SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 1, 2014
Orchid Island Capital, Inc.
(Exact Name of Registrant as Specified in Charter)
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Maryland
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001-35236
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27-3269228
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(State or Other Jurisdiction of Incorporation)
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(Commission File Number)
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(IRS Employer Identification No.)
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3305 Flamingo Drive, Vero Beach, Florida 32963
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code (772) 231-1400
N/A
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
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¨
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
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¨
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
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¨
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
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¨
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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ITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
On May 1, 2014, Orchid Island Capital, Inc. (the “Company”) issued the press release attached hereto as Exhibit 99.1 announcing the Company’s results of operations for the period ended March 31, 2014. The information furnished under this “Item 2.02 Results of Operations and Financial Condition,” including the exhibit related hereto, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any disclosure document of the Company, except as shall be expressly set forth by specific reference in such document.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
(d) Exhibits
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99.1
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Press Release dated May 1, 2014
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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Date: May 1, 2014
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ORCHID ISLAND CAPITAL, INC.
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By:
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/s/ Robert E. Cauley
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Robert E. Cauley
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Chairman and Chief Executive Officer
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EXHIBIT 99.1
ORCHID ISLAND CAPITAL ANNOUNCES FIRST QUARTER 2014 RESULTS
VERO BEACH, Fla. (May 1, 2014) – Orchid Island Capital, Inc. (NYSE MKT:ORC) ("Orchid” or the "Company"), a real estate investment trust ("REIT"), today announced results of operations for the three month period ended March 31, 2014.
First Quarter 2014 Highlights
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·
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Net income of $3.6 million, or $0.71 per common share
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·
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First quarter total dividend payments of $0.54 per common share
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·
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Book Value Per Share of $12.47 at March 31, 2014
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·
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2.9% economic loss on common equity for the quarter, or 11.6% annualized, comprised of $0.54 dividend per common share and $0.93 decrease in net book value per common share, divided by beginning book value per share
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·
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Company to discuss results on Friday, May 2, 2014, at 10:00 AM ET
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Details of First Quarter 2014 Results of Operations
The Company reported net income of $3.6 million for the three-month period ended March 31, 2014, compared with net income of $0.4 million for the three month period ended March 31, 2013. The first quarter net income of $3.6 million included net interest income of $3.4 million, net gains of $0.8 million (which includes mark to market gains, realized gains on securities sold and losses on funding hedges), audit, legal and other professional fees of $0.1 million, management fees of $0.3 million, and other operating, general and administrative expenses of $0.2 million. During the first quarter of 2014, the Company sold mortgage-backed securities (“RMBS”) with a market value at the time of sale of $141.3 million, resulting in realized gains of $0.9 million (based on security prices from December 31, 2013). The remaining net gain on RMBS was due to fair value adjustments for the period.
Capital Allocation and Return on Invested Capital
The Company allocates capital to two RMBS sub-portfolios, the pass-through RMBS portfolio (“PT RMBS”), and the structured RMBS portfolio, consisting of interest only (“IO”) and inverse interest-only (“IIO”) securities. As of December 31, 2013, approximately 44% of the Company’s investable capital (which consists of equity in pledged PT RMBS, available cash and unencumbered assets) was deployed in the PT RMBS portfolio. At March 31, 2014, the allocation to the PT RMBS had increased 12% to approximately 56%.
The table below details the changes to the respective sub-portfolios during the quarter, as well as the returns generated by each.
