Orchid Island Capital, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Orchid is an externally managed mortgage REIT investing primarily in agency residential mortgage-backed securities (RMBS), financed largely through short-term repurchase agreements. Its objective is long-term risk-adjusted returns through income and capital appreciation.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Interest income | $26.9 million | $35.7 million |
| Interest expense | $1.9 million | $16.5 million |
| Net interest income | $24.9 million | $19.1 million |
| Net portfolio loss | $25.9 million | $89.1 million |
| Net loss | $29.4 million | $91.2 million |
| Basic and diluted loss per share | $0.34 | $1.41 |
| Dividends declared per common share | $0.195 | $0.240 |
- Net interest income improved by $5.8 million as sharply lower funding costs more than offset lower asset income. Average RMBS yield fell to 2.66% from 4.36%; average GAAP funding cost fell to 0.20% from 2.11%. Average RMBS holdings and average borrowings rose by approximately $762.9 million and $759.5 million, respectively.
- RMBS losses were $96.3 million, including $88.9 million of unrealized losses and $7.4 million of realized losses. Derivatives and other hedging instruments produced $45.5 million of gains, partly offsetting the RMBS losses.
- Management’s non-GAAP net earnings excluding realized and unrealized gains and losses were $21.4 million, or $0.26 per share. This measure is not a substitute for GAAP net loss.
- Operating cash flow was $24.8 million; investing cash flow was negative $662.4 million; financing cash flow was positive $666.7 million. Cash, cash equivalents and restricted cash totaled $328.6 million at quarter end.
Financial position and material changes
- At March 31, 2021, total assets were $4.93 billion, including $4.34 billion of RMBS at fair value. Repurchase agreements were $4.18 billion; stockholders’ equity was $466.2 million.
- RMBS increased from $3.73 billion at December 31, 2020. Repurchase agreements rose from $3.60 billion. Quarter-end common shares outstanding increased to 94.4 million from 76.1 million, primarily following two underwritten offerings and at-the-market sales.
- The two January and March underwritten offerings generated approximately $95.3 million in net proceeds; total Q1 public equity issuance generated $96.9 million in net proceeds. Approximate quarter-end book value was $4.94 per share, versus $5.46 at year-end, calculated from reported equity and shares outstanding.
- RMBS portfolio effective duration increased to 4.090 from 2.360 at year-end. The portfolio was 99.1% pass-through RMBS and 0.9% structured RMBS; Fannie Mae securities represented 79.3% of fair value.
- Repo funding had a 0.18% net weighted-average borrowing rate and 43-day weighted-average remaining maturity. The company reported a 5.0% weighted-average collateral haircut and said it had met all margin calls.
Outlook, risks and contingencies
- Management described an improving economy but rising long-term rates and volatility. The 10-year Treasury yield rose about 83 basis points during Q1; management attributed the quarter’s RMBS losses in part to rising rates, spread widening and extension concerns. It noted that lower rates after quarter end could sustain elevated prepayments.
- The filing provides no earnings, dividend or portfolio performance guidance. Management stated it believed liquidity and capital resources were sufficient for investment activity, debt repayments and dividends needed to maintain REIT status.
- Principal risks include interest-rate, spread, prepayment, extension, liquidity and counterparty risks; short-term repo funding against longer-term assets; margin calls and repo renewal or haircut changes; and possible changes to Federal Reserve support and GSE policy. The sensitivity analysis estimated that a 100-basis-point rate increase would reduce book value by 13.50%, and a 200-basis-point increase by 33.27%; management cautioned that actual results could differ materially.
- COVID-19-related market disruption had previously caused severe RMBS dislocations and margin calls; the company reported timely satisfaction of all margin calls through March 31, 2021. It said the pandemic could continue to materially affect results, financial position and liquidity.
- No material pending legal proceedings or known contingencies were reported; no material changes to previously disclosed risk factors were identified. Disclosure controls were assessed as effective, with no significant quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether RMBS losses, higher duration and further interest-rate or spread moves could erode book value, and how effective hedges are under changing prepayment assumptions.
- Repo availability, collateral haircuts, counterparty exposure and liquidity under renewed market stress; quarter-end cash included $117.2 million of restricted cash.
- The effect of equity issuance and dilution on per-share book value and future distributions, and whether the dividend remains supported by REIT taxable income and cash generation.
- How management’s non-GAAP earnings and economic funding-cost measures reconcile with GAAP results and realized portfolio performance.
- Developments in Fed asset purchases, GSE policy and the LIBOR transition, which could affect RMBS valuations, funding and hedging.