UNITED STATES
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): October 24, 2019
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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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
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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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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class:
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Trading symbol:
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Name of each exchange on which registered:
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Common Stock, par value $0.01 per share
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ORC
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NYSE
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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of
1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
ITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
On October 24, 2019, 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 September 30, 2019. In addition, the Company posted supplemental financial information on the investor
relations section of its website (www.orchidislandcapital.com).
The press release, attached as Exhibit 99.1, is being furnished under this “Item 2.02 Results of Operations and Financial Condition,” and 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.
Forward-Looking Statements
Disclaimer
This Current Report on Form 8-K contains “forward-looking statements” made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, including, but not limited to statements regarding interest rates, liquidity, pledging of our structured RMBS, funding levels and spreads, prepayment speeds, portfolio positioning and repositioning, hedging
levels, the supply and demand for Agency RMBS, the effect of actions of the U.S. government, including the Fed, market expectations, the stock repurchase program and general economic conditions. Forward-looking statements typically are identified
by use of terms such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions. Forward-looking statements are based on the Company’s beliefs, assumptions and expectations of the
Company’s future performance, taking into account all information currently available to the Company. The Company cannot assure you that actual results will not vary from the expectations contained in the forward-looking statements. All of the
forward-looking statements are subject to numerous possible events, factors and conditions, many of which are beyond the control of the Company and not all of which are known to the Company, including, without limitation, market conditions and
those described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, which has been filed with the Securities and Exchange Commission. All forward-looking statements speak only as of the date on which they are
made. New risks and uncertainties arise over time, and it is not possible to predict those events or how they may affect us. Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
(d) Exhibits
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Exhibit No.
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Description
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SIGNATURES
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: October 24, 2019
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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 THIRD QUARTER 2019 RESULTS
VERO BEACH, Fla. (October 24, 2019) – 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 September 30, 2019.
Third Quarter 2019 Highlights
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·
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Net loss of $8.5 million, or $0.14 per common share, which consists of:
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·
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Net interest income of $13.6 million, or $0.22 per common share
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·
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Total expenses of $2.6 million, or $0.04 per common share
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·
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Net realized and unrealized losses of $19.4 million, or $0.32 per share, on RMBS and derivative instruments, including net interest
income on interest rate swaps
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·
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Third quarter total dividends declared and paid of $0.24 per common share
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·
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Book value per share of $6.22 at September 30, 2019
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·
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Total return of (2.6)%, comprised of $0.24 dividend per common share and $0.41 decrease in net book value per common share, divided by
beginning book value per share
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·
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Total return of 1.5% for the nine months ended September 30, 2019, or 1.9% annualized
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·
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Company to discuss results on Friday, October 25, 2019, at 10:00 AM ET
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·
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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
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Details of Third Quarter 2019 Results of Operations
The Company reported a net loss of $8.5 million for the three month period ended September 30, 2019, compared with net loss
of $3.0 million for the three month period ended September 30, 2018. The third quarter net loss included net interest income of $13.6 million, net portfolio losses of $19.4 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 $1.8 million, audit, legal and other professional fees of $0.2 million, and other operating, general and administrative
expenses of $0.6 million.
Capital Allocation and Return on Invested Capital
The Company allocates capital to two RMBS sub-portfolios, the pass-through RMBS portfolio, consisting of mortgage
pass-through certificates issued by Fannie Mae, Freddie Mac or Ginnie Mae (“GSEs”) and collateralized mortgage obligations (“CMOs”) issued by the GSEs (“PT RMBS”), and the structured RMBS portfolio, consisting of interest-only (“IO”) and inverse
interest-only (“IIO”) securities. As of June 30, 2019, approximately 66% of the Company’s investable capital (which consists of equity in pledged PT RMBS, available cash and unencumbered assets) was deployed in the PT RMBS portfolio. At September
30, 2019, the allocation to the PT RMBS portfolio increased by 9% to approximately 75%.
The table below details the changes to the respective sub-portfolios during the quarter, as well as the returns generated by
each.
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(in thousands)
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||||||||||||||||||||
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Portfolio Activity for the Quarter
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||||||||||||||||||||
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Structured Security Portfolio
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Pass-Through
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Interest-Only
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Inverse Interest
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Portfolio
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Securities
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Only Securities
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Sub-total
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Total
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Market value - June 30, 2019
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$
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3,399,460
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$
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101,678
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$
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26,118
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$
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127,796
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$
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3,527,256
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Securities purchased
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932,100
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-
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-
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-
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932,100
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Securities sold
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(467,088
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)
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-
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-
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-
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(467,088
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)
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Losses on sales
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(5,491
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)
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-
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-
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-
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(5,491
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)
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Return of investment
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n/a
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(7,339
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)
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(1,486
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)
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(8,825
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)
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(8,825
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)
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Pay-downs
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(151,742
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)
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n/a
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n/a
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n/a
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(151,742
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)
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Premium lost due to pay-downs
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(8,251
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)
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n/a
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n/a
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n/a
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(8,251
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)
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Mark to market gains (losses)
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17,703
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(15,305
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)
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561
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(14,744
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)
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2,959
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Market value - September 30, 2019
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$
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3,716,691
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$
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79,034
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$
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25,193
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$
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104,227
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$
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3,820,918
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The tables below present the allocation of capital between the respective portfolios at September 30, 2019 and June 30, 2019,
and the return on invested capital for each sub-portfolio for the three month period ended September 30, 2019. The return on invested capital in the PT RMBS and structured RMBS portfolios was approximately 3.7% and (11.9)%, respectively, for the
third quarter of 2019. The combined portfolio generated a return on invested capital of approximately (1.5)%.
