valued at a price of $125.74 at June 30,
2020. The notional contract value of the short position was $86.8
million.
The table below presents information related to the Company’s
interest rate swap positions at June 30, 2020.
($ in
thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
Net |
|
|
|
|
|
|
Fixed |
|
Average |
|
|
Estimated |
|
Average |
|
|
Notional |
|
Pay |
|
Receive |
|
|
Fair |
|
Maturity |
Expiration |
|
Amount |
|
Rate |
|
Rate |
|
|
Value |
|
(Years) |
> 3 to ≤ 5 years |
$ |
620,000 |
|
1.29 |
% |
|
0.46 |
% |
|
|
(27,018 |
) |
|
4.1 |
Expiration > 5 years |
|
200,000 |
|
0.67 |
% |
|
0.31 |
% |
|
|
(2,922 |
) |
|
7.0 |
|
$ |
820,000 |
|
1.14 |
% |
|
0.42 |
% |
|
$ |
(29,940 |
) |
|
4.8 |
The following table presents information related to our interest
rate swaption positions as of June 30, 2020.
($ in
thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option |
|
Underlying Swap |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
Average |
|
Adjustable |
|
Average |
|
|
|
|
Fair |
|
Months to |
|
|
Notional |
|
Fixed |
|
Rate |
|
Term |
Expiration |
|
Cost |
|
Value |
|
Expiration |
|
|
Amount |
|
Rate |
|
(LIBOR) |
|
(Years) |
Payer Swaptions - long |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
≤ 1 year |
$ |
3,450 |
|
$ |
231 |
|
|
8.5 |
|
$ |
500,000 |
|
0.95 |
% |
|
3 Month |
|
4.0 |
>1
year ≤ 2 years |
|
8,100 |
|
|
7,594 |
|
|
23.2 |
|
|
582,000 |
|
1.50 |
% |
|
3 Month |
|
10.0 |
|
$ |
11,550 |
|
$ |
7,825 |
|
|
16.4 |
|
$ |
1,082,000 |
|
1.25 |
% |
|
3 Month |
|
7.2 |
Payer Swaptions - short |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
≤ 1
year |
$ |
(2,400 |
) |
$ |
(3,289 |
) |
|
11.2 |
|
$ |
436,200 |
|
1.50 |
% |
|
3 Month |
|
10.0 |
The following table summarizes our contracts to purchase and
sell TBA securities as of June 30, 2020.
($ in
thousands) |
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
|
|
|
Net |
|
|
Amount |
|
Cost |
|
Market |
|
Carrying |
|
|
Long (Short)(1) |
|
Basis(2) |
|
Value(3) |
|
Value(4) |
June 30, 2020 |
|
|
|
|
|
|
|
|
15-Year
TBA securities: |
|
|
|
|
|
|
|
|
|
2.0% |
$ |
200,000 |
$ |
206,094 |
$ |
206,500 |
$ |
406 |
|
$ |
200,000 |
$ |
206,094 |
$ |
206,500 |
$ |
406 |
(1) Notional amount represents the par value (or principal
balance) of the underlying Agency RMBS.(2) Cost basis represents
the forward price to be paid (received) for the underlying Agency
RMBS.(3) Market value represents the current market value of the
TBA securities (or of the underlying Agency RMBS) as of
period-end.(4) Net carrying value represents the difference between
the market value and the cost basis of the TBA securities as of
period-end and is reported in derivative assets (liabilities), at
fair value in our balance sheets.
The following table summarizes our U.S. Treasury short positions
of June 30, 2020.
($ in
thousands) |
|
|
|
|
|
|
|
|
Face |
|
Cost |
|
Fair |
|
|
Amount |
|
Basis |
|
Value |
Maturity |
|
|
|
|
|
|
5 Years |
$ |
(140,000 |
) |
$ |
(139,712 |
) |
$ |
(139,843 |
) |
Total |
$ |
(140,000 |
) |
$ |
(139,712 |
) |
$ |
(139,843 |
) |
Dividends
In addition to other requirements that must be satisfied to
qualify as a REIT, we must pay annual dividends to our stockholders
of at least 90% of our REIT taxable income, determined without
regard to the deduction for dividends paid and excluding any net
capital gains. We intend to pay regular monthly dividends to our
stockholders and have declared the following dividends since our
February 2013 IPO.
