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 March 31, 2015.
First Quarter 2015 Highlights
- Net income of $5.5 million, or $0.33 per common share
- First quarter total dividends declared and paid of $0.54 per
common share
- Book Value Per Share of $12.87 at March 31, 2015
- 2.7% economic gain on common equity for the quarter, or 10.8%
annualized, comprised of $0.54 dividend per common share and $0.19
decrease in net book value per common share, divided by beginning
book value per share
- Company to discuss results on Tuesday, April 28, 2015, at 10:00
AM ET
Details of First Quarter 2015 Results of
Operations
The Company reported net income of $5.5 million for the three
month period ended March 31, 2015, compared with net income of $3.6
million for the three month period ended March 31, 2014. The first
quarter net income of $5.5 million included net interest income of
$13.3 million, net portfolio losses of $6.1 million (which includes
mark-to-market gains, realized losses on securities sold and losses
on derivative instruments), accrued incentive compensation of $0.2
million, audit, legal and other professional fees of $0.2 million,
management fees of $0.9 million, and other operating, general and
administrative expenses of $0.4 million. During the first quarter
of 2015, the Company sold residential mortgage-backed securities
("RMBS") with a market value at the time of sale of $40.3 million,
resulting in realized losses of $0.03 million (based on security
prices from December 31, 2014). The remaining net loss 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, 2014,
approximately 71% 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, 2015, the allocation to the PT RMBS had decreased by 7%
to approximately 64%.
The table below details the changes to the respective
sub-portfolios during the quarter, as well as the returns generated
by each.
(in thousands) |
Portfolio
Activity for the Quarter |
|
|
|
Structured
Security Portfolio |
|
|
|
Pass-Through
Portfolio |
Interest-Only
Securities |
Inverse Interest Only
Securities |
Sub-total |
Total |
Market Value -
December 31, 2014 |
$ 1,486,787 |
$ 46,611 |
$ 15,773 |
$ 62,384 |
$ 1,549,171 |
Securities Purchased |
180,353 |
24,074 |
-- |
24,074 |
204,427 |
Securities Sold |
(40,255) |
-- |
-- |
-- |
(40,255) |
Losses on Sales |
(32) |
-- |
-- |
-- |
(32) |
Return on Investment |
n/a |
(4,811) |
(1,130) |
(5,941) |
(5,941) |
Pay-downs |
(37,069) |
n/a |
n/a |
n/a |
(37,069) |
Premium Lost Due to
Pay-downs |
(3,217) |
n/a |
n/a |
n/a |
(3,217) |
Mark to Market Gains
(Losses) |
9,640 |
(642) |
539 |
(103) |
9,537 |
Market Value -
March 31, 2015 |
$ 1,596,207 |
$ 65,232 |
$ 15,182 |
$ 80,414 |
$ 1,676,621 |
The tables below present the allocation of capital between the
respective portfolios at March 31, 2015 and December 31, 2014, and
the return on invested capital for each sub-portfolio for the three
month period ended March 31, 2015. The return on invested
capital in the PT RMBS and structured RMBS portfolios was
approximately 4.9% and (0.2)%, respectively, for the first quarter
of 2015. The combined portfolio generated a return on invested
capital of approximately 3.4%. Due to the deployment of the
proceeds of our capital raising activities during the three months
ended March 31, 2015, the balances of the respective portfolios
increased significantly. Accordingly, returns generated based
on the beginning of period capital are larger than returns on a
stabilized portfolio. We have added the return on average
capital deployed to address this issue.