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($ in thousands)
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Capital Allocation
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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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September 30, 2019
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Market value
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$
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3,716,691
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$
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79,034
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$
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25,193
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$
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104,227
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$
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3,820,918
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Cash(1)
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412,880
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-
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-
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-
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412,880
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Borrowings(2)
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(3,813,977
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)
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-
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-
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-
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(3,813,977
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)
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Total
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$
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315,594
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$
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79,034
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$
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25,193
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$
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104,227
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$
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419,821
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||||||||||
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% of Total
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75.2
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%
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18.8
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%
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6.0
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%
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24.8
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%
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100.0
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%
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||||||||||
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June 30, 2019
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||||||||||||||||||||
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Market value
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$
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3,399,460
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$
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101,678
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$
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26,118
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$
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127,796
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$
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3,527,256
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||||||||||
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Cash
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181,093
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-
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-
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-
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181,093
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|||||||||||||||
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Borrowings(3)
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(3,329,527
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)
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-
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-
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-
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(3,329,527
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)
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|||||||||||||
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Total
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$
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251,026
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$
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101,678
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$
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26,118
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$
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127,796
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$
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378,822
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||||||||||
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% of Total
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66.3
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%
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26.8
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%
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6.9
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%
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33.7
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%
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100.0
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%
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||||||||||
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(1)
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At September 30, 2019, cash was increased by unsettled security sales of approximately $210.6 million, which have already been
reflected in the market value of the portfolio.
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(2)
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At September 30, 2019, there were outstanding repurchase
agreement balances of $56.9 million secured by IO securities and $11.1 million secured by IIO 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.
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(3)
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At June 30, 2019, there were outstanding repurchase agreement balances of $78.5 million secured by IO securities and $11.7 million
secured by IIO securities. We entered into these arrangements to generate additional cash available to meet margin calls on PT RMBS; therefore, we have not considered these balances to be allocated to the structured securities strategy.
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($ in thousands)
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||||||||||||||||||||
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Returns for the Quarter Ended September 30, 2019
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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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||||||||||||||||||
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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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Income / (loss) (net of borrowing cost)
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$
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14,011
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$
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(402
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)
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$
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(23
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)
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$
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(425
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)
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$
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13,586
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|||||||
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Realized and unrealized gains / (losses)
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3,961
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(15,305
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)
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561
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(14,744
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)
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(10,783
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)
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||||||||||||
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Derivative losses
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(8,646
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)
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n/a
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n/a
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n/a
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(8,646
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)
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|||||||||||||
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Total Return
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$
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9,326
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$
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(15,707
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)
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$
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538
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$
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(15,169
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)
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$
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(5,843
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)
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|||||||
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Beginning Capital Allocation
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$