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Portfolio Activity for the Quarter
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||||||||||||||||||||
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Structured Security Portfolio
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||||||||||||||||||||
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Pass-Through
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Interest-Only
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Inverse Interest
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Portfolio
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Securities
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Only Securities
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Sub-total
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Total
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||||||||||||||||
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Market Value - December 31, 2013
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$ | 326,975,173 | $ | 19,205,809 | $ | 5,041,530 | $ | 24,247,339 | $ | 351,222,512 | ||||||||||
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Securities Purchased
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521,467,950 | 17,876,998 | 6,407,041 | 24,284,039 | 545,751,989 | |||||||||||||||
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Securities Sold
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(141,297,295 | ) | - | - | - | (141,297,295 | ) | |||||||||||||
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Gains on Sales
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911,318 | - | - | - | 911,318 | |||||||||||||||
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Return on Investment
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n/a | (2,362,650 | ) | (623,582 | ) | (2,986,232 | ) | (2,986,232 | ) | |||||||||||
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Pay-downs
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(7,384,780 | ) | n/a | n/a | n/a | (7,384,780 | ) | |||||||||||||
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Premium Lost Due to Pay-downs
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(343,750 | ) | n/a | n/a | n/a | (343,750 | ) | |||||||||||||
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Mark to Market Gains (Losses)
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1,147,586 | 961,279 | (225,127 | ) | 736,152 | 1,883,738 | ||||||||||||||
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Market Value - March 31, 2014
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$ | 701,476,202 | $ | 35,681,436 | $ | 10,599,862 | $ | 46,281,298 | $ | 747,757,500 | ||||||||||
The tables below present the allocation of capital between the respective portfolios at March 31, 2014 and December 31, 2013, and the return on invested capital for each sub-portfolio for the three month period ended March 31, 2014. The return on invested capital in the PT RMBS and structured RMBS portfolios was approximately 21.1% and 0.5%, respectively, for the first quarter of 2014. The combined portfolio generated a return on invested capital of approximately 9.5%. Due to the two secondary offerings completed during the quarter ended March 31, 2014, the capital allocated to the respective portfolios increased by over 100%. Accordingly, returns generated based on the beginning of period capital may be misleading. We have added the return on average capital deployed to address this issue.
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Capital Allocation
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||||||||||||||||||||
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Structured Security Portfolio
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Pass-Through
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Interest-Only
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Inverse Interest
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Portfolio
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Securities
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Only Securities
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Sub-total
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Total
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||||||||||||||||
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March 31, 2014
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Market Value
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$ | 701,476,202 | $ | 35,681,436 | $ | 10,599,862 | $ | 46,281,298 | $ | 747,757,500 | ||||||||||
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Cash(1)
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8,160,979 | - | - | - | 8,160,979 | |||||||||||||||
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Repurchase Agreement Obligations(2)
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(651,246,345 | ) | - | - | - | (651,246,345 | ) | |||||||||||||
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Total
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$ | 58,390,836 | $ | 35,681,436 | $ | 10,599,862 | $ | 46,281,298 | $ | 104,672,134 | ||||||||||
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% of Total
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55.8 | % | 34.1 | % | 10.1 | % | 44.2 | % | 100.0 | % | ||||||||||
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December 31, 2013
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Market Value
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$ | 326,975,173 | $ | 19,205,809 | $ | 5,041,530 | $ | 24,247,339 | $ | 351,222,512 | ||||||||||
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Cash
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10,615,027 | - | - | - | 10,615,027 | |||||||||||||||
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Repurchase Agreement Obligations
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(318,557,054 | ) | - | - | - | (318,557,054 | ) | |||||||||||||
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Total
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$ | 19,033,146 | $ | 19,205,809 | $ | 5,041,530 | $ | 24,247,339 | $ | 43,280,485 | ||||||||||
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% of Total
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44.0 | % | 44.4 | % | 11.6 | % | 56.0 | % | 100.0 | % | ||||||||||
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(1)
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At March 31, 2014, total cash has been reduced by unsettled security purchases of approximately $39.5 million.
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(2)
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At March 31, 2014, there were outstanding repurchase agreement balances of $6.0 million and $5.4 million secured by interest-only and inverse interest-only securities, respectively. We entered into these arrangements to generate additional cash to invest in pass-through RMBS; therefore, we have not considered these balances to be allocated to the structured securities strategy.