($ in
thousands) |
|
|
|
|
|
Capital
Allocation |
|
|
Structured
Security Portfolio |
|
|
Pass-Through
Portfolio |
Interest-Only
Securities |
Inverse Interest Only
Securities |
Sub-total |
Total |
March 31, 2015 |
|
|
|
|
|
Market Value |
$ 1,596,207 |
$ 65,232 |
$ 15,182 |
$ 80,414 |
$ 1,676,621 |
Cash(1) |
7,182 |
-- |
-- |
-- |
7,182 |
Repurchase Agreement
Obligations(2) |
(1,459,490) |
-- |
-- |
-- |
(1,459,490) |
Total |
$ 143,899 |
$ 65,232 |
$ 15,182 |
$ 80,414 |
$ 224,313 |
% of Total |
64.2% |
29.0% |
6.8% |
35.8% |
100.0% |
December 31, 2014 |
|
|
|
|
|
Market Value |
$ 1,486,787 |
$ 46,611 |
$ 15,773 |
$ 62,384 |
$ 1,549,171 |
Cash |
100,927 |
-- |
-- |
-- |
100,927 |
Repurchase Agreement
Obligations(3) |
(1,436,651) |
-- |
-- |
-- |
(1,436,651) |
Total |
$ 151,063 |
$ 46,611 |
$ 15,773 |
$ 62,384 |
$ 213,447 |
% of Total |
70.8% |
21.8% |
7.3% |
29.2% |
100.0% |
|
|
|
|
|
|
(1) At March
31, 2015, total cash has been reduced by unsettled security
purchases of approximately $79.2 million. |
|
(2) At March
31, 2015, there were outstanding repurchase agreement balances of
$21.6 million and $4.0 million secured by IO and IIO 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. |
(3) At December
31, 2014, there were outstanding repurchase agreement balances of
$17.9 million and $4.6 million secured by IO and IIO securities,
respectively. We entered into these arrangements to generate
additional cash to invest in pass-through RMBS; therefore, we have
not considered these balances to be allocated to the structured
securities strategy. |
|
($ in
thousands) |
|
|
|
|
|
Returns for the
Quarter |
|
|
Structured
Security Portfolio |
|
|
Pass-Through
Portfolio |
Interest-Only
Securities |
Inverse Interest Only
Securities |
Sub-total |
Total |
Income / (loss) (net of repo cost) |
$ 13,334 |
$ (444) |
$ 428 |
$ (16) |
$ 13,318 |
Realized and unrealized gains / (losses) |
6,391 |
(642) |
539 |
(103) |
6,288 |
Derivative losses |
(12,351) |
n/a |
n/a |
n/a |
(12,351) |
Total Return |
$ 7,374 |
$ (1,086) |
$ 967 |
$ (119) |
$ 7,255 |
Beginning Capital Allocation |
$ 151,063 |
$ 46,611 |
$ 15,773 |
$ 62,384 |
$ 213,447 |
Return on Invested Capital for the
Quarter(1) |
4.9% |
(2.3)% |
6.1% |
(0.2)% |
3.4% |
Average Capital Allocation(2) |
$ 147,481 |
$ 55,922 |
$ 15,478 |
$ 71,400 |
$ 218,881 |
Return on Average Invested Capital for
the Quarter(3) |
5.0% |
(1.9)% |
6.2% |
(0.2)% |
3.3% |
|
|
|
|
|
|
(1) Calculated
by dividing the Total Return by the Beginning Capital Allocation,
expressed as a percentage. |
(2) Calculated
using two data points, the Beginning and Ending Capital Allocation
balances. |
|
(3) Calculated
by dividing the Total Return by the Average Capital Allocation,
expressed as a percentage. |
Prepayments
For the quarter, Orchid received $43.0 million in scheduled and
unscheduled principal repayments and prepayments, which equated to
a constant prepayment rate ("CPR") of approximately 9.7% for the
first quarter of 2015. Prepayment rates on the two RMBS
sub-portfolios were as follows (in CPR):
|
|
|
|
Three Months
Ended |
PT RMBS Portfolio (%) |
Structured RMBS Portfolio
(%) |
Total Portfolio (%) |
March 31, 2015 |
8.1 |
14.6 |
9.7 |
December 31, 2014 |
4.0 |
14.9 |
7.8 |
September 30, 2014 |
8.1 |
18.8 |
12.5 |
June 30, 2014 |
4.1 |
15.9 |
8.1 |
March 31, 2014 |
4.2 |
14.9 |
9.1 |
Portfolio
As of March 31, 2015, Orchid's RMBS portfolio consisted of
$1,676.6 million of PT RMBS and structured RMBS at fair value and
had a weighted average coupon of 4.27%. The following tables
summarize Orchid's PT RMBS and structured RMBS as of March 31, 2015
and December 31, 2014:
($ in
thousands) |
|
|
|
|
|
|
|
|
Asset Category |
Fair Value |
Percentage of Entire Portfolio |
Weighted Average Coupon |
Weighted Average Maturity in Months |
Longest Maturity |
Weighted Average Coupon Reset
in Months |
Weighted Average Lifetime Cap |