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251,026
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$
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101,678
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$
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26,118
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$
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127,796
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$
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378,822
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||||||||||
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Return on Invested Capital for the Quarter(1)
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3.7
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%
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(15.4
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)%
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2.1
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%
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(11.9
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)%
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(1.5
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)%
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||||||||||
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Average Capital Allocation(2)
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$
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283,310
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$
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90,356
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$
|
25,656
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$
|
116,012
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$
|
399,322
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||||||||||
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Return on Average Invested Capital for the Quarter(3)
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3.3
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%
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(17.4
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)%
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2.1
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%
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(13.1
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)%
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(1.5
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)%
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||||||||||
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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 ended September 30, 2019, Orchid received $159.9 million in scheduled and unscheduled principal repayments
and prepayments, which equated to a 3-month constant prepayment rate (“CPR”) of approximately 16.4%. 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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|||||||||
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September 30, 2019
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15.5
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19.3
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16.4
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June 30, 2019
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10.9
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12.7
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11.4
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|||||||||
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March 31, 2019
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9.5
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8.4
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9.2
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|||||||||
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December 31, 2018
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6.7
|
9.0
|
7.2
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|||||||||
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September 30, 2018
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7.5
|
11.5
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8.6
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|||||||||
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June 30, 2018
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8.7
|
11.8
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9.8
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|||||||||
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March 31, 2018
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6.5
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11.6
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7.7
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|||||||||
Portfolio
The following tables summarize certain characteristics of Orchid’s PT RMBS and structured RMBS as of September 30, 2019 and
December 31, 2018:
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($ in thousands)
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||||||
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Weighted
|
||||||
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Percentage
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Average
|
|||||
|
of
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Weighted
|
Maturity
|
||||
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Fair
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Entire
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Average
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in
|
Longest
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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
|
|
|
September 30, 2019
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||||||
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Adjustable Rate RMBS
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$
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1,183
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0.0%
|
4.52%
|
180
|
1-Sep-35
|
|
Fixed Rate RMBS
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3,110,647
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81.4%
|
4.21%
|
317
|
1-Aug-49
|
|
|
Fixed Rate CMOs
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604,861
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15.8%
|
4.25%
|
336
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15-Oct-44
|
|
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Total Mortgage-backed Pass-through
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3,716,691
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97.2%
|
4.22%
|
320
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1-Aug-49
|
|
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Interest-Only Securities
|
79,034
|
2.1%
|
3.76%
|
248
|
25-Jul-48
|
|
|
Inverse Interest-Only Securities
|
25,193
|
0.7%
|
3.08%
|
288
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15-Jul-47
|
|
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Total Structured RMBS
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104,227
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2.8%
|
3.61%
|
257
|
25-Jul-48
|
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Total Mortgage Assets
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$
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3,820,918
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100.0%
|
4.09%
|
307
|
1-Aug-49
|
|
December 31, 2018
|
||||||
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Adjustable Rate RMBS
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$
|
1,437
|
0.0%
|
4.75%
|
190
|
1-Sep-35
|
|
Fixed Rate RMBS
|
2,130,974
|
70.7%
|
4.28%
|
275
|
1-Nov-48
|
|
|
Fixed Rate CMOs
|
741,926
|
24.6%
|
4.27%
|
348
|
15-Oct-44
|
|
|
Total Mortgage-backed Pass-through
|
2,874,337
|
95.3%
|
4.27%
|
294
|
1-Nov-48
|
|
|
Interest-Only Securities
|
116,415
|
3.9%
|
3.74%
|
254
|
25-Jul-48
|
|
|
Inverse Interest-Only Securities
|
23,751
|
0.8%
|
2.65%
|
297
|
15-Jul-47
|
|
|
Total Structured RMBS
|
140,166
|
4.7%
|
3.55%
|
264
|
25-Jul-48
|
|
|
Total Mortgage Assets
|
$
|
3,014,503
|
100.0%
|
4.06%
|
286
|
1-Nov-48
|
|
($ in thousands)
|
||||||||||||||||
|
September 30, 2019
|
December 31, 2018
|
|||||||||||||||
|
Percentage of
|
Percentage of
|
|||||||||||||||
|
Agency
|
Fair Value
|
Entire Portfolio
|
Fair Value
|
Entire Portfolio
|
||||||||||||
|
Fannie Mae
|
$
|
2,755,540
|
72.1
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%
|
$
|
1,527,055
|
50.7
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%
|
||||||||
|
Freddie Mac
|
1,062,897
|
27.8
|
%
|
1,483,406
|
49.2
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%
|
||||||||||
|
Ginnie Mae
|
2,481
|
0.1
|
%
|
4,042
|
0.1
|
%
|
||||||||||
|
Total Portfolio
|
$
|
3,820,918
|
100.0
|
%
|
$
|
3,014,503
|
100.0
|
%
|
||||||||
|
September 30, 2019
|
December 31, 2018
|
|||||||
|
Weighted Average Pass-through Purchase Price
|
$
|
104.92
|
$
|
104.57
|
||||
|
Weighted Average Structured Purchase Price
|
$
|
15.24
|
$
|
15.14
|
||||
|
Weighted Average Pass-through Current Price
|
$
|
106.53
|
$
|
103.64
|
||||
|
Weighted Average Structured Current Price
|
$
|
11.38
|
$
|
14.04
|
||||
|
Effective Duration (1)
|
1.600
|
2.078
|
||||||
|
(1)
|
Effective duration of 1.600 indicates that an interest rate increase of 1.0% would be expected to cause a 1.600% decrease in the value
of the RMBS in the Company’s investment portfolio at September 30, 2019. An effective duration of 2.078 indicates that an interest rate increase of 1.0% would be expected to cause a 2.078% decrease in the value of the RMBS in the
Company’s investment portfolio at December 31, 2018. 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 September 30, 2019, the Company had outstanding repurchase obligations of approximately $3,814.0 million with a net
weighted average borrowing rate of 2.36%. These agreements were collateralized by RMBS with a fair value, including accrued interest, of approximately $4,016.5 million and cash pledged to counterparties of approximately $27.1 million. The
Company’s leverage ratio at September 30, 2019 was 9.9 to 1. At September 30, 2019, the Company’s liquidity was approximately $176.7 million, consisting of unpledged RMBS (excluding the value of the unsettled purchases) and cash and cash
equivalents. To enhance our liquidity even further, we may pledge more of our structured RMBS as part of a repurchase agreement funding, but retain the cash in lieu of acquiring additional assets. In this way we can, at a modest cost, retain
higher levels of cash on hand and decrease the likelihood we will have to sell assets in a distressed market in order to raise cash. Below is a list of our outstanding borrowings under repurchase obligations at September 30, 2019.