(in
thousands, except per share data) |
Year |
|
|
|
Per Share Amount |
|
Total |
2013 |
|
|
$ |
1.395 |
$ |
4,662 |
2014 |
|
|
|
2.160 |
|
22,643 |
2015 |
|
|
|
1.920 |
|
38,748 |
2016 |
|
|
|
1.680 |
|
41,388 |
2017 |
|
|
|
1.680 |
|
70,717 |
2018 |
|
|
|
1.070 |
|
55,814 |
2019 |
|
|
|
0.960 |
|
54,421 |
2020 -
YTD(1) |
|
|
|
0.465 |
|
30,595 |
Totals |
|
|
$ |
11.330 |
$ |
318,988 |
(1) On July 15, 2020, the Company declared a dividend of $0.06
per share to be paid on August 27, 2020. The effect of this
dividend is included in the table above, but is not reflected in
the Company’s financial statements as of June 30, 2020.
Peer Performance
The tables below present total return data for Orchid compared
to a selected group of peers based on stock price performance for
periods through June 30, 2020 and based on book value performance
for periods through March 31, 2020.
Portfolio Total Rate of Return Versus Peer Group Average -
Stock Price Performance |
|
|
|
|
|
|
ORC Spread |
|
|
ORC |
|
|
|
Over / (Under) |
|
|
Total Rate |
|
Peer |
|
Peer |
|
|
of Return(1) |
|
Average(1)(2) |
|
Average(3) |
Year to Date (1/1/2020 - 6/30/2020) |
|
(11.8 |
)% |
|
(32.2 |
)% |
|
20.4 |
% |
One Year Total Return |
|
(12.0 |
)% |
|
(30.5 |
)% |
|
18.5 |
% |
Two Year Total Return |
|
(14.2 |
)% |
|
(28.5 |
)% |
|
14.3 |
% |
Three Year Total Return |
|
(23.0 |
)% |
|
(30.7 |
)% |
|
7.7 |
% |
Four Year Total Return |
|
(13.6 |
)% |
|
(19.8 |
)% |
|
6.2 |
% |
Five Year Total Return |
|
(5.5 |
)% |
|
(7.1 |
)% |
|
1.6 |
% |
Six Year Total Return |
|
(5.2 |
)% |
|
(16.3 |
)% |
|
11.1 |
% |
Seven Year Total Return |
|
28.3 |
% |
|
(8.1 |
)% |
|
36.4 |
% |
Inception to Date (2/13/2013 - 6/30/2020) |
|
0.6 |
% |
|
(21.1 |
)% |
|
21.7 |
% |
Source: SEC filings and press releases of Orchid and Peer
Group(1) Total rate of return for each period is pulled from
Bloomberg COMP page and includes reinvested dividends, for each
period noted.(2) The peer average is the unweighted, simple,
average of the total rate of return for each of the following
companies in each respective measurement period: NLY, AGNC,
ANH, CMO, DX, AI and CHMI.(3) Represents the total rate of return
for Orchid minus peer average in each respective measurement
period.