Weighted Average Periodic Cap |
March
31, 2015 |
|
|
|
|
|
|
|
|
Adjustable Rate RMBS |
$ 3,755 |
0.2% |
3.55% |
233 |
1-Sep-35 |
2.31 |
10.05% |
2.00% |
Fixed Rate RMBS |
1,522,833 |
90.8% |
4.36% |
313 |
1-Apr-45 |
NA |
NA |
NA |
Hybrid Adjustable Rate RMBS |
69,619 |
4.2% |
2.54% |
335 |
1-Aug-43 |
94.75 |
7.54% |
2.00% |
Total Mortgage-backed Pass-through |
1,596,207 |
95.2% |
4.27% |
314 |
1-Apr-45 |
NA |
NA |
NA |
Interest-Only Securities |
65,232 |
3.9% |
3.67% |
256 |
25-Apr-45 |
NA |
NA |
NA |
Inverse Interest-Only Securities |
15,182 |
0.9% |
6.21% |
305 |
25-Apr-41 |
NA |
6.39% |
NA |
Total Structured RMBS |
80,414 |
4.8% |
4.15% |
266 |
25-Apr-45 |
NA |
NA |
NA |
Total Mortgage Assets |
$ 1,676,621 |
100.0% |
4.27% |
312 |
25-Apr-45 |
NA |
NA |
NA |
December 31, 2014 |
|
|
|
|
|
|
|
|
Adjustable Rate RMBS |
$ 3,794 |
0.2% |
3.55% |
236 |
1-Sep-35 |
4.02 |
10.05% |
2.00% |
Fixed Rate RMBS |
1,412,593 |
91.2% |
4.37% |
318 |
1-Dec-44 |
NA |
NA |
NA |
Hybrid Adjustable Rate RMBS |
70,400 |
4.6% |
2.54% |
338 |
1-Aug-43 |
97.75 |
7.54% |
2.00% |
Total Mortgage-backed Pass-through |
1,486,787 |
96.0% |
4.28% |
319 |
1-Dec-44 |
NA |
NA |
NA |
Interest-Only Securities |
46,611 |
3.0% |
3.95% |
248 |
25-Jan-43 |
NA |
NA |
NA |
Inverse Interest-Only Securities |
15,773 |
1.0% |
6.23% |
308 |
25-Apr-41 |
NA |
6.39% |
NA |
Total Structured RMBS |
62,384 |
4.0% |
4.52% |
263 |
25-Jan-43 |
NA |
NA |
NA |
Total Mortgage Assets |
$ 1,549,171 |
100.0% |
4.29% |
317 |
1-Dec-44 |
NA |
NA |
NA |
|
|
|
|
|
($ in
thousands) |
|
|
|
|
|
March 31,
2015 |
December 31,
2014 |
Agency |
Fair Value |
Percentage of Entire
Portfolio |
Fair Value |
Percentage of Entire
Portfolio |
Fannie Mae |
$ 1,330,629 |
79.36% |
$ 1,243,923 |
80.30% |
Freddie Mac |
331,574 |
19.78% |
296,203 |
19.12% |
Ginnie Mae |
14,418 |
0.86% |
9,045 |
0.58% |
Total Portfolio |
$ 1,676,621 |
100.00% |
$ 1,549,171 |
100.00% |
|
|
|
|
March 31, 2015 |
December 31,
2014 |
Weighted Average Pass-through Purchase
Price |
$ 107.92 |
$ 107.88 |
Weighted Average Structured Purchase
Price |
$ 13.07 |
$ 13.67 |
Weighted Average Pass-through Current
Price |
$ 109.23 |
$ 108.59 |
Weighted Average Structured Current
Price |
$ 12.54 |
$ 13.65 |
Effective Duration (1) |
1.399 |
2.291 |
|
|
|
(1) Effective
duration of 1.399 indicates that an interest rate increase of 1.0%
would be expected to cause a 1.399% decrease in the value of the
RMBS in the Company's investment portfolio at March 31,
2015. An effective duration of 2.291 indicates that an
interest rate increase of 1.0% would be expected to cause a 2.291%
decrease in the value of the RMBS in the Company's investment
portfolio at December 31, 2014. 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 March 31, 2015, the Company had outstanding repurchase
obligations of approximately $1,459.5 million with a net weighted
average borrowing rate of 0.36%. These agreements were
collateralized by RMBS with a fair value, including accrued
interest, of approximately $1,552.7 million, and cash pledged to
counterparties of approximately $2.2 million. The Company's
leverage ratio at March 31, 2015 was 6.3 to 1 (excluding the $79.2
million of payable for unsettled securities purchased at March 31,
2015). At March 31, 2015, the Company's liquidity was approximately
$128.6 million, consisting of unpledged RMBS (excluding the value
of the unsettled purchases) and cash and cash equivalents. To
enhance our liquidity even further, we may pledge more of our
structured RMBS as part of a repurchase agreement funding, but
retain the cash in lieu of acquiring additional assets. In
this way we can, at a modest cost, retain higher levels of cash on
hand and decrease the likelihood we will have to sell assets in a
distressed market in order to raise cash. Below is a listing
of outstanding borrowings under repurchase obligations at March 31,
2015.
