Orchid Island Capital, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Orchid is an externally managed REIT investing primarily in leveraged agency residential mortgage-backed securities (RMBS); its common stock trades as ORC on the NYSE. All figures are in U.S. dollars. Financial statements are unaudited.
Key financial metrics
| Metric | Q3 2020 / Sept. 30, 2020 | Comparable period / Dec. 31, 2019 |
|---|---|---|
| Interest income | $27.2 million (Q3); $90.2 million (nine months) | $35.9 million (Q3 2019); $104.8 million (nine months 2019) |
| Net interest income | $25.2 million (Q3); $67.1 million (nine months) | $13.6 million (Q3 2019); $41.2 million (nine months 2019) |
| Net income (loss) | $28.1 million, or $0.42/share (Q3); loss of $14.4 million, or $0.22/share (nine months) | Loss of $8.5 million, or $0.14/share (Q3 2019); income of $5.7 million, or $0.10/share (nine months 2019) |
| Total assets | $3.813 billion | $3.882 billion |
| RMBS at fair value | $3.540 billion | $3.591 billion |
| Repurchase-agreement debt | $3.281 billion | $3.448 billion |
| Stockholders’ equity | $376.7 million | $395.5 million |
| Cash and cash equivalents; restricted cash | $199.8 million; $47.5 million | $193.8 million; $84.9 million |
Q3 net portfolio income was $30.9 million, compared with a $5.8 million net portfolio loss in Q3 2019. Nine-month net portfolio loss was $6.6 million, versus income of $13.3 million in 2019. Total operating expenses were $2.8 million for Q3 and $7.7 million for the nine months.
For the nine months, operating cash flow was $30.9 million, investing cash flow was $109.7 million, and financing cash flow was negative $171.9 million. Cash, cash equivalents and restricted cash decreased $31.3 million to $247.3 million. Q3 cash flow was not separately presented in the supplied filing text.
Material changes versus prior periods
- Q3 net income improved by $36.6 million year over year, primarily reflecting the swing in RMBS and hedge results; nine-month net income deteriorated by $20.0 million.
- Q3 net interest income rose $11.6 million year over year despite lower interest income, as borrowing costs fell substantially. Nine-month net interest income rose $26.0 million for the same broad reason.
- For the nine months, interest income fell $14.6 million, while interest expense fell $40.6 million. Average RMBS yield declined to 3.67% from 4.18%; reported average funding cost declined to 0.99% from 2.65%. Management’s non-GAAP economic net interest income was $49.6 million versus $46.3 million.
- Nine-month derivative and other hedging losses were $87.6 million, versus $62.0 million in 2019. RMBS gains, net of realized and unrealized items, were $13.9 million, versus $34.1 million in 2019.
- Common shares outstanding increased to 69.3 million from 63.1 million at year-end 2019, partly reflecting 6.24 million shares issued through at-the-market programs for $35.0 million net proceeds during the nine months.
- Portfolio duration was 1.79 at September 30, compared with 2.78 at year-end. The portfolio was 99.1% pass-through RMBS and 0.9% structured RMBS; the structured allocation had declined from 2.4% at year-end.
Liquidity, leverage and distributions
Repurchase borrowings were approximately 8.7 times stockholders’ equity at quarter-end. Repo funding had a 0.24% weighted-average borrowing rate and a 60-day weighted-average remaining maturity; the collateral haircut averaged approximately 4.9%. Management reported sufficient borrowing capacity and liquidity, and said all margin calls had been met by September 30. Unpledged securities were approximately $124.2 million, in addition to unrestricted cash and cash equivalents.
Orchid declared dividends of $0.190 per common share for Q3 and $0.595 per share for the first nine months. On October 14, it declared an additional $0.065 per share, payable November 25; that later dividend was not recorded as a September 30 liability. As a REIT, the company generally must distribute at least 90% of REIT taxable income to maintain its tax status.
Outlook, commentary and risks
- COVID-19 disruption: In March, market dislocations and margin calls forced asset sales and hedge closures. Orchid sold about $2.7 billion of RMBS during the nine months, realizing $24.5 million of losses; approximately $1.1 billion of sales on March 19–20 generated about $31.4 million of losses. It also terminated $1.2 billion notional of swaps, with approximately $54.5 million of mark-to-market losses through termination.
- Management outlook: No numerical earnings, book-value or dividend guidance was provided. Management expected elevated mortgage prepayments, low funding rates and continued Federal Reserve activity in agency MBS markets, while noting that pandemic-related uncertainty and uneven economic recovery could persist. These are expectations, not guarantees.
- Principal risks: Interest-rate and mortgage-spread movements, prepayment and extension risk, short-term repo rollover and margin-call liquidity risk, counterparty exposure, and hedge effectiveness. Federal Reserve support helped stabilize the agency RMBS market; reduced or changed support could adversely affect the portfolio.
- Rate sensitivity: The company’s model estimated that a 100-basis-point rate increase would reduce book value by 12.99%, while a 100-basis-point decrease would increase it by 10.10%. These estimates assume a static portfolio and no spread changes; actual results could differ materially.
- Other disclosures: Management reported no material pending legal proceedings, no material commitments for capital expenditures and no off-balance-sheet arrangements. Disclosure controls were deemed effective, with no significant quarterly change in internal control over financial reporting.
Investor verification checklist
- Review subsequent results for whether elevated prepayments, lower asset yields and market spreads affected earnings and RMBS values.
- Verify repo availability, maturity extensions, borrowing costs, collateral haircuts and margin-call requirements under stressed conditions.
- Assess hedge performance and the realized versus unrealized components of derivative and RMBS gains or losses.
- Track share issuance and its effect on per-share book value, and confirm the sustainability and tax treatment of dividends.
- Evaluate sensitivity estimates alongside actual changes in rates, mortgage spreads, prepayments and portfolio composition; the filing cautions that model estimates may not predict realized outcomes.