Orchid Island Capital, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. 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 | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest income | $50.1m | $35.6m | $128.0m | $112.7m |
| Interest expense | $58.7m | $21.4m | $149.6m | $32.2m |
| GAAP net interest income (expense) | ($8.6m) | $14.2m | ($21.6m) | $80.5m |
| Net portfolio loss | ($75.5m) | ($80.2m) | ($51.9m) | ($280.1m) |
| Net loss / loss per share | ($80.1m) / ($1.68) | ($84.5m) / ($2.40) | ($66.4m) / ($1.58) | ($293.4m) / ($8.31) |
| Economic net interest income (non-GAAP) | $15.8m | $18.4m | $45.6m | $84.7m |
Q3 economic net interest spread was 1.33%, versus 1.99% a year earlier; the GAAP spread was negative 0.93%, versus positive 1.51%. For the nine-month periods, economic spread was 1.35% versus 2.50%, while GAAP spread was negative 0.91% versus positive 2.37%. Economic measures are non-GAAP and should not be treated as substitutes for GAAP results.
- Balance sheet at September 30: Assets were $4.94bn, including $4.52bn of RMBS; liabilities were $4.47bn, including $4.43bn of repurchase agreements; stockholders’ equity was $466.8m. At December 31, 2022, assets were $3.87bn and equity was $438.8m.
- Funding and leverage: Repo borrowings carried a 5.49% weighted-average rate and had a 32-day weighted-average remaining maturity. Adjusted leverage was 9.5:1 and economic leverage 8.5:1, up from 7.7:1 and 6.3:1, respectively, at year-end 2022.
- Liquidity and cash flow: Cash and cash equivalents were $158.6m and restricted cash was $119.6m. Nine-month operating cash flow was $48.8m; investing used $1.15bn and financing provided $1.14bn. The filing reports $278.2m in cash, cash equivalents and restricted cash combined at period-end.
- Dividends and shares: Dividends declared were $0.48 per share in Q3 and $1.44 for the first nine months, versus $0.545 and $1.995 in the comparable 2022 periods. The company issued 15.88m shares through public offerings during the first nine months, receiving $159.4m net; shares outstanding rose from 36.8m at year-end to 52.3m.
Material changes versus comparable periods
- Q3 interest income increased year over year, but higher funding costs outweighed that gain: average cost of funds rose to 5.44% from 2.48%, and GAAP net interest income turned negative.
- Nine-month interest income rose $15.3m, while interest expense rose $117.4m. Management attributed the expense increase mainly to a 404-basis-point increase in average funding cost, partly offset by lower average borrowings.
- Nine-month net loss improved substantially from 2022, when Orchid recorded $132.7m of realized RMBS sale losses and much larger unrealized losses. Orchid reported no RMBS sales in the first nine months of 2023.
- RMBS fair value increased to $4.52bn from $3.54bn at year-end 2022. The portfolio was 99.6% fixed-rate RMBS; its weighted-average coupon was 4.01%, up from 3.46%.
Outlook, commentary and risks
Management described Q3 as challenging for fixed-income markets. It cited resilient U.S. growth, persistent inflation concerns, restrictive monetary policy, increased Treasury issuance and higher long-term yields as factors contributing to market volatility and wider agency RMBS spreads. The filing provides no specific earnings or dividend guidance.
After quarter-end, as rates and RMBS volatility continued, management said it reduced leverage and increased hedges; it also reduced 30-year 3.0% coupon holdings, added shorts in that coupon, eliminated its 15-year TBA long, and closed higher-coupon short TBA positions. These actions occurred after September 30.
- Key exposures include interest-rate, mortgage-spread, prepayment, extension, liquidity and counterparty risks. Higher rates can reduce RMBS values and increase funding costs; spread widening may not be offset by rate hedges.
- Short-term repo funding creates rollover, haircut and margin-call risk. The company reported that it had met all margin calls at September 30; aggregate repo counterparty amount at risk was approximately $207.6m.
- Management said it believed liquidity and capital resources were sufficient for operations, debt repayments and dividends needed to maintain REIT status. This is management’s assessment, not a guarantee of future funding access.
- The company reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls. It reported no material capital expenditure commitments.
Important facts for investors to verify
- How rising repo rates and short-term funding maturities affect future GAAP and economic net interest income.
- Whether RMBS spread widening, higher rates or margin calls could pressure book value, liquidity or leverage; review the filing’s interest-rate sensitivity estimates and assumptions.
- The sustainability of the dividend relative to taxable income, earnings and available liquidity; the filing notes that REIT taxable income can differ from GAAP results.
- The impact of ATM share issuance and higher shares outstanding on per-share book value, earnings and dividends.
- Post-quarter portfolio and hedging changes, and whether repo facilities remain available on comparable terms beyond the period described.