Portfolio Total Rate of Return Versus Peer Group Average -
Book Value Performance |
|
|
|
|
|
|
ORC Spread |
|
|
ORC |
|
|
|
Over / (Under) |
|
|
Total Rate |
|
Peer |
|
Peer |
|
|
of Return(1) |
|
Average(1)(2) |
|
Average(3) |
First Quarter 2020 |
|
(22.0 |
)% |
|
(26.3 |
)% |
|
4.3 |
% |
One Year Total Return |
|
(17.7 |
)% |
|
(21.8 |
)% |
|
4.1 |
% |
Two Year Total Return |
|
(18.3 |
)% |
|
(20.2 |
)% |
|
1.9 |
% |
Three Year Total Return |
|
(16.1 |
)% |
|
(15.5 |
)% |
|
(0.6 |
)% |
Four Year Total Return |
|
(10.4 |
)% |
|
(11.4 |
)% |
|
1.0 |
% |
Five Year Total Return |
|
(9.4 |
)% |
|
(13.5 |
)% |
|
4.1 |
% |
Six Year Total Return |
|
10.8 |
% |
|
(1.9 |
)% |
|
12.7 |
% |
Inception to Date (3/31/2013 – 3/31/2013)(4) |
|
4.3 |
% |
|
(8.9 |
)% |
|
13.2 |
% |
Source: SEC filings and press releases of Orchid and Peer
Group(1) Total rate of return for each period is change in book
value per share over the period plus dividends per share declared
divided by the book value per share at the beginning of the
period.(2) The peer average is the unweighted, simple, average of
the total rate of return for each of the following companies in
each respective measurement period: NLY, AGNC, ANH, CMO, ARR,
DX, AI and CHMI.(3) Represents the total rate of return for Orchid
minus peer average in each respective measurement period.(4) Peer
book values are not available for Orchid's true inception date
(2/13/2013). Because all peer book values are not available as
of Orchid’s true inception date (2/13/2013), the starting point for
all of the peer companies is 3/31/2013.
Book Value Per Share
The Company's book value per share at June 30, 2020 was
$5.22. The Company computes book value per share by dividing
total stockholders' equity by the total number of shares
outstanding of the Company's common stock. At June 30, 2020, the
Company's stockholders' equity was $346.0 million with 66,220,664
shares of common stock outstanding.
The range of the Company’s estimated book value per share as of
July 29, 2020 was $5.23 - $5.33. At July 29, 2020, the
Company's estimated stockholders' equity range was $346.3 million
to $353.0 million with 66,240,664 shares of common stock
outstanding. This book value range gives effect to the payment of
the dividend payable August 27, 2020, with a record date of July
31, 2020. This book value range gives effect to the payment of the
dividend payable August 27, 2020, with a record date of July 31,
2020. The Company’s estimated book value per share and estimated
stockholders’ equity as of July 29, 2020 and estimated third
quarter-to-date total return are preliminary, subject to change,
and have not been audited or verified by any third party.The market
prices used to compute the fair market value of the MBS and
Structured MBS positions were obtained from JP Morgan Pricing
Direct. Swap and futures marks were obtained from the CME
closing marks. Swaption marks were obtained from the
counterparty to the trade and verified internally for
reasonableness. Closing TBA prices were obtained from
Bloomberg.
Stock Offerings
On January 23, 2020, we entered into an equity distribution
agreement (the “January 2020 Equity Distribution Agreement”) with
three sales agents pursuant to which we may offer and sell, from
time to time, up to an aggregate amount of $200,000,000 of shares
of our common stock in transactions that are deemed to be “at the
market” offerings and privately negotiated transactions.
Through June 30, 2020, we issued a total of 3,170,727 shares under
the January 2020 Equity Distribution Agreement for aggregate gross
proceeds of $19.8 million, and net proceeds of approximately $19.4
million, net of commissions and fees.
Stock Repurchase Program
On July 29, 2015, the Board of Directors passed a resolution
authorizing the repurchase of up to 2,000,000 shares of the
Company’s common stock. As part of the stock repurchase
program, shares may be purchased in open market transactions,
including through block purchases, privately negotiated
transactions, or pursuant to any trading plan that may be adopted
in accordance with Rule 10b5-1 of the Securities Exchange Act of
1934, as amended. Open market repurchases will be made in
accordance with Exchange Act Rule 10b-18, which sets certain
restrictions on the method, timing, price and volume of open market
stock repurchases. The timing, manner, price and amount of any
repurchases is determined by the Company in its discretion and is
subject to economic and market conditions, stock price, applicable
legal requirements and other factors. On February 8, 2018, the
Board of Directors approved an increase in the stock repurchase
program for up to an additional 4,522,822 shares of the Company’s
common stock. The authorization does not obligate the Company to
acquire any particular amount of common stock, and the program may
be suspended or discontinued at the Company’s discretion without
prior notice.