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Returns for the Quarter
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Structured Security Portfolio
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Pass-Through
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Interest-Only
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Inverse Interest
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Portfolio
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Securities
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Only Securities
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Sub-total
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Total
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Income / (loss) (net of repo cost)
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$ | 3,990,307 | $ | (736,897 | ) | $ | 117,835 | $ | (619,062 | ) | $ | 3,371,245 | ||||||||
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Realized and unrealized gains / (losses)
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1,715,154 | 961,279 | (225,127 | ) | 736,152 | 2,451,306 | ||||||||||||||
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Hedge losses
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(1,693,292 | ) | n/a | n/a | n/a | (1,693,292 | ) | |||||||||||||
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Total Return
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$ | 4,012,169 | $ | 224,382 | $ | (107,292 | ) | $ | 117,090 | $ | 4,129,259 | |||||||||
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Beginning Capital Allocation
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$ | 19,033,146 | $ | 19,205,809 | $ | 5,041,530 | $ | 24,247,339 | $ | 43,280,485 | ||||||||||
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Return on Invested Capital for the Quarter(1)
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21.1 | % | 1.2 | % | (2.1 | )% | 0.5 | % | 9.5 | % | ||||||||||
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Average Capital Allocation(2)
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$ | 38,711,991 | $ | 27,443,623 | $ | 7,820,696 | $ | 35,264,319 | $ | 73,976,310 | ||||||||||
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Return on Average Invested Capital for the Quarter(3)
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10.4 | % | 0.8 | % | (1.4 | )% | 0.3 | % | 5.6 | % | ||||||||||
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(1)
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Calculated by dividing the Total Return by the Beginning Capital Allocation, expressed as a percentage.
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(2)
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Calculated using two data points, the Beginning and Ending Capital Allocation balances.
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(3)
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Calculated by dividing the Total Return by the Average Capital Allocation, expressed as a percentage.
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Prepayments
For the quarter, Orchid received $10.4 million in scheduled and unscheduled principal repayments and prepayments, which equated to a constant prepayment rate (“CPR”) of approximately 9.1% for the first quarter of 2014. Prepayment rates on the two RMBS sub-portfolios were as follows: (in CPR).
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Structured
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||||||||||||
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PT RMBS
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RMBS
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Total
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||||||||||
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Three Months Ended,
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Portfolio (%)
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Portfolio (%)
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Portfolio (%)
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March 31, 2014
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4.2 | 14.9 | 9.1 | |||||||||
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December 31, 2013
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5.3 | 17.9 | 9.9 | |||||||||
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September 30, 2013
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6.5 | 28.2 | 12.6 | |||||||||
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June 30, 2013
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6.5 | 29.8 | 16.3 | |||||||||
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March 31, 2013
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9.2 | 33.0 | 20.0 | |||||||||
Portfolio
As of March 31, 2014, Orchid’s RMBS portfolio consisted of $747.8 million of PT RMBS and structured RMBS at fair value and had a weighted average coupon of 4.13%. The following tables summarize Orchid’s PT RMBS and structured RMBS as of March 31, 2014 and December 31, 2013:
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($ in thousands)
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|||||||||
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Weighted
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Weighted
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||||||||
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Percentage
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Average
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Average
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Weighted
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Weighted
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|||||
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of
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Weighted
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Maturity
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Coupon
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Average
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Average
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||||
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Fair
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Entire
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Average
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in
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Longest
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Reset in
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Lifetime
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Periodic
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||
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Asset Category
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Value
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Portfolio
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Coupon
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Months
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Maturity
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Months
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Cap
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Cap
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March 31, 2014
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Adjustable Rate RMBS
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$
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4,698
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0.6%
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4.10%
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242
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1-Sep-35
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1.93
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10.16%
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2.00%
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Fixed Rate RMBS
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620,928
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83.0%
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4.27%
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311
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1-Apr-44
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NA
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NA
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NA
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Hybrid Adjustable Rate RMBS
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75,850
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10.1%
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2.55%
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347
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1-Aug-43
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106.65
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7.55%
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2.00%
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Total Mortgage-backed Pass-through
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701,476
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93.7%
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4.09%
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314
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1-Apr-44
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100.54
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7.71%
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2.00%
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Interest-Only Securities
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35,681
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4.8%
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4.32%
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266
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15-Dec-40
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NA
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NA
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NA
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Inverse Interest-Only Securities
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10,600
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1.5%
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6.04%
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308
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15-Dec-40
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NA
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2.42%
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NA
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Total Structured RMBS
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46,281
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6.3%
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4.71%
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276
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15-Dec-40
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NA
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NA
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NA