($ in
thousands) |
|
|
|
|
|
Counterparty |
Total Outstanding Balances(1) |
% of Total |
Weighted Average Borrowing
Rate |
Amount at Risk(2) |
Weighted Average Maturity in
Days |
J.P. Morgan Securities LLC |
$ 197,537 |
13.7% |
0.35% |
$ 11,278 |
10 |
Citigroup Global Markets, Inc. |
189,239 |
13.0% |
0.40% |
17,600 |
23 |
Mitsubishi UFJ Securities (USA), Inc. |
139,712 |
9.6% |
0.35% |
7,557 |
18 |
CRT Capital Group, LLC |
135,590 |
9.3% |
0.35% |
7,484 |
20 |
ICBC Financial Services, LLC |
124,600 |
8.5% |
0.36% |
6,757 |
14 |
Goldman Sachs & Co. |
122,498 |
8.4% |
0.37% |
6,616 |
75 |
KGS-Alpha Capital Markets, L.P. |
108,031 |
7.4% |
0.36% |
6,327 |
15 |
ED&F Man Capital Markets Inc. |
83,663 |
5.7% |
0.34% |
4,913 |
23 |
Cantor Fitzgerald & Co. |
75,043 |
5.1% |
0.35% |
4,407 |
11 |
Morgan Stanley & Co. LLC |
57,444 |
3.9% |
0.36% |
3,688 |
20 |
Mizuho Securities USA, Inc. |
54,587 |
3.7% |
0.41% |
6,567 |
12 |
Daiwa Capital Markets America, Inc. |
49,598 |
3.4% |
0.36% |
2,188 |
11 |
Guggenheim Securities, LLC |
49,491 |
3.4% |
0.37% |
2,906 |
29 |
South Street Securities, LLC |
36,611 |
2.5% |
0.35% |
2,259 |
32 |
Nomura Securities International, Inc. |
31,359 |
2.1% |
0.37% |
1,830 |
18 |
Suntrust Robinson Humphrey, Inc. |
4,487 |
0.3% |
0.34% |
363 |
10 |
Total / Weighted Average |
$ 1,459,490 |
100.0% |
0.36% |
$ 92,740 |
22 |
|
|
|
|
|
|
(1) In March, the Company purchased assets
with a fair value of approximately $79.3 million which settle in
April 2015 that are expected to be funded by repurchase
agreements. |
|
|
|
|
|
(2) Equal to the sum of the fair value of
securities sold, accrued interest receivable and cash posted as
collateral (if any), minus the sum of repurchase agreement
liabilities, accrued interest payable and the fair value of
securities posted by the counterparties (if any). |
|
|
|
|
|
Hedging
In connection with its interest rate risk management strategy,
the Company economically hedges a portion of the cost of its
repurchase agreement funding by entering into derivative financial
instrument contracts. The Company has not elected
hedging treatment under U.S. generally accepted accounting
principles ("GAAP") in order to align the accounting treatment of
its derivative instruments with the treatment of its portfolio
assets under the fair value option election. As such, all gains or
losses on these instruments are reflected in earnings for all
periods presented. At March 31, 2015, such instruments were
comprised of Eurodollar futures contracts and interest rate
swaption agreements, giving the Company the option to enter into a
pay fixed interest rate swap ("payer swaption"). The table
below presents information related to the Company's Eurodollar
futures contracts at March 31, 2015.