|
($ in thousands)
|
||||||||||||||||||||
|
Weighted
|
Weighted
|
|||||||||||||||||||
|
Total
|
Average
|
Average
|
||||||||||||||||||
|
Outstanding
|
% of
|
Borrowing
|
Amount
|
Maturity
|
||||||||||||||||
|
Counterparty
|
Balances
|
Total
|
Rate
|
at Risk(1)
|
in Days
|
|||||||||||||||
|
J.P. Morgan Securities LLC
|
$
|
446,536
|
11.6
|
%
|
2.41
|
%
|
$
|
23,214
|
56
|
|||||||||||
|
RBC Capital Markets, LLC
|
423,714
|
11.1
|
%
|
2.37
|
%
|
25,075
|
34
|
|||||||||||||
|
Mirae Asset Securities (USA) Inc.
|
410,078
|
10.8
|
%
|
2.45
|
%
|
25,820
|
45
|
|||||||||||||
|
Wells Fargo Bank, N.A.
|
351,571
|
9.2
|
%
|
2.31
|
%
|
18,255
|
12
|
|||||||||||||
|
Citigroup Global Markets, Inc.
|
234,845
|
6.2
|
%
|
2.29
|
%
|
19,651
|
18
|
|||||||||||||
|
Mitsubishi UFJ Securities (USA), Inc.
|
227,408
|
6.0
|
%
|
2.46
|
%
|
12,562
|
38
|
|||||||||||||
|
ASL Capital Markets Inc.
|
222,485
|
5.8
|
%
|
2.36
|
%
|
12,024
|
17
|
|||||||||||||
|
Cantor Fitzgerald & Co.
|
211,276
|
5.5
|
%
|
2.20
|
%
|
11,762
|
36
|
|||||||||||||
|
ABN AMRO Bank N.V.
|
211,218
|
5.5
|
%
|
2.35
|
%
|
3,629
|
9
|
|||||||||||||
|
ED&F Man Capital Markets Inc.
|
205,197
|
5.4
|
%
|
2.28
|
%
|
10,980
|
65
|
|||||||||||||
|
South Street Securities, LLC
|
175,095
|
4.6
|
%
|
2.51
|
%
|
9,566
|
135
|
|||||||||||||
|
ING Financial Markets LLC
|
162,442
|
4.3
|
%
|
2.28
|
%
|
8,786
|
20
|
|||||||||||||
|
ICBC Financial Services, LLC
|
103,548
|
2.7
|
%
|
2.32
|
%
|
5,885
|
15
|
|||||||||||||
|
Guggenheim Securities, LLC
|
91,614
|
2.4
|
%
|
2.30
|
%
|
4,829
|
21
|
|||||||||||||
|
FHLB-Cincinnati
|
79,850
|
2.1
|
%
|
2.55
|
%
|
2,868
|
1
|
|||||||||||||
|
Nomura Securities International, Inc.
|
49,381
|
1.3
|
%
|
2.28
|
%
|
2,836
|
15
|
|||||||||||||
|
Daiwa Capital Markets America, Inc.
|
48,255
|
1.3
|
%
|
2.26
|
%
|
2,307
|
11
|
|||||||||||||
|
Lucid Cash Fund USG LLC
|
46,947
|
1.2
|
%
|
2.31
|
%
|
4,211
|
17
|
|||||||||||||
|
BMO Capital Markets Corp.
|
40,897
|
1.1
|
%
|
2.33
|
%
|
4,603
|
17
|
|||||||||||||
|
J.V.B. Financial Group, LLC
|
28,515
|
0.7
|
%
|
2.24
|
%
|
1,570
|
39
|
|||||||||||||
|
Merrill Lynch, Pierce, Fenner & Smith Inc
|
26,126
|
0.7
|
%
|
2.40
|
%
|
4,482
|
8
|
|||||||||||||
|
Lucid Prime Fund LLC
|
13,421
|
0.4
|
%
|
2.35
|
%
|
1,693
|
17
|
|||||||||||||
|
Mizuho Securities USA, Inc.
|
3,558
|
0.1
|
%
|
2.58
|
%
|
1,068
|
15
|
|||||||||||||
|
Total / Weighted Average
|
$
|
3,813,977
|
100.0
|
%
|
2.36
|
%
|
$
|
217,676
|
36
|
|||||||||||
|
(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 September 30, 2019,
such instruments were comprised of Eurodollar, Fed Funds and Treasury note (“T-Note”) futures contracts and interest rate swap agreements.