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Total Mortgage Assets
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$
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747,757
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100.0%
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4.13%
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312
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1-Apr-44
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NA
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NA
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NA
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|
December 31, 2013
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|||||||||
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Adjustable Rate RMBS
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$
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5,334
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1.5%
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3.92%
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247
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1-Sep-35
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3.77
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10.13%
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2.00%
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Fixed Rate RMBS
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245,523
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69.9%
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4.05%
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323
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1-Dec-43
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NA
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NA
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NA
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Hybrid Adjustable Rate RMBS
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76,118
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21.7%
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2.56%
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350
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1-Aug-43
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109.60
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7.56%
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2.00%
|
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Total Mortgage-backed Pass-through
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326,975
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93.1%
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3.70%
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328
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1-Dec-43
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102.67
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7.72%
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2.00%
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Interest-Only Securities
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19,206
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5.5%
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4.39%
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261
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25-Nov-40
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NA
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NA
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NA
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Inverse Interest-Only Securities
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5,042
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1.4%
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5.92%
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317
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15-Dec-40
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NA
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6.08%
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NA
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Total Structured RMBS
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24,248
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6.9%
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4.71%
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272
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15-Dec-40
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NA
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NA
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NA
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Total Mortgage Assets
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$
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351,223
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100.0%
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3.77%
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324
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1-Dec-43
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NA
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NA
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NA
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($ in thousands)
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||||||||||||||||
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March 31, 2014
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December 31, 2013
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|||||||||||||||
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Percentage of
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Percentage of
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|||||||||||||||
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Agency
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Fair Value
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Entire Portfolio
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Fair Value
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Entire Portfolio
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||||||||||||
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Fannie Mae
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$ | 419,300 | 56.07 | % | $ | 211,063 | 60.09 | % | ||||||||
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Freddie Mac
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303,195 | 40.55 | % | 121,842 | 34.69 | % | ||||||||||
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Ginnie Mae
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25,262 | 3.38 | % | 18,318 | 5.22 | % | ||||||||||
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Total Portfolio
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$ | 747,757 | 100.00 | % | $ | 351,223 | 100.00 | % | ||||||||
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March 31, 2014
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December 31, 2013
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|||||||
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Weighted Average Pass Through Purchase Price
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$ | 106.54 | $ | 105.60 | ||||
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Weighted Average Structured Purchase Price
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$ | 12.93 | $ | 12.11 | ||||
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Weighted Average Pass Through Current Price
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$ | 105.89 | $ | 102.83 | ||||
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Weighted Average Structured Current Price
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$ | 14.34 | $ | 14.59 | ||||
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Effective Duration (1)
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3.831 | 4.188 | ||||||
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(1)
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Effective duration of 3.831 indicates that an interest rate increase of 1.0% would be expected to cause a 3.831% decrease in the value of the RMBS in the Company’s investment portfolio at March 31, 2014. An effective duration of 4.188 indicates that an interest rate increase of 1.0% would be expected to cause a 4.188% decrease in the value of the RMBS in the Company’s investment portfolio at December 31, 2013. These figures include the structured securities in the portfolio, but do not include the effect of the Company’s funding cost hedges.
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Financing, Leverage and Liquidity
As of March 31, 2014, the Company had outstanding repurchase obligations of approximately $651.2 million with a net weighted average borrowing rate of 0.35%. These agreements were collateralized by RMBS with a fair value, including accrued interest, of approximately $691.7 million. The Company’s leverage ratio at March 31, 2014 was 6.1 to 1, excluding the $39.5 million of payable for unsettled securities purchased at March 31, 2014. At March 31, 2014, the Company’s liquidity was approximately $62.5 million, consisting of unpledged RMBS (excluding the value of the unsettled purchases) and cash and cash equivalents. To enhance our liquidity even further, we may pledge more of our structured RMBS as part of a repurchase agreement funding, but retain the cash in lieu of acquiring additional assets. In this way we can, at a modest cost, retain higher levels of cash on hand and decrease the likelihood we will have to sell assets in a distressed market in order to raise cash. Below is a listing of outstanding borrowings under repurchase obligations at March 31, 2014.
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(in thousands)
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||||||||||||||||||||
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Weighted
|
Weighted
|
|||||||||||||||||||
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Total
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Average
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Average
|
||||||||||||||||||
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Outstanding
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% of
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Borrowing
|
Amount
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Maturity
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||||||||||||||||
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Counterparty
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Balances
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Total
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Rate
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at Risk(1)
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in Days
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|||||||||||||||
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Citigroup Global Markets, Inc.
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$ | 154,732 | 23.8 | % | 0.36 | % | $ | 10,099 | 19 | |||||||||||
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Cantor Fitzgerald & Co.