($ in
thousands) |
|
|
|
Expiration Year |
Weighted Average LIBOR Rate |
Average Contract Notional
Amount |
Open Equity(1) |
2015 |
0.51% |
$ 800,000 |
$ (1,791) |
2016 |
1.13% |
900,000 |
(3,435) |
2017 |
1.74% |
825,000 |
(4,976) |
2018 |
2.09% |
800,000 |
(5,061) |
Total / Weighted Average |
1.37% |
$ 835,714 |
$ (15,263) |
|
|
|
|
(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 positions at March 31, 2015.
($ in
thousands) |
|
|
|
|
|
|
|
|
Option |
Underlying
Swap |
Expiration |
Cost |
Fair Value |
Weighted Average Months to
Expiration |
Notional Amount |
Fixed Pay Rate |
Receive Rate (LIBOR) |
Weighted Average Term
(Years) |
≤ 1 year |
$ 5,350 |
$ 126 |
3 |
$ 375,000 |
2.79% |
3 Month |
7.3 |
Dividends
In addition to other requirements, 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 during 2015 and 2014.
(in thousands, except per
share data) |
Declaration Date |
Record Date |
Payment Date |
Per Share
Amount |
Total |
2015 |
|
|
|
|
April 9, 2015(1) |
April 27, 2015 |
April 30, 2015 |
$ 0.180 |
$ 3,303 |
March 10, 2015 |
March 27, 2015 |
March 31, 2015 |
0.180 |
3,205 |
February 10, 2015 |
February 25, 2015 |
February 27, 2015 |
0.180 |
3,017 |
January 13, 2015 |
January 26, 2015 |
January 30, 2015 |
0.180 |
3,017 |
Totals |
|
|
$ 0.720 |
$ 12,542 |
2014 |
|
|
|
|
December 9, 2014 |
December 26, 2014 |
December 30, 2014 |
0.180 |
3,004 |
November 12, 2014 |
November 25, 2014 |
November 28, 2014 |
0.180 |
2,737 |
October 9, 2014 |
October 28, 2014 |
October 31, 2014 |
0.180 |
2,358 |
September 9, 2014 |
September 25, 2014 |
September 30, 2014 |
0.180 |
2,348 |
August 12, 2014 |
August 26, 2014 |
August 29, 2014 |
0.180 |
1,999 |
July 10, 2014 |
July 28, 2014 |
July 31, 2014 |
0.180 |
1,759 |
June 11, 2014 |
June 25, 2014 |
June 30, 2014 |
0.180 |
1,712 |
May 8, 2014 |
May 27, 2014 |
May 30, 2014 |
0.180 |
1,641 |
April 8, 2014 |
April 25, 2014 |
April 30, 2014 |
0.180 |
1,636 |
March 11, 2014 |
March 26, 2014 |
March 31, 2014 |
0.180 |
1,550 |
February 11, 2014 |
February 25, 2014 |
February 28, 2014 |
0.180 |
974 |
January 9, 2014 |
January 27, 2014 |
January 31, 2014 |
0.180 |
925 |
Totals |
|
|
$ 2.160 |
$ 22,643 |
|
|
|
|
|
(1) The effect
of the dividend declared in April 2015 is not reflected in the
Company's financial statements as of March 31, 2015. |
Book Value Per Share
The Company's Book Value Per Share at March 31, 2015 was
$12.87. 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, 2015, the
Company's stockholders' equity was $230.7 million with 17,924,383
shares of common stock outstanding.
Secondary Offerings
On March 2, 2015, Orchid entered into an equity distribution
agreement (the "Equity Distribution Agreement") with two sales
agents pursuant to which the Company may offer and sell, from time
to time, up to an aggregate amount of $100,000,000 of shares of the
Company's common stock in transactions that are deemed to be "at
the market" offerings and privately negotiated
transactions. Through March 31, 2015, the Company issued a
total of 1,196,572 shares under the Equity Distribution Agreement
for aggregate proceeds of approximately $16.0 million, net of
commissions and fees. After March 31, 2015, the Company issued an
additional 393,892 shares under the Equity Distribution Agreement
for aggregate proceeds of approximately $5.1 million, net of
commissions and fees.
