Orchid Island Capital, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. Orchid is an externally managed mortgage REIT investing primarily in agency residential mortgage-backed securities (RMBS), financed largely with short-term repurchase agreements.
Key financial metrics
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $38.0 million | $41.9 million in Q1 2022 |
| Interest expense | $42.2 million | $2.7 million in Q1 2022 |
| Net interest income (expense), GAAP | $(4.2) million | $39.2 million in Q1 2022 |
| Net income (loss) | $3.5 million; $0.09 per diluted share | $(148.7) million; $(4.20) per share in Q1 2022 |
| Economic net interest income, non-GAAP | $15.0 million; 1.46% economic net interest spread | $37.6 million; 2.70% in Q1 2022 |
| RMBS portfolio | $4.00 billion fair value; 3.55% weighted average coupon | $3.54 billion at December 31, 2022 |
| Repurchase agreements | $3.77 billion; 4.90% net weighted average borrowing rate | $3.38 billion at December 31, 2022 |
| Total assets / stockholders’ equity | $4.27 billion / $451.4 million | $3.87 billion / $438.8 million at December 31, 2022 |
| Cash and cash equivalents | $143.2 million; restricted cash $42.7 million | $205.7 million and $31.6 million, respectively, at December 31, 2022 |
| Cash flow | Operating $(2.6) million; investing $(448.9) million; financing $400.3 million. Cash, equivalents and restricted cash fell $51.3 million to $186.0 million. | Q1 2022: operating cash flow $114.2 million; investing $1.67 billion; financing $(1.81) billion |
| Dividends declared per common share | $0.48 during Q1 | $0.775 in Q1 2022 |
Material changes versus Q1 2022
- Net income improved by $152.3 million, but the comparison reflects a sharp reversal in valuation results: Q1 2023 recorded $53.9 million of unrealized gains on RMBS and Treasury notes, while Q1 2022 recorded $310.0 million of unrealized losses and $51.1 million of realized RMBS losses.
- Derivative and other hedge instruments generated a $41.2 million loss in Q1 2023, versus a $177.5 million gain in Q1 2022. Combined RMBS and derivative gains were $12.7 million in Q1 2023 versus losses of $183.6 million in Q1 2022.
- GAAP interest expense rose $39.6 million as the average cost of funds increased 452 basis points to 4.72%; average borrowings declined to $3.57 billion from $5.35 billion. Average RMBS holdings also declined year over year, while portfolio yield rose to 4.03% from 3.02%.
- Economic net interest income declined to $15.0 million from $37.6 million. This company-defined non-GAAP measure incorporates designated hedging effects and should be read alongside GAAP results, not as a substitute for them.
- The company bought $467.5 million of pass-through RMBS and made no RMBS sales; in Q1 2022, it sold $1.41 billion of RMBS. Principal repayments fell to $61.0 million from $157.1 million, and average three-month prepayment speeds fell to 4.0% from 10.7%.
- Equity increased to $451.4 million, including $31.7 million net proceeds from issuing 2.69 million shares. Orchid also repurchased 373,041 shares for about $4.0 million.
Outlook, risks and other notable items
- Management commentary: Management described Q1 as a period of substantial interest-rate and policy uncertainty, intensified by two regional bank failures in March. It noted that further bank failures remain possible and that inflation and labor-market data could keep monetary policy restrictive.
- Agency RMBS market risk: Management reported that the FDIC was liquidating approximately $114 billion of securities from failed banks, with sales expected to continue for 30–40 weeks from April 2023. Orchid holds a significant allocation to securities included in the sales, whose relative performance could remain weak.
- Funding and liquidity: Repo agreements are short-term, with a 30-day weighted average remaining maturity. Orchid reported $143.2 million of unrestricted cash and about $53.8 million of unpledged securities; it had met margin-call requirements at quarter-end. Repo lenders may decline to renew funding, increase haircuts, or require additional collateral. The company reported an aggregate repo-counterparty amount at risk of approximately $193.2 million.
- Market exposure: Key risks include interest-rate, mortgage-spread, prepayment, extension, liquidity and counterparty risks. The filing’s modeled sensitivity estimates show that a 100-basis-point rate increase could reduce portfolio value by 1.03% and book value by 9.13%; management cautions that actual outcomes may differ materially and that estimates assume a static portfolio.
- Dividends and capital: Orchid intends to pay regular monthly dividends and must meet REIT distribution requirements. A $0.16-per-share dividend declared April 12, 2023, for payment May 26, 2023, was not recorded as a March 31 liability. A new at-the-market equity agreement authorizes up to $250 million of offerings; no shares had been issued under it by quarter-end.
- Other items: The company expects to adopt reference-rate reform accounting provisions in Q2 2023 as certain derivatives transition from LIBOR to SOFR and does not expect a material financial-statement impact. Management reported no material pending legal proceedings, no material changes to the prior-year risk factors, and effective disclosure controls.
- No specific earnings or dividend guidance: The filing provides management’s market outlook but does not provide a quantified earnings forecast.
Important facts for investors to verify
- Whether repo funding remains available on comparable terms as agreements mature, and how borrowing costs, haircuts and margin requirements evolve.
- The effect of the FDIC securities liquidations and ongoing rate volatility on RMBS valuations, spreads, hedges and book value.
- Whether operating cash generation and taxable income support dividend levels, given negative GAAP net interest income and the REIT distribution requirement.
- How future share issuance under the $250 million ATM agreement affects per-share book value and earnings, relative to repurchases.
- The assumptions and limitations underlying management’s non-GAAP economic interest measures and interest-rate sensitivity estimates.