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80,889 | 12.4 | % | 0.34 | % | 4,265 | 19 | |||||||||||||
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Goldman Sachs & Co.
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68,871 | 10.6 | % | 0.36 | % | 3,873 | 23 | |||||||||||||
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CRT Capital Group, LLC
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64,183 | 9.9 | % | 0.35 | % | 3,521 | 61 | |||||||||||||
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Mitsubishi UFJ Securities (USA), Inc.
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59,896 | 9.2 | % | 0.33 | % | 3,265 | 31 | |||||||||||||
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Mizuho Securities USA, Inc.
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42,142 | 6.5 | % | 0.45 | % | 4,910 | 12 | |||||||||||||
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South Street Securities, LLC
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41,002 | 6.3 | % | 0.34 | % | 1,990 | 14 | |||||||||||||
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Suntrust Robinson Humphrey, Inc.
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39,953 | 6.1 | % | 0.34 | % | 2,345 | 11 | |||||||||||||
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KGS - Alpha Capital Markets, L.P.
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38,055 | 5.8 | % | 0.33 | % | 2,524 | 30 | |||||||||||||
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Morgan Stanley & Co. LLC
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36,822 | 5.7 | % | 0.36 | % | 2,660 | 43 | |||||||||||||
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ED&F Man Capital Markets Inc.
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24,701 | 3.7 | % | 0.32 | % | 1,435 | 16 | |||||||||||||
| $ | 651,246 | 100.0 | % | 0.35 | % | $ | 40,887 | 25 | ||||||||||||
Hedging
In connection with its interest rate risk management strategy, the Company economically hedges a portion of the cost of its repurchase agreement funding by entering into derivative financial instrument contracts. The Company has not elected hedging treatment under GAAP, and as such, all gains or losses on these instruments are reflected in earnings for all periods presented. As of March 31, 2014, such instruments were comprised of Eurodollar futures contracts with an average contract notional amount of $400.0 million and a weighted average fixed LIBOR rate of 2.01%, and an interest rate swaption agreement, giving the Company the option to enter into a pay fixed interest rate swap (“payer swaption”). The table below presents information related to the Company’s Eurodollar futures contracts at March 31, 2014.
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($ in thousands)
|
||||||||||||
|
Average
|
||||||||||||
|
Weighted
|
Contract
|
|||||||||||
|
Average
|
Notional
|
Open
|
||||||||||
|
Expiration Year
|
LIBOR Rate
|
Amount
|
Equity(1)
|
|||||||||
|
2014
|
0.32 | % | $ | 400,000 | $ | (211 | ) | |||||
|
2015
|
0.78 | % | 400,000 | (264 | ) | |||||||
|
2016
|
1.90 | % | 400,000 | 1,354 | ||||||||
|
2017
|
2.85 | % | 400,000 | 1,777 | ||||||||
|
2018
|
3.44 | % | 350,000 | 797 | ||||||||
|
Total / Weighted Average
|
2.01 | % | $ | 390,625 | $ | 3,453 | ||||||
|
(1)
|
Open equity represents the cumulative gains (losses) recorded on open futures positions.
|
The table below presents information related to the Company’s interest rate swaption position at March 31, 2014.
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($ in thousands)
|
|||||||
|
Option
|
Underlying Swap
|
||||||
|
Fixed
|
Receive
|
||||||
|
Fair
|
Months to
|
Notional
|
Pay
|
Rate
|
Term
|
||
|
Expiration
|
Cost
|
Value
|
Expiration
|
Amount
|
Rate
|
(LIBOR)
|
(Years)
|
|
≤ 1 year
|
$1,705 | $1,549 |
12
|
$100,000 |
2.53%
|
3M
|
5
|
Dividends
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 IPO.