Management Commentary
Commenting on the first quarter, Robert E. Cauley, Chairman and
Chief Executive Officer, said, "As we entered 2015, the economy was
humming along nicely and the market was acutely focused on any and
all utterings from Janet Yellen or other Federal Reserve governors
for clues as to the timing of their eventual end of the zero rate
policy. Payroll growth had been robust and there were emerging
signs of wage pressure. Developments in Europe were quite the
opposite, with Greece renewing talk of their possible exit from the
EU. With projected demand falling and supply still expanding,
oil prices had fallen nearly 50% since the summer of 2014, and the
dollar was strengthening. At that point, the dichotomy in relative
economic performance between the U.S. and Europe was
striking. On the one hand, the U.S. was clearly removed from
the financial crisis and approaching the point where the Federal
Reserve needed to remove accommodation in a more explicit
fashion. On the other, Europe, and to a lesser extent Asia,
were clearly slowing. Inflation in Europe was barely positive
and GDP in China was approaching the psychologically important 7%
level, below which alarm bells would be triggered. The central
banks in China, Japan and Europe were still running policies to
provide maximum accommodation. The long end of the U.S.
treasury market rallied into January, with the yield on the 10-year
U.S. Treasury reaching a low of 1.642% on January 30th. The
rally at the long end of the curve was being driven by events
overseas while short rates in the U.S. were more sensitive to Fed
expectations. As a result, the yield curve was flattening as we
approached the end of January. The rally at the long end of the
curve ended in early February with the release of the January jobs
data, and then again when the February data was released in early
March. With the rally in the long end of the treasury curve
reversing, the curve began to steepen.
"However, later in the quarter and into April it became apparent
the dichotomy was starting to erode. The strong dollar had an
impact on exports, and therefore, the manufacturing sector of the
economy. The manufacturing sector was also being hurt by the
plunge in oil prices, which impeded more robust growth in oil
production, especially with respect to high cost
fracking. Inflation in the U.S., as measured by the consumer
price index, especially at the headline level, was declining into
year-end 2014 before eventually leveling off just below 0% the last
two months. This level is well below the Fed's target level of
2%. Finally, on April 3rd, non-farm payroll growth for March came
in at a mere 126,000, well below the 245,000 consensus
estimate. Prior months were revised down as well. At this
point it became clear the growth of the U.S. economy was not as
robust as expected at the beginning of the first quarter. The
market began to doubt the Fed would need to raise rates in the face
of these developments and the belly of the curve, particularly the
five year, rallied. This caused the curve to steepen,
especially the spread between 5 and 30 year maturity U.S. Treasury
securities. The market received confirmation of this on March
18th when the Fed, at the conclusion of their two day meeting,
issued a statement that clearly reflected the Fed was attuned to
these developments. The Federal Reserve's Summary of Economic
Projections, or SEP, was revised down from their last projections
in December of 2014. Their projections for GDP growth, the
unemployment rate and inflation were all lowered. Given the
lowered growth and inflation projections, their projections for the
Fed Funds target rate over the next three years were also
lowered. The market priced in even lower estimates for Fed
Funds going out three years. Today we await clarity as to the
true direction of the US economy, hopefully to be evident in data
over the next few months. The Federal Reserve stated in their
March 18th statement, and in comments by Fed Governors since, that
they intend to get off the 'zero bound' this year. We believe the
market expects this to occur in September at the earliest and for
the trajectory of subsequent hikes to be shallow.
"During the quarter we established another at the market ('ATM')
program, our third since first using this method of raising capital
in June 2014. The Company sold an additional 1.6 million
shares during the quarter through the ATM program. Inclusive of
shares sold in late March that settled in early April, we raised
approximately $21.1 million in proceeds, net of fees paid to the
agent and other costs, during the quarter. The weighted
average sale price of these shares was $13.56. The Company's
book value per share was $13.06 at December 31, 2014 and $12.87 at
March 31, 2015. At March 31, 2015 our total stockholders'
equity was $230.7 million.