The table below presents information related to the Company’s Eurodollar, Fed Funds and T-Note futures contracts at September 30, 2019.
|
($ in thousands)
|
||||||||||||||||
|
Average
|
Weighted
|
Weighted
|
||||||||||||||
|
Contract
|
Average
|
Average
|
||||||||||||||
|
Notional
|
Entry
|
Effective
|
Open
|
|||||||||||||
|
Expiration Year
|
Amount
|
Rate
|
Rate
|
Equity(1)
|
||||||||||||
|
Eurodollar Futures Contracts (Short Positions)
|
||||||||||||||||
|
2019
|
$
|
500,000
|
2.91
|
%
|
1.96
|
%
|
$
|
(1,192
|
)
|
|||||||
|
2020
|
500,000
|
2.97
|
%
|
1.54
|
%
|
(7,136
|
)
|
|||||||||
|
Total / Weighted Average
|
$
|
500,000
|
2.96
|
%
|
1.63
|
%
|
$
|
(8,328
|
)
|
|||||||
|
Fed Funds Futures Contracts (Short Positions)
|
||||||||||||||||
|
2019
|
$
|
400,000
|
1.64
|
%
|
1.76
|
%
|
$
|
123
|
||||||||
|
2020
|
400,000
|
1.35
|
%
|
1.53
|
%
|
175
|
||||||||||
|
Total / Weighted Average
|
$
|
400,000
|
1.49
|
%
|
1.64
|
%
|
$
|
298
|
||||||||
|
Treasury Note Futures Contracts (Short Positions)(2)
|
||||||||||||||||
|
December 2019 5-year T-Note futures
|
||||||||||||||||
|
(Dec 2019 - Dec 2024 Hedge Period)
|
$
|
140,000
|
1.80
|
%
|
1.96
|
%
|
$
|
1,048
|
||||||||
|
(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 $119.15 at September 30, 2019. The notional contract value of the short position
was $166.8 million.
|
The table below presents information related to the Company’s interest rate swap positions at September 30, 2019.
|
($ in thousands)
|
||||||||||||||||||||
|
Average
|
Net
|
|||||||||||||||||||
|
Fixed
|
Average
|
Estimated
|
Average
|
|||||||||||||||||
|
Notional
|
Pay
|
Receive
|
Fair
|
Maturity
|
||||||||||||||||
|
Expiration
|
Amount
|
Rate
|
Rate
|
Value
|
(Years)
|
|||||||||||||||
|
> 1 to ≤ 3 years
|
$
|
1,210,000
|
1.71
|
%
|
2.18
|
%
|
$
|
(3,712
|
)
|
1.1
|
||||||||||
|
> 3 to ≤ 5 years
|
910,000
|
2.03
|
%
|
2.18
|
%
|
(20,270
|
)
|
4.7
|
||||||||||||
|
$
|
2,120,000
|
1.84
|
%
|
2.18
|
%
|
$
|
(23,982
|
)
|
2.6
|
|||||||||||
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 - YTD(1)
|
0.800
|
44,321
|
||||||
|
Totals
|
$
|
10.705
|
$
|
278,293
|
||||
|
(1)
|
On October 17, 2019, the Company declared a dividend of $0.08 per share to be paid on November 29, 2019. The effect of this dividend
is included in the table above, but is not reflected in the Company’s financial statements as of September 30, 2019.
|
Peer Performance
The table below presents total return data for Orchid compared to a selected group of peers for periods through June 30,
2019.
|
Portfolio Total Rate of Return Versus Peer Group Average
|
||||||||||||
|
ORC Spread
|
||||||||||||
|
ORC
|
Over / (Under)
|
|||||||||||
|
Total Rate
|
Peer
|
Peer
|
||||||||||
|
of Return(1)
|
Average(1)(2)
|
Average(3)
|
||||||||||
|
Stub 2013 (Annualized)(4)
|
(2.8
|
)%
|
(15.4
|
)%
|
12.6
|
%
|
||||||
|
2014 Total Return
|
13.6
|
%
|
15.6
|
%
|
(2.0
|
)%
|
||||||
|
2015 Total Return
|
3.8
|
%
|
(1.6
|
)%
|
5.4
|
%
|
||||||
|
2016 Total Return
|
1.1
|
%
|
0.4
|
%
|
0.7
|
%
|
||||||
|
2017 Total Return
|
3.0
|
%
|
13.1
|
%
|
(10.1
|
)%
|
||||||
|
2018 Total Return
|
(9.2
|
)%
|
(6.1
|
)%
|
(3.1
|
)%
|
||||||
|
First Quarter 2019
|
3.2
|
%
|
4.6
|
%
|
(1.4
|
)%
|
||||||
|
Second Quarter 2019
|
0.7
|
%
|
(2.6
|
)%
|
3.3
|
%
|
||||||
|
Three Year Total Return
|
(1.5
|
)%
|
4.6
|
%
|
(6.1
|
)%
|
||||||
|
Five Year Total Return
|
11.4
|
%
|
7.0
|
%
|
4.4
|
%
|
||||||
|
Inception to 6/30/2019(4)
|
12.7
|
%
|
4.8
|
%
|
7.9
|
%
|
||||||
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. None of the return calculations are annualized except the Stub 2013 calculation.