Since inception of the program through June 30, 2020, the
Company repurchased a total of 5,685,511 shares under the stock
repurchase program at an aggregate cost of approximately $40.4
million, including commissions and fees, for a weighted average
price of $7.10 per share. During the six months ended June 30,
2020, the Company repurchased a total of 19,891 shares at an
aggregate cost of approximately $0.1 million, including commissions
and fees, for a weighted average price of $3.42 per share. As of
June 30, 2020, the remaining authorization under the repurchase
program is for up to 837,311 shares of the Company’s common
stock.
Management Commentary
Commenting on the second quarter, Robert E. Cauley, Chairman and
Chief Executive Officer, said, “After suffering through arguably
the most dramatic contraction of economic activity and financial
market turmoil ever witnessed during the first quarter of 2020, the
second quarter was one of recovery – or so it appeared until
mid-June. As the economy slowly reopened from a near complete
shut-down caused by the pervasive safety precautions taken as the
COVID-19 virus spread throughout the U.S., economic activity
rebounded. However, as life returned to normal, and people
could resume their lives as they existed prior to the outbreak, the
virus spread again and reported cases surged, starting in mid-June.
Safety precautions are being re-implemented to stem the spread of
the virus once more. Economic activity is generally reported
with a lag, so we will not know the extent of the slowdown in
economic activity caused by the re-emergence of the virus until a
later date.
“The financial markets are generally functioning properly, in
large part because of the substantial intervention by the
Fed. The Fed has undertaken a quantitative easing program
whereby they buy U.S. Treasuries and Agency RMBS securities
regularly throughout the week. In addition, they have provided
financing to essentially all aspects of the markets – from
municipal securities to small and large corporations, as well as
foreign central banks. Interest rates remain at or near the lowest
levels seen across the U.S. Treasury curve, and are likely to
remain so until the economy is well on the road to recovery and
inflation is nearing the Fed’s target level of 2%. Given the
excess capacity in the economy caused by the demand shock resulting
from the virus, this could take several years.
“With rates at such low levels refinancing activity is robust
and likely to become even more so as originators add capacity. This
is in spite of the virus and various measures of social distancing
and shelter-in-place prevalent throughout the economy. As
originators add capacity, prevailing mortgage rates available to
borrowers could fall well below 3%. Eventually most borrowers
will have the opportunity to refinance their mortgage and the
effect of such low rates will diminish. Another factor affecting
the Agency RMBS market is the quantitative easing on the part of
the Fed. During the month of July 2020 the Fed purchased over
$100 billion of Agency RMBS. The Fed generally purchases between
$40 and $45 billion per month as part of their quantitative easing
program plus reinvests prepayments in their existing
portfolio. The latter figure was approximately $57 billion in
July. Gross supply of Agency RMBS for the month of July is
anticipated to be between $135 billion and $150 billion. The Fed
tends to purchase the coupons currently in production. As
they are an indiscriminate buyer, they remove most of the worst
securities in terms of prepayments behavior from the market.
This is the case for the coupons they purchase. For those
coupons they do not purchase, the market must absorb all that are
produced. As a result, the coupons the Fed purchases tend to
outperform those not purchased by the Fed. For the latter
coupons, specified pools with favorable prepayment characteristics,
become much more valuable to investors. Current premiums
charged for such securities are at the highest levels ever
observed. This is likely to be the case as long as current
conditions persist.
“With prepayment concerns paramount in the current environment,
we continued to focus security selection on the specified pool
market and to a lesser extent lower coupon, 30-year securities that
offered attractive carry potential. We continue to
de-emphasize structured securities in this environment in light of
high speeds and potential liquidity issues should market conditions
deteriorate again. Our security selections have brought the
weighted average coupon down slightly as well. As I said
above, with the economic outlook very uncertain, given the pandemic
and both the Fed and Congress clearly willing and able to support
the economy and markets as needed, we anticipate the current rate
levels will remain over the short to medium term. If this
proves to be the case, we would anticipate book value volatility to
abate and relative performance to be driven by realized net
interest margins. Accordingly, our focus will remain on
managing premium amortization and therefore protecting the
portfolio from excessive prepayments. We expect that the low
level of rates, if realized, will keep funding levels low as well,
and supportive of our net interest margin. Finally, our hedge
strategy has shifted as a result of these developments as well and
we now utilize volatility linked instruments such as swaptions
given the low levels of implied volatility reflected in market
pricing. Earnings Conference Call
Details
An earnings conference call and live audio webcast will be
hosted Friday, July 31, 2020, at 10:00 AM ET. The conference
call may be accessed by dialing toll free (877) 341-5668.