|
Declaration Date
|
Record Date
|
Payment Date
|
Per Share Amount
|
Total
|
||||||
|
2014
|
||||||||||
|
April 8, 2014(1)
|
April 25, 2014
|
April 30, 2014
|
$ | 0.180 | $ | 1,636,500 | ||||
|
March 11, 2014
|
March 26, 2014
|
March 31, 2014
|
0.180 | 1,550,100 | ||||||
|
February 11, 2014
|
February 25, 2014
|
February 28, 2014
|
0.180 | 974,100 | ||||||
|
January 9, 2014
|
January 27, 2014
|
January 31, 2014
|
0.180 | 925,500 | ||||||
|
2013
|
||||||||||
|
December 11, 2013
|
December 26, 2013
|
December 30, 2013
|
$ | 0.180 | $ | 601,500 | ||||
|
November 12, 2013
|
November 25, 2013
|
November 27, 2013
|
0.135 | 451,125 | ||||||
|
October 10, 2013
|
October 25, 2013
|
October 31, 2013
|
0.135 | 451,125 | ||||||
|
September 10, 2013
|
September 25, 2013
|
September 30, 2013
|
0.135 | 451,125 | ||||||
|
August 12, 2013
|
August 26, 2013
|
August 30, 2013
|
0.135 | 451,125 | ||||||
|
July 9, 2013
|
July 25, 2013
|
July 31, 2013
|
0.135 | 451,125 | ||||||
|
June 10, 2013
|
June 25, 2013
|
June 28, 2013
|
0.135 | 451,125 | ||||||
|
May 9, 2013
|
May 28, 2013
|
May 31, 2013
|
0.135 | 451,125 | ||||||
|
April 10, 2013
|
April 25, 2013
|
April 30, 2013
|
0.135 | 451,125 | ||||||
|
March 8, 2013
|
March 25, 2013
|
March 27, 2013
|
0.135 | 451,125 | ||||||
|
(1)
|
The effect of the dividends declared in April 2014 is not reflected in the Company’s financial statements as of March 31, 2014.
|
Book Value Per Share
The Company's Book Value Per Share at March 31, 2014 was $12.47. 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 March 31, 2014, the Company's stockholders' equity was $107.4 million with 8,611,665 shares of common stock outstanding.
Secondary Offerings
The Company completed a secondary offering of 1,800,000 common shares on January 23, 2014 at a price of $12.50 per share. The underwriters exercised their overallotment option in full for an additional 270,000 shares on January 29, 2014. The aggregate net proceeds to the Company were approximately $24.2 million which were invested in Agency RMBS securities on a leveraged basis.
The Company completed a secondary offering of 3,200,000 common shares on March 24, 2014 at a price of $12.55 per share. The underwriters exercised their overallotment option in full for an additional 480,000 shares on April 11, 2014. The aggregate net proceeds to the Company were approximately $44.0 million which were invested in Agency RMBS securities on a leveraged basis.
Management Commentary
Commenting on the first quarter, Robert E. Cauley, Chairman and Chief Executive Officer, said, “Orchid Island Capital had a very busy first quarter of 2014. The events that unfolded in 2013, starting with the initial hints by the Federal Reserve in the late spring of 2013 that they would begin to taper their asset purchases, and ending with the December 2013 announcement of the reduced purchases beginning in January 2014, resulted in interest rates at the end of 2013 well above the levels seen at the beginning of the year. Prices of most fixed rate RMBS were down sharply at year end, premiums for call protected securities collapsed and prepayment speeds slowed appreciably - with the mortgage bankers refinance index falling from over 5,000 late in 2012 to under 1,500 in December of 2013. These events put considerable downward pressure on the book values of most Agency RMBS REITs and led many to reduce the size of their balance sheets and/or significantly increase their hedges. We were not forced to do either and were able to reposition our portfolio during the fourth quarter of 2013 to take advantage of the market conditions. As a result, we were able to access the capital markets twice during the first quarter of 2014 when investment opportunities were quite compelling. We completed two secondary offerings – in January and again in March – and increased the size of the Company by over 100%. With the deployment of the proceeds, we were able to reposition the portfolio to best take advantage of the current market environment and position ourselves for the market developments we anticipate over the balance of the year.