|
|
(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 and ARR have been included since ORC inception. HTS is included from ORC inception to Q1 2016. MTGE is included from Q1 2017 to Q2 2018. CYS is included from ORC inception to Q2
2018. WMC is included from ORC inception to Q4 2018. DX was added in Q1 2017. AI and CHMI were added in Q1 2019.
|
|
(3)
|
Represents the total rate of return for Orchid minus peer average in each respective measurement period.
|
|
(4)
|
Orchid completed its Initial Public Offering, or IPO, in February 2013. We have elected to start our comparison
beginning with Orchid's first full operating quarter, which was the second quarter of 2013. The Orchid IPO price was $15.00 per share on February 13, 2013, and Orchid paid its first dividend of $0.135 per share in March 2013. The book
value per share at March 31, 2013 was $14.98.
|
Book Value Per Share
The Company's book value per share at September 30, 2019 was $6.22. 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 September 30, 2019, the Company's stockholders' equity was $392.0 million with 63,058,209 shares of common stock outstanding.
Stock Offerings
On August 2, 2017, we entered into an equity distribution agreement (the “August 2017 Equity Distribution Agreement”) with
two sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate amount of $125,000,000 of shares of our common stock in transactions that are deemed to be “at the market” offerings and privately negotiated
transactions. Through September 30, 2019, we issued a total of 15,123,178 shares under the August 2017 Equity Distribution Agreement for aggregate gross proceeds of $125.0 million, and net proceeds of approximately $123.1 million, net of
commissions and fees.
On July 30, 2019, we entered into an underwriting agreement (the “Underwriting Agreement”) with Morgan Stanley & Co. LLC,
Citigroup Global Markets Inc. and J.P. Morgan Securities LLC, as representatives of the underwriters named therein, relating to the offer and sale of 7,000,000 shares of our common stock at a price to the public of $6.55 per share. The underwriters
purchased the shares pursuant to the Underwriting Agreement at a price of $6.3535 per share. The closing of the offering of 7,000,000 shares of common stock occurred on August 2, 2019, with net proceeds to us of approximately $44.2 million after
deduction of underwriting discounts and commissions and other estimated offering expenses payable by us.
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 September 30, 2019, the Company repurchased a total of 5,665,620 shares under the
stock repurchase program at an aggregate cost of approximately $40.3 million, including commissions and fees, for a weighted average price of $7.11 per share. However, we did not repurchase any shares of our common stock during the three months
ended September 30, 2019. As of September 30, 2019, the remaining authorization under the repurchase program is for up to 857,202 shares of the Company’s common stock.
Management Commentary
Commenting on the third quarter, Robert E.
Cauley, Chairman and Chief Executive Officer, said, “The third quarter of 2019 proved to be a very turbulent period for the markets. As the global economy continued its slowdown that started in 2018 and the U.S. manufacturing segment continued
to cool, the markets expected the Federal Reserve would need to ease monetary policy in 2019. Contributing to the slowdown, both globally and domestically, was the trade war between the U.S. and China. The trade war was meaningfully escalated
when on August 1, 2019 the administration announced substantial increases to both the dollar amount of goods that would be subject to tariffs and the size of the tariffs themselves. The markets reacted violently, and several key market
indicators reached new extreme levels – such as the yield on the German 10-year Bund, the 30-year U.S. Treasury yield and many others. These extreme levels were reached in late August and early September before the market once again pivoted and
reversed course, as the yield on the 10-year U.S. Treasury note increased 44 basis points in a mere 8 trading days. Not surprisingly, the markets would reverse a few more times as one development after another buffeted the market – including a
major attack on Saudi oil fields, the possible impeachment of President Trump, a major disruption in the over-night funding markets and finally, in October, a potential end to the Brexit crisis and a tentative trade deal between the U.S. and
China. In between all of the events volatility levels were elevated, risk markets gyrated wildly, and Agency MBS assets performed poorly.
