Orchid Island Capital, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Orchid is an externally managed mortgage REIT investing primarily in agency residential mortgage-backed securities (RMBS), financed largely through short-term repurchase agreements.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Comparable period / December 31, 2019 |
|---|---|---|
| Interest income | $35.7 million | $32.4 million in Q1 2019 |
| Net interest income | $19.1 million | $13.5 million in Q1 2019 |
| Net income (loss) | $(91.2) million; $(1.41) per share | $10.6 million; $0.22 per share in Q1 2019 |
| Net portfolio loss | $(89.1) million | $12.8 million income in Q1 2019 |
| RMBS and derivative losses | $(108.2) million | $(0.7) million in Q1 2019 |
| Total assets | $3.16 billion | $3.88 billion |
| RMBS at fair value | $2.95 billion | $3.59 billion |
| Repurchase agreement debt | $2.81 billion | $3.45 billion |
| Stockholders’ equity | $308.1 million | $395.5 million |
| Cash and cash equivalents | $162.7 million | $193.8 million |
GAAP net interest spread was 2.25%; the company’s non-GAAP economic spread, reflecting hedging effects attributed to the quarter, was 1.62%. Economic net interest income was $14.2 million, down from $16.0 million in Q1 2019, as hedging performance weakened. Operating cash flow was $(7.1) million; investing activities provided $563.7 million and financing activities used $633.8 million. Cash, cash equivalents and restricted cash totaled $201.5 million at quarter-end.
Material changes and unusual items
- COVID-19 market dislocations in March drove margin calls and distressed asset sales. Orchid sold about $1.8 billion of RMBS and recorded $28.4 million of realized losses; approximately $1.1 billion of sales on March 19–20 generated about $31.4 million in losses.
- The company terminated interest-rate swaps with $860 million notional and incurred approximately $45 million in mark-to-market losses through termination. Total derivative losses were $82.9 million for the quarter.
- Equity fell about 22% from year-end; management separately described book value as down approximately 25.8%. RMBS holdings declined about 17.9% from year-end, and repurchase borrowings declined about $638 million.
- Interest income rose year over year with a larger average RMBS portfolio and higher portfolio yield. Lower average funding costs reduced GAAP interest expense, but hedging losses increased economic funding costs.
- Orchid issued 3.17 million shares through its at-the-market program for $19.4 million net proceeds. Shares outstanding were 66.24 million at March 31.
Liquidity, outlook and risks
Management said it met all margin calls and believed liquidity and capital resources were sufficient for operations, debt repayments and required REIT distributions. At March 31, unrestricted cash was $162.7 million, unpledged securities were approximately $11.0 million, and the weighted-average repo haircut was about 4.9%. Repo maturities averaged 24 days. The company reported that facilities remained available on comparable terms through May 1, with maturities extending through July 22, 2020.
The Federal Reserve’s March 23 commitment to buy agency MBS and Treasuries in amounts needed to support market functioning helped stabilize the agency RMBS market. Management said it expected to operate with a smaller portfolio and intended to continue monthly dividends, but provided no quantified earnings or dividend guidance. Future dividends remain subject to board discretion and market conditions; an April 8 dividend of $0.055 per share was declared for payment May 27 and was not recorded at March 31.
Key risks include renewed market volatility, widening mortgage spreads, higher repo haircuts or loss of financing, further margin calls and forced sales, interest-rate and prepayment changes, and counterparty risk. Management highlighted uncertainty about the duration and economic impact of COVID-19, borrower forbearance and refinancing, and the effects of government and Federal Reserve actions. The company’s manager had shifted employees to remote work; management reported no identified related operational or internal-control issues. No material pending legal proceedings, material capital-expenditure commitments or off-balance-sheet arrangements were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether repo financing, counterparties, haircuts and margin requirements remain stable, and how liquidity changes as facilities mature.
- Subsequent changes in RMBS market values, mortgage spreads, portfolio size and book value after the March disruption.
- Whether realized and unrealized hedging results continue to weigh on economic net interest income and funding costs.
- Prepayment speeds, borrower forbearance and refinancing trends, particularly their effects on asset yields and structured RMBS.
- Future dividend declarations and the company’s capacity to sustain distributions while meeting REIT requirements.
- Share issuance and repurchase disclosures: the filing says no program repurchases occurred in Q1, while separately reporting 20 shares acquired for tax withholding in March.