“Harsh winter weather conditions are widely considered to have led to depressed economic data around year end and into the first quarter of 2014. The weak economic data observed caused the market to rally sharply in January as the yield on the ten year treasury rallied from just over 3.0% at year-end 2013 to under 2.60% in early February. Since then the market has settled into a well-defined range as the yield of the ten year note has hovered between 2.60% and 2.80% for 13 weeks now. Volatility in the market has come off as expected, and prepayment speeds – as measured by the RMBS conventional refinancing index - have stayed at or below 1,500 during the quarter. This leads to a very conducive market for RMBS investing and coupon clipping. This has occurred in the face of reduced purchases by the Federal Reserve. With refinancing activity very low, supply of RMBS has decreased accordingly and the reduced demand on the part of the Federal Reserve has not had the impact on RMBS spreads many feared. With the ultimate end of RMBS purchases by the Federal Reserve clearly in sight, most multi-sector fixed income investors are underweight in their allocations to Agency RMBS. The resulting selling has had some impact on RMBS spreads, as the conventional 30 year fixed rate current coupon mortgage trades at a wider spread to 10 year swaps than it did at the beginning of the year. However, the reduced supply of RMBS has kept this spread from widening further. Market participants are currently split on what the eventual end of Federal Reserve purchases will mean for RMBS prices, but we think the current underweight by multi-sector fixed income investors will lead to buying when and if RMBS spreads widen as Federal Reserve purchases stop. Accordingly we do not anticipate meaningful widening absent another external event.
“As for the portfolio, we have completed the deployment of the $68.2 million of net proceeds from the two offerings in the first quarter, including the exercise of the underwriters’ over-allotment option on April 11, 2014 of 480,000 additional shares. Our leverage ratio was 6.1:1 at March 31, 2014 and stands at approximately 6.8:1 today versus 7.1:1 at December 31, 2013. The leverage ratio at March 31, 2014 did not reflect the settlement of certain RMBS purchases or the deployment of the proceeds from the exercise of the underwriters’ over-allotment option in early April. We have continued to increase our allocation to fixed rate RMBS away from ARM’s – both hybrid ARM’s and short reset ARM’s. Our fixed rate allocation was approximately 83% of the portfolio at March 31, 2014 versus approximately 69.9% at December 31, 2013. Within the fixed rate sub-portfolio, our holdings are concentrated in 30 year securities and, to a much lesser extent 20 year securities. We have purchased most of our 30 year fixed rate securities with some form of call protection – predominantly low loan balance collateral. The pay-up premiums of these securities are significantly lower than we have observed for several years and these securities offer very attractive returns in the event of a rally in rates – the outcome least expected by market participants. As with the end of the year, most position indicators we track indicate the market is still positioned for higher rates and there remains the risk the market could be surprised by a rally – what traders call the “pain trade”. The weighted average coupon of our fixed rate position was 4.27% at March 31, 2014 versus 4.05% at December 31, 2013. Our allocation to 15 year securities remains low as well as the weighted average maturity of the fixed rate sub-portfolio is 311 months at March 31, 2014 versus 323 months at December 31, 2013. The allocation to structured RMBS was reduced from 56.0% at December 31, 2013 to 44.2% at March 31, 2014. The primary focus has been on higher coupon 30 year collateral – predominantly 4.5% fixed rates. The other area is 15 year securities - as we anticipate the belly of the curve – or the 3 to 7 year maturity range – will lead the sell-off as the economy recovers, thus increasing 15 year rates in relation to 30 year rates. The spread between 5 and 10 year treasury rates has already decreased by over 30 basis points year to date. Most of the additions have been IO securities as the IIO allocation remains near 1.4% of the portfolio. As for our funding hedges, we continue to use Eurodollar futures contracts with maturities out approximately 5 years and have added a payer swaption with a one year option period struck on the five year part of the curve.
“Going forward we anticipate prepayment speeds will remain low and rates to gradually increase as the economy recovers. The curve is likely to continue to flatten as the market anticipates the eventual beginning of rate increases by the Federal Reserve. In the event that we are wrong and RMBS prices rally, we have substantial protection from higher prepayments from the call-protected securities we have added, and if the curve steepens our higher coupon and IO positions should benefit.”
Earnings Conference Call Details
An earnings conference call and live audio webcast will be hosted Friday, May 2, 2014, 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 37102775. 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 for approximately one year.