"With the deployment of the new capital, we continued to grow
our RMBS portfolio. The RMBS portfolio grew by approximately
8% during the quarter. Consistent with our deployment of our
capital in prior quarters, both the existing and new capital raised
via the ATM programs, we continue to focus our exposure towards
high coupon, fixed rate RMBS, and 30-year securities in
particular. The weighted average coupon of the pass-through
portfolio is essentially unchanged, and well within the range of
approximately the past 9 months, which was 4.26% at September 30,
2014, 4.28% at December 31, 2014 and 4.27% at March 31, 2015. While
the capital allocation was shifted during the first quarter away
from the pass-through strategy, it is also within the range of the
past nine months. The allocations of capital were 64.2%
pass-throughs and 35.8% structured securities at March 31, 2015,
61.0% pass-throughs and 39.0% structured securities at September
30, 2014, and 70.8% pass-throughs and 29.2% structured securities
at December 31, 2014. The variation within the 10% allocation
range of the respective portfolios over the past three quarters
reflects the variation in the relative attractiveness of IO
securities versus higher coupon pass-throughs during the
period. We were able to acquire some attractive IO securities
during the quarter and the realized weighted average yield of the
structured securities portfolio was (0.09)% versus (3.88)% for the
fourth quarter of 2014 and (1.39)% for the third quarter of
2014. Importantly, this shift also reflects the fact our
pass-through portfolio, in conjunction with our funding hedges, has
traded to a negative duration during the market rally, especially
so in the last two quarters. This enables us to rely less on
the IO portfolio to provide up rate protection for the combined
portfolios which in turn allows us to select more current income
oriented IO's versus those that offer little current income in
return for up rate protection. With respect to our funding hedges,
the notional balance of our hedges in place at March 31, 2015
represents approximately 77% of our repurchase agreement balance
versus 79% at December 31, 2014, based on the balance of
outstanding repurchase agreements in place at the time and assuming
all unsettled security sales and purchases were settled, if
applicable.
"As was the case at December 31, 2014, the portfolio is exposed
to a substantial increase in prepayment speeds. While we saw
an increase in refinancing activity as a result of the rally in
January, and we may see speeds remain elevated when the April
figures are released in early May, the market appears to have
stabilized above the January lows as the ten year U.S. Treasury
Note has traded between 1.85% and 2.00% since early
February. Further, while the MBA refinance index has remained
near the two thousand level, the percentage of applications that
are for refinancing has remained below 60% since January, which is
not consistent with a refinancing wave. We do not anticipate an
acceleration in refinancing activity from current levels absent
another shock, such as a Greek exit from the EU or a material
downturn in economic data in the U.S. Accordingly, we intend
to maintain our exposure to higher prepayment speeds. We have been
able to avoid excessive prepayment speeds by holding lower payup
call protected securities just long enough before their
prepayment speeds accelerate. We also anticipate ARM prepayment
speeds to accelerate when the Fed begins to raise rates. As a
result, we continue to avoid them. Finally, we started to
opportunistically enter into dollar roll transactions this quarter
and expect to continue to do so, although we do not anticipate
generating a meaningful amount of our income from dollar rolls in
the near future.
"As we mentioned when we reported our fourth quarter 2014
results, we no longer see the greatest risks to the market as
symmetrical and balanced. Previously we feared there was a
small, but non-zero probability we might see an outbreak of
inflation resulting in a more aggressive Fed and elevated
volatility in the rates markets. With the drop in oil prices,
strong dollar and very low inflation in Europe, this outcome seems
even more unlikely. However, as always, the consequences of such an
outcome are potentially very severe, and so we attempt to protect
against that outcome. We feel the high premium pass-through/IO bias
of the portfolio, which has traded to a negative duration for the
past six months, will do well in such a scenario. However, if
we rally further we may see our earnings come under pressure due to
higher premium amortization but offset by appreciation in
price for our call protected pass-throughs, as they did for the
first half of the first quarter.
"Looking ahead, we continue to anticipate the Federal Reserve
will begin the process of policy normalization, which will entail,
among other measures, increases to the Fed Funds target
range. However, recent economic data seems to reinforce the
notion that the strong dollar and the decline in the price of oil
are having an impact on economic growth, and, more importantly, the
Federal Reserve has noticed. While we still believe the Fed is
anxious to get off the zero bound in interest rates, the path of
the Fed Funds target rate over the next few years–or range as it is
likely to be–likely will be shallow and reach a lower terminal rate
than appeared likely late last year. This expectation is
clearly reflected in the market pricing, such as the Eurodollar
market and Fed Funds futures. When and if Europe recovers
materially and the European Central Bank can consider removing
their QE program, the Euro will begin to appreciate against the
dollar and the effects of the strong dollar discussed above should
begin to reverse. At that point, Fed rate moves, absent other
developments, may occur on a steeper trajectory. In any event,
increases in the Fed Funds target range are likely to result to
increases in LIBOR rates, which are tied to the Company's funding
costs. The Company utilizes Eurodollar futures and swaptions
to hedge its funding costs, although it does not employ hedge
accounting for GAAP purposes. For GAAP, our funding costs will
rise as short-term rates rise as there will be no hedge
offset. However, to the extent the corresponding hedges
increase in value as LIBOR increases, then we will experience
positive fair value adjustment associated with the funding
hedges."
