Orchid Island Capital, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Orchid invests primarily in agency residential mortgage-backed securities (RMBS), financed largely through short-term repurchase agreements. The filing was signed October 30, 2015.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Interest income | $18.4 million | $9.3 million | $49.7 million | $19.7 million |
| Interest expense | $2.0 million | $0.8 million | $4.9 million | $1.9 million |
| Net interest income | $16.3 million | $8.5 million | $44.8 million | $17.8 million |
| Net portfolio income (loss) | $(7.4) million | $8.2 million | $(0.9) million | $24.0 million |
| Net income (loss) | $(9.4) million | $6.8 million | $(6.7) million | $21.0 million |
| Diluted EPS | $(0.42) | $0.63 | $(0.34) | $2.53 |
| Dividends declared per common share | $0.42 | $0.54 | $1.50 | $1.62 |
At September 30, total assets were $2.293 billion, including $2.118 billion of RMBS; repurchase agreements were $1.943 billion and stockholders’ equity was $255.9 million. Cash and cash equivalents were $67.1 million, with a further $11.2 million restricted. Operating cash flow for the nine months was $2.4 million; investing activities used $579.2 million and financing activities provided $550.8 million. Cash declined $26.0 million from year-end 2014.
Q3 average asset yield was 3.42%, average GAAP funding cost 0.41%, and net interest spread 3.01%. Including current-period hedge effects, economic funding cost was 0.59% and economic spread was 2.83%. For the nine months, GAAP spread was 3.12% and economic spread 2.98%. These economic measures are non-GAAP.
Changes and drivers
- RMBS fair value increased from $1.549 billion at December 31, 2014 to $2.118 billion. Management attributed higher interest income mainly to deploying equity proceeds into a leveraged portfolio.
- Despite higher net interest income, nine-month results swung to a loss. RMBS realized and unrealized losses totaled $10.1 million, while derivative losses were $35.7 million. Q3 derivative losses were $22.5 million; management cited wider RMBS spreads relative to comparable swap rates and losses on Eurodollar and Treasury futures.
- Repurchase obligations rose from $1.437 billion at year-end to $1.943 billion; the weighted-average borrowing rate rose from 0.36% to 0.47%. Average repo maturity was 18 days at quarter-end, versus 27 days at year-end.
- Common shares issued and outstanding rose to 21.9 million from 16.7 million at year-end, primarily reflecting 6.2 million shares issued under the at-the-market program. Orchid also repurchased 1.07 million shares for approximately $9.5 million at an average $8.89 per share.
- Monthly dividends were reduced from $0.18 to $0.14 per share beginning with the July 2015 declaration. The October declaration was also $0.14 per share and was not included in September 30 financial statements.
Outlook, risks and other matters
Management gave no quantified earnings, book-value, or dividend forecast. It described continued uncertainty around Federal Reserve policy, global growth, and interest-rate volatility. Management said wider agency-MBS spreads pressured book value, while lower prepayments benefited net interest margin; it warned that rising short-term rates could increase funding costs.
Principal risks include spread and interest-rate movements, mortgage prepayments and extension, short-term repo renewal and haircut changes, liquidity and margin calls, and counterparty default. Repo financing was collateralized by RMBS and cash; the weighted-average haircut was approximately 5.4%. The company reported $122.7 million of aggregate repo counterparty exposure at risk. It stated that it had sufficient liquidity, and that through October 30 it had maintained repo facilities on comparable terms, with maturities through January 19, 2016. These statements do not eliminate refinancing or collateral-call risk.
The company operates as a REIT and generally must distribute at least 90% of REIT taxable income to maintain that status. It reported no material pending legal proceedings, no known contingencies at quarter-end, and no material capital-expenditure commitments. Management concluded disclosure controls were effective; no significant changes in internal control were reported.
Important facts for investors to verify
- How much of the reported loss and book-value movement reflects derivative valuation versus realized portfolio performance, and how management’s non-GAAP economic interest measures are calculated.
- Current book value per share, leverage, and sensitivity to interest-rate and mortgage-spread changes; the filing’s sensitivity estimates assume a static portfolio and unchanged mortgage spreads.
- Repo renewal terms, collateral haircuts, concentration and counterparty exposure, and liquidity available for potential margin calls.
- Whether the reduced monthly dividend is supported by recurring earnings and REIT taxable income, rather than equity issuance or portfolio transactions.
- The effect of further share issuance or repurchases on per-share book value, and the related-party management fees and termination provisions.