International callers dial (224) 357-2205. The conference
passcode is 5051924. The supplemental materials may be
downloaded from the investor relations section of the Company’s
website at www.orchidislandcapital.com. A live audio webcast of the
conference call can be accessed via the investor relations section
of the Company’s website at www.orchidislandcapital.com, and an
audio archive of the webcast will be available until August 31,
2020.
About Orchid Island Capital, Inc.
Orchid Island Capital, Inc. is a specialty finance company that
invests on a leveraged basis in Agency RMBS. Our investment
strategy focuses on, and our portfolio consists of, two categories
of Agency RMBS: (i) traditional pass-through Agency RMBS and CMOs,
such as mortgage pass-through certificates issued by the GSEs, and
(ii) structured Agency RMBS, such as IOs, IIOs and principal only
securities, among other types of structured Agency RMBS. Orchid is
managed by Bimini Advisors, LLC, a registered investment adviser
with the Securities and Exchange Commission.
Forward Looking Statements
Statements herein relating to matters that are not historical
facts, including, but not limited to statements regarding interest
rates, liquidity, pledging of our structured RMBS, funding levels
and spreads, prepayment speeds, refinancing activity, portfolio
positioning and repositioning, book value, investment and operating
strategy, hedging levels, the supply and demand for Agency RMBS,
the effect of actions of the U.S. government, including the Fed,
market expectations, future dividends, the success of, and costs
associated with, the implementation of our remote working policy,
the stock repurchase program and general economic conditions, are
forward-looking statements as defined in the Private Securities
Litigation Reform Act of 1995. The reader is cautioned that such
forward-looking statements are based on information available at
the time and on management's good faith belief with respect to
future events, and are subject to risks and uncertainties that
could cause actual performance or results to differ materially from
those expressed in such forward-looking statements. Important
factors that could cause such differences are described in Orchid
Island Capital, Inc.'s filings with the Securities and Exchange
Commission, including its most recent Annual Report on Form 10-K
and Quarterly Reports on Form 10-Q. Orchid Island Capital, Inc.
assumes no obligation to update forward-looking statements to
reflect subsequent results, changes in assumptions or changes in
other factors affecting forward-looking statements.
CONTACT:Orchid Island Capital, Inc.Robert E. Cauley,
772-231-1400Chairman and Chief Executive
Officerwww.orchidislandcapital.com
Summarized Financial Statements
The following is a summarized presentation of the unaudited
balance sheets as of June 30, 2020, and December 31, 2019, and
the unaudited quarterly results of operations for the six and three
months ended June 30, 2020 and 2019. Amounts presented are
subject to change.
ORCHID ISLAND CAPITAL, INC. |
BALANCE SHEETS |
($ in thousands, except per share data) |
(Unaudited - Amounts Subject to Change) |
|
|
|
|
|
|
|
|
|
|
June 30, 2020 |
December 31, 2019 |
ASSETS: |
|
|
|
|
Total
mortgage-backed securities |
$ |
3,304,761 |
$ |
3,590,921 |
Cash, cash
equivalents and restricted cash |
|
236,030 |
|
278,655 |
Accrued interest
receivable |
|
10,241 |
|
12,404 |
Derivative assets,
at fair value |
|
8,231 |
|
- |
Receivable for
securities sold |
|
727 |
|
- |
Other
assets |
|
140,418 |
|
100 |
Total Assets |