Earnings Conference Call Details
An earnings conference call and live audio webcast will be
hosted Tuesday, April 28, 2015, 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 31055070. 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 May 19,
2015.
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.
Summarized Financial Statements
The following is a summarized presentation of the unaudited
balance sheets as of March 31, 2015, and December 31, 2014,
and the unaudited quarterly results of operations for the three
months ended March 31, 2015 and 2014. Amounts presented are
subject to change.
ORCHID ISLAND CAPITAL,
INC. |
BALANCE
SHEETS |
($ in thousands, except
per share data) |
(Unaudited - Amounts
Subject To Change) |
|
|
|
|
March 31, 2015 |
December 31,
2014 |
ASSETS: |
|
|
Total mortgage-backed securities |
$ 1,676,621 |
$ 1,549,171 |
Cash, cash equivalents and restricted
cash |
86,368 |
100,927 |
Accrued interest receivable |
6,883 |
6,211 |
Derivative assets, at fair value |
218 |
1,217 |
Other assets |
725 |
282 |
Total Assets |
$ 1,770,815 |
$ 1,657,808 |
|
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY |
|
|
Repurchase agreements |
$ 1,459,490 |
$ 1,436,651 |
Payable for unsettled securities
purchased |
79,186 |
-- |
Accrued interest payable |
368 |
628 |
Due to affiliates |
386 |
330 |
Other liabilities |
639 |
2,121 |
Total Liabilities |
1,540,069 |
1,439,730 |
Total Stockholders'
Equity |
230,746 |
218,078 |
Total Liabilities and
Stockholders' Equity |
$ 1,770,815 |
$ 1,657,808 |
Common shares outstanding |
17,924,383 |
16,699,656 |
Book value per share |
$ 12.87 |
$ 13.06 |
|
ORCHID ISLAND CAPITAL,
INC. |
STATEMENTS OF
OPERATIONS |
($ in thousands, except
per share data) |
(Unaudited - Amounts
Subject to Change) |
|
|
|
|
Three Months
Ended March 31, |
|
2015 |
2014 |
Interest income |
$ 14,614 |
$ 3,783 |
Interest expense |
(1,296) |
(411) |
Net interest income |
13,318 |
3,372 |
(Losses) gains |
(6,063) |
758 |
Net portfolio income |
7,255 |
4,130 |
Expenses |
1,746 |
535 |
Net income |
$ 5,509 |
$ 3,595 |
Basic and diluted net income per
share |
$ 0.33 |
$ 0.71 |
Dividends Declared Per Common
Share: |
$ 0.54 |
$ 0.54 |
Weighted average shares
outstanding |
16,846,950 |
5,093,554 |
|
|
|
|
Three Months
Ended March 31, |
Key Balance Sheet
Metrics |
2015 |
2014 |
Average RMBS(1) |
$ 1,612,896 |
$ 549,490 |
Average repurchase agreements(1) |
1,448,071 |
484,902 |
Average stockholders' equity(1) |
224,412 |
76,088 |
Leverage ratio(2) |
6.3:1 |
6.1:1 |
|
|
|
Key Performance Metrics |
|
|
Average yield on RMBS(3) |
3.62% |
2.75% |
Average cost of funds(3) |
0.36% |
0.34% |
Average economic cost of funds(4) |
0.44% |
0.36% |
Average interest rate spread(5) |
3.26% |
2.41% |
Average economic interest rate
spread(6) |
3.18% |
2.39% |
|
|
|
(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, 2015 and 2014,
the $79.2 million and $39.5 million, respectively, of payable for
unsettled securities purchased have 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 the effect of Eurodollar
futures contracts and interest rate swaptions 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. |
CONTACT: Orchid Island Capital, Inc.
Robert E. Cauley, 772-231-1400
Chairman and Chief Executive Officer
www.orchidislandcapital.com
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