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 (ii) structured Agency RMBS, such as CMOs, IOs, IIOs and POs, 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 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, 772-231-1400
Chairman and Chief Executive Officer
www.orchidislandcapital.com
Summarized Financial Statements
The following is a summarized presentation of the unaudited balance sheets as of March 31, 2014, and December 31, 2013, and the unaudited quarterly results of operations for the calendar quarters ended March 31, 2014 and 2013. Amounts presented are subject to change.
|
ORCHID ISLAND CAPITAL, INC.
|
||||||||
|
BALANCE SHEETS
|
||||||||
|
(Unaudited - Amounts Subject To Change)
|
||||||||
|
March 31, 2014
|
December 31, 2013
|
|||||||
|
ASSETS:
|
||||||||
|
Total mortgage-backed securities
|
$ | 747,757,500 | $ | 351,222,512 | ||||
|
Cash, cash equivalents and restricted cash
|
47,663,673 | 10,615,027 | ||||||
|
Accrued interest receivable
|
2,875,420 | 1,559,437 | ||||||
|
Derivative asset, at fair value
|
1,548,521 | - | ||||||
|
Prepaid expenses and other assets
|
292,315 | 179,071 | ||||||
|
Total Assets
|
$ | 800,137,429 | $ | 363,576,047 | ||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||
|
Repurchase agreements
|
$ | 651,246,345 | $ | 318,557,054 | ||||
|
Payable for unsettled securities purchased
|
39,502,694 | - | ||||||
|
Accrued interest payable
|
116,677 | 91,461 | ||||||
|
Due to affiliates
|
132,200 | 81,925 | ||||||
|
Accounts payable, accrued expenses and other
|
1,729,799 | 80,260 | ||||||
|
Total Liabilities
|
692,727,715 | 318,810,700 | ||||||
|
Total Stockholders' Equity
|
107,409,714 | 44,765,347 | ||||||
|
Total Liabilities and Stockholders' Equity
|
$ | 800,137,429 | $ | 363,576,047 | ||||
|
Common shares outstanding
|
8,611,665 | 3,341,665 | ||||||
|
Book value per share
|
$ | 12.47 | $ | 13.40 | ||||
|
ORCHID ISLAND CAPITAL, INC.
|
||||||||
|
STATEMENTS OF OPERATIONS
|
||||||||
|
(Unaudited - Amounts Subject to Change)
|
||||||||
|
Three Months Ended March 31,
|
||||||||
|
2014
|
2013
|
|||||||
|
Interest income
|
$ | 3,782,622 | $ | 1,413,258 | ||||
|
Interest expense
|
(410,843 | ) | (201,420 | ) | ||||
|
Net interest income
|
3,371,779 | 1,211,838 | ||||||
|
Gains (losses)
|
758,014 | (413,160 | ) | |||||
|
Net portfolio income
|
4,129,793 | 798,678 | ||||||
|
Expenses
|
534,529 | 398,320 | ||||||
|
Net income
|
$ | 3,595,264 | $ | 400,358 | ||||
|
Basic and diluted net income per share
|
$ | 0.71 | $ | 0.20 | ||||
|
Dividends Declared Per Common Share:
|
$ | 0.540 | $ | 0.135 | ||||
|
Three Months Ended
|
||||||||
|
March 31,
|
||||||||
|
Key Balance Sheet Metrics
|
2014
|
2013
|
||||||
|
Average RMBS(1)
|
$ | 549,490,005 | $ | 237,819,924 | ||||
|
Average repurchase agreements(1)
|
484,901,700 | 210,193,522 | ||||||
|
Average stockholders' equity(1)
|
76,087,531 | 32,399,592 | ||||||
|
Leverage ratio(2)
|
6.1:1
|
6.3:1
|
||||||
|
Key Performance Metrics
|
||||||||
|
Average yield on RMBS(3)
|
2.75 | % | 2.38 | % | ||||
|
Average cost of funds(3)
|
0.34 | % | 0.38 | % | ||||
|
Average economic cost of funds(4)
|
0.36 | % | 0.51 | % | ||||
|
Average interest rate spread(5)
|
2.41 | % | 2.00 | % | ||||
|
Average economic interest rate spread(6)
|
2.39 | % | 1.87 | % | ||||
|
(1)
|
Average RMBS, repurchase agreements 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. At March 31, 2014, the $39.5 million of payable for unsettled securities purchased has been excluded from the total liabilities for this ratio.
|
|
(3)
|
Portfolio yields and costs of funds are calculated based on the average balances of the underlying investment portfolio/repurchase agreement balances and are annualized for the quarterly periods presented.
|
|
(4)
|
Represents interest cost of our borrowings and effect of Eurodollar futures contracts hedges attributed to the period related to hedging activities, divided by average repurchase agreements.
|
|
(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.
|