“The Agency MBS market total return for the
third quarter was 1.4%, although the return was -0.2% versus equivalent duration swaps and LIBOR (per data by Bank of America Merrill Lynch/ICE Data Indices). With interest rates declining to near all-time low levels, prepayment activity
accelerated and is expected to continue to remain high. Prepayment activity during the current cycle is approaching levels not seen since the summer of 2003 when prepayment activity reached the highest levels ever in terms of the MBA refinance
index and peak speeds on current coupon cohorts (60 – 70 CPR). The current level of the MBA refinance index is barely more than 25% of the 10,000 level seen in 2003, but the extent of refinance activity observed is reflected in the pricing of
some interest-only securities. These securities are either prepaying at extreme levels or anticipated to do so, such that they trade to positive convexity. The spread of the current-coupon 30-year mortgage to the 10-year U.S. Treasury note
reached 98.07 basis points on August 27, 2019, the highest spread since early 2012. Total returns across the Agency MBS universe followed durations to some extent, as 30-year returns exceeded returns to 15-year MBS and Ginnie Mae securities,
although within the coupon stack this trend did not hold. As prepayment performance was worst among the 3.5% and 4.0% coupons, these securities generally trailed higher and lower coupons on a total return basis. With prepayment activity
elevated and the continued poor quality of generic, TBA collateral, specified pools continue to outperform. Agency MBS asset performance trailed that of other non RMBS structured products as well as investment grade corporates. High yield
corporates generated returns similar to Agency MBS of 1.2% outright and -0.1% versus comparable duration swaps and LIBOR. As we enter the fourth quarter of 2019, Agency MBS performance has been very directional – with poor performance when the
rates markets rally (yields lower) and positive performance when rates increase. Even with the increase in rates since the end of the third quarter, available mortgage rates are still very low by historical standards and prepayment activity is
expected to remain elevated.
“On the capital front, we added to our capital
base via a 7.0 million share underwritten public follow-on offering that priced on July 30, 2019. The net proceeds from the offering of approximately $44.2 million were fully deployed within a few days of pricing. This occurred before the severe
market turmoil in August fully unfolded. We were also able to lock in funding via interest rate swaps on essentially all of the new funding required at levels below the current level of Fed Funds. The capital raise, in conjunction with capital
raised via our ATM program earlier in the year and prior to the follow-on offering in late July, was done in anticipation of the Federal Reserve lowering the Fed Funds target range - presuming this would in turn lead to lower funding costs and a
wider net-interest margin on our investment RMBS portfolio. Since then the Federal Reserve has indeed lowered the Fed Funds rate two times although the repo funding market disruptions that emerged mid-September has offset the benefit of these
two interest rate cuts by approximately 10 or 15 basis points. To the extent recent actions announced by the Federal Reserve to address these issues are successful, we anticipate most of the benefit of the cuts will be realized. This is of
course predicated on the assumption all else is equal, which given the current turbulent market conditions is probably not be taken for granted.
“In conjunction with the deployment of the
proceeds of the capital raise, we continue to migrate the positioning of the portfolio. As opposed to the first two quarters of the year when we were migrating away from a high rate/flattening yield curve environment towards a lower rate,
potentially steepening yield curve environment, the third quarter focus was on enhancing the prepay protection of the portfolio. We did not meaningfully change the product mix – with a focus still in 30-year securities, but the mix of specified
pools changed. We changed the composition of our 30-year, 3% allocation, materially increasing the call protection, and thus duration, of this sector. We increased the call protection of the 30-year, 4.5% coupon allocation as well. Within the
hedge portfolio the changes were made via the new positions put in place in conjunction with the follow-on offering. In this case we added swap positions in the 5-year area of the curve. We also added to our futures positions via Fed Funds
futures in an effort to lock-in market pricing – at the time – of several Fed Funds rate reductions.
“Going forward, we are positioning for the level
of prepayment activity to remain elevated, as the events that have led to the recent turmoil in the markets, and the current low level of rates, do not appear to be near resolution. This also reflects the fact there are numerous forces at play –
Brexit, impeachment, trade wars, global growth slowing, a potential domestic growth slowdown and the 2020 presidential election. Resolution of all of these issues over the near term seems unlikely. The shape of the yield curve, or more
specifically the spread between the yields on our assets and our funding costs, which are the primary drivers of our earnings and dividends, will to a large extent depend on a resolution to the overnight funding market disruptions. The extent of
any additional accommodation from the Federal Reserve, if any, will also be crucial.”
Earnings Conference Call Details
An earnings conference call and live audio webcast will be hosted Friday, October 25, 2019, 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 5386232. 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 November 25, 2019.
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, such as mortgage pass-through certificates issued by Fannie Mae, Freddie Mac or Ginnie Mae and CMOS, and (ii) structured
Agency RMBS, such as 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, including, but not limited to statements regarding
interest rates, liquidity, pledging of our structured RMBS, funding levels and spreads, prepayment speeds, portfolio positioning and repositioning, hedging levels, the supply and demand for Agency RMBS, the effect of actions of the U.S. government,
including the Fed, market expectations, 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, 772-231-1400
Chairman and Chief Executive Officer
www.orchidislandcapital.com
Summarized Financial Statements
The following is a summarized presentation of the unaudited balance sheets as of September 30, 2019, and December 31, 2018,
and the unaudited quarterly results of operations for the nine and three months ended September 30, 2019 and 2018. Amounts presented are subject to change.