$ |
3,700,408 |
$ |
3,882,080 |
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
Repurchase
agreements |
$ |
3,174,739 |
$ |
3,448,106 |
Dividends
payable |
|
3,642 |
|
5,045 |
Derivative
liabilities, at fair value |
|
33,229 |
|
20,658 |
Accrued interest
payable |
|
706 |
|
11,101 |
Due to
affiliates |
|
569 |
|
622 |
Obligation to
return securities borrowed under reverse repurchase agreements, at
fair value |
|
139,843 |
|
- |
Other
liabilities |
|
1,712 |
|
1,041 |
Total
Liabilities |
|
3,354,440 |
|
3,486,573 |
Total Stockholders' Equity |
|
345,968 |
|
395,507 |
Total Liabilities and Stockholders' Equity |
$ |
3,700,408 |
$ |
3,882,080 |
Common shares
outstanding |
|
66,220,664 |
|
63,061,781 |
Book
value per share |
$ |
5.22 |
$ |
6.27 |
ORCHID ISLAND CAPITAL, INC. |
STATEMENTS OF OPERATIONS |
($ in thousands, except per share data) |
(Unaudited - Amounts Subject to Change) |
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
Three Months Ended June 30, |
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
Interest income |
$ |
62,929 |
|
$ |
68,888 |
|
$ |
27,258 |
|
$ |
36,455 |
|
Interest expense |
|
(21,002 |
) |
|
(41,323 |
) |
|
(4,479 |
) |
|
(22,431 |
) |
Net interest income |
|
41,927 |
|
|
27,565 |
|
|
22,779 |
|
|
14,024 |
|
(Losses) gains on RMBS and derivative contracts |
|
(79,457 |
) |
|
(8,418 |
) |
|
28,749 |
|
|
(7,670 |
) |
Net portfolio (loss)
income |
|
(37,530 |
) |
|
19,147 |
|
|
51,528 |
|
|
6,354 |
|
Expenses |
|
4,897 |
|
|
5,017 |
|
|
2,756 |
|
|
2,821 |
|
Net (loss) income |
$ |
(42,427 |
) |
$ |
14,130 |
|
$ |
48,772 |
|
$ |
3,533 |
|
Basic net (loss) income per share |
$ |
(0.65 |
) |
$ |
0.28 |
|
$ |
0.74 |
|
$ |
0.07 |
|
Diluted net (loss) income per share |
$ |
(0.65 |
) |
$ |
0.28 |
|
$ |
0.73 |
|
$ |
0.07 |
|
Weighted Average Shares Outstanding |
|
65,408,722 |
|
|
50,762,883 |
|
|
66,310,219 |
|
|
52,600,758 |
|
Dividends Declared Per Common Share: |
$ |
0.405 |
|
$ |
0.480 |
|
$ |
0.165 |
|
$ |
0.240 |
|
|
|
Three Months Ended June 30, |
Key Balance Sheet Metrics |
|
2020 |
|
2019 |
|
Average RMBS(1) |
|
$ |
3,126,779 |
|
$ |
3,307,885 |
|
Average repurchase
agreements(1) |
|
|
2,992,494 |
|
|
3,098,133 |
|
Average stockholders'
equity(1) |
|
|
327,057 |
|
|
350,036 |
|
Leverage ratio(2) |
|
|
9.7:1 |
|
|
9.4:1 |
|
|
|
|
|
|
|
Key Performance
Metrics |
|
|
|
|
|
Average yield on RMBS(3) |
|
|
3.49 |
% |
|
4.41 |
% |
Average cost of funds(3) |
|
|
0.60 |
% |
|
2.90 |
% |
Average economic cost of
funds(4) |
|
|
1.37 |
% |
|
2.71 |
% |
Average interest rate
spread(5) |
|
|
2.89 |
% |
|
1.51 |
% |
Average
economic interest rate spread(6) |
|
|
2.12 |
% |
|
1.70 |
% |
(1) Average RMBS, borrowings and stockholders’ equity balances
are calculated using two data points, the beginning and ending
balances.(2) The leverage ratio is calculated by dividing total
ending liabilities by ending stockholders’ equity. (3)
Portfolio yields and costs of funds are calculated based on the
average balances of the underlying investment portfolio/borrowings
balances and are annualized for the quarterly periods presented.(4)
Represents the interest cost of our borrowings and the effect of
derivative agreements attributed to the period related to hedging
activities, divided by average borrowings.(5) Average interest rate
spread is calculated by subtracting average cost of funds from
average yield on RMBS.(6) Average economic interest rate spread is
calculated by subtracting average economic cost of funds from
average yield on RMBS.
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