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ORCHID ISLAND CAPITAL, INC.
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||||||||
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BALANCE SHEETS
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||||||||
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($ in thousands, except per share data)
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||||||||
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(Unaudited - Amounts Subject to Change)
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||||||||
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September 30, 2019
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December 31, 2018
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|||||||
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ASSETS:
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||||||||
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Total mortgage-backed securities
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$
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3,820,918
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$
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3,014,503
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||||
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Cash, cash equivalents and restricted cash
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202,216
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126,263
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||||||
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Accrued interest receivable
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15,232
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13,241
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||||||
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Derivative assets, at fair value
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3,389
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16,885
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||||||
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Receivable for securities sold
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210,664
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221,746
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||||||
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Other assets
|
912
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2,993
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||||||
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Total Assets
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$
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4,253,331
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$
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3,395,631
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LIABILITIES AND STOCKHOLDERS' EQUITY
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||||||||
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Repurchase agreements
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$
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3,813,977
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$
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3,025,052
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||||
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Dividends payable
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5,046
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3,931
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||||||
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Derivative liabilities, at fair value
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27,371
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5,948
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||||||
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Accrued interest payable
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11,892
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6,445
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||||||
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Due to affiliates
|
597
|
654
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||||||
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Other liabilities
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2,460
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17,522
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||||||
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Total Liabilities
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3,861,343
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3,059,552
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Total Stockholders' Equity
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391,988
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336,079
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Total Liabilities and Stockholders' Equity
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$
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4,253,331
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$
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3,395,631
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||||
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Common shares outstanding
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63,058,209
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49,132,423
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Book value per share
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$
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6.22
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$
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6.84
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ORCHID ISLAND CAPITAL, INC.
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STATEMENTS OF OPERATIONS
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($ in thousands, except per share data)
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(Unaudited - Amounts Subject to Change)
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Nine Months Ended
September 30,
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Three Months Ended
September 30,
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2019
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2018
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2019
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2018
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Interest income
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$
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104,795
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$
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117,580
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$
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35,907
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$
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39,054
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||||||||
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Interest expense
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(63,644
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)
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(50,620
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)
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(22,321
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)
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(18,892
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)
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Net interest income
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41,151
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66,960
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13,586
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20,162
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Losses on RMBS and derivative contracts
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(27,848
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)
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(75,939
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)
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(19,429
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)
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(20,149
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)
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Net portfolio income (loss)
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13,303
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(8,979
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)
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(5,843
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)
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13
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||||||||||
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Expenses
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7,650
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9,009
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2,634
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2,971
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||||||||||||
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Net income (loss)
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$
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5,653
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$
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(17,988
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)
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$
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(8,477
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)
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$
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(2,958
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)
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Basic and diluted net income (loss) per share
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$
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0.10
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$
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(0.34
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)
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$
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(0.14
|
)
|
$
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(0.06
|
)
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|||||
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Weighted Average Shares Outstanding
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54,037,721
|
52,538,457
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60,418,985
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52,034,695
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||||||||||||
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Dividends Declared Per Common Share:
|
$
|
0.72
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$
|
0.83
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$
|
0.24
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$
|
0.25
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Three Months Ended September 30,
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Key Balance Sheet Metrics
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2019
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2018
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Average RMBS(1)
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$
|
3,674,087
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$
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3,601,776
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Average repurchase agreements(1)
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3,571,752
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3,385,829
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||||||
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Average stockholders' equity(1)
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375,823
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401,251
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Leverage ratio(2)
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9.9:1
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8.6:1
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Key Performance Metrics
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Average yield on RMBS(3)
|
3.91
|
%
|
4.34
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%
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Average cost of funds(3)
|
2.50
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%
|
2.23
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%
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||||
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Average economic cost of funds(4)
|
2.36
|
%
|
2.20
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%
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Average interest rate spread(5)
|
1.41
|
%
|
2.11
|
%
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||||
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Average economic interest rate spread(6)
|
1.55
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%
|
2.14
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%
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(1)
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Average RMBS, borrowings and stockholders’ equity balances are calculated using two data points, the beginning and ending balances.
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(2)
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The leverage ratio is calculated by dividing total ending liabilities by ending stockholders’ equity.
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(3)
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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.
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(4)
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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.
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(5)
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Average interest rate spread is calculated by subtracting average cost of funds from average yield on RMBS.
|
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(6)
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Average economic interest rate spread is calculated by subtracting average economic cost of funds from average yield on RMBS.
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