Orchid Island Capital, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. Orchid is an externally managed mortgage REIT investing primarily in agency residential mortgage-backed securities (RMBS), financed largely through short-term repurchase agreements. Amounts below are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.
Financial performance and position
| Metric | Q1 2022 / March 31, 2022 | Comparable period / December 31, 2021 |
|---|---|---|
| Interest income | $41.9 million | $26.9 million in Q1 2021 |
| Net interest income | $39.2 million | $24.9 million in Q1 2021 |
| GAAP net loss | $148.7 million; $0.84 per share | $29.4 million loss; $0.34 per share in Q1 2021 |
| Net interest spread | 2.82% GAAP; 2.73% economic | 2.46% GAAP; 2.04% economic in Q1 2021 |
| RMBS portfolio, fair value | $4.58 billion | $6.51 billion |
| Repurchase agreements | $4.46 billion; weighted-average borrowing rate 0.37% | $6.24 billion; 0.15% |
| Cash and cash equivalents | $297.2 million; restricted cash $130.2 million | $385.1 million; restricted cash $65.3 million |
| Stockholders’ equity | $592.4 million | $768.1 million |
| Dividends declared per common share | $0.155 for Q1 | $0.195 in Q1 2021 |
Q1 cash flows included $114.2 million provided by operating activities, $1.67 billion provided by investing activities, and $1.81 billion used in financing activities. Cash, cash equivalents and restricted cash declined by $23.0 million to $427.4 million. Total expenses were $4.7 million, up from $3.5 million a year earlier. The filing reports no material capital-expenditure commitments or off-balance-sheet arrangements.
Changes and drivers
- GAAP net loss widened by $119.4 million year over year. RMBS realized and unrealized losses totaled $361.0 million, compared with $96.3 million in Q1 2021; derivative and other hedge gains of $177.8 million partly offset those losses.
- Interest income rose $15.0 million as average RMBS holdings increased to $5.55 billion from $4.03 billion and average portfolio yield rose to 3.02% from 2.66%. Management attributed the larger portfolio primarily to capital raised in 2021.
- Economic net interest income, a company-defined non-GAAP measure that includes selected hedge effects, was approximately $37.9 million versus $20.9 million in Q1 2021. It should not be treated as a substitute for GAAP results.
- Portfolio fair value fell by approximately $1.93 billion from year-end. Repurchase borrowings also declined, while stockholders’ equity fell by $175.7 million, reflecting the quarterly loss and dividends.
- RMBS effective duration increased to 4.890 from 3.390. Average three-month prepayment speed was 10.7%, down from 12.0% a year earlier.
Outlook, risks and notable items
- The filing provides no specific earnings or dividend guidance. Management described the outlook as challenging, citing high inflation, sharply higher interest rates, elevated volatility, the Fed’s transition to balance-sheet reduction, and potential weaker demand for agency RMBS.
- Management expected funding costs to rise materially through 2022 and possibly into 2023, and warned that falling agency RMBS prices and underperformance relative to hedges could pressure book value. The company said it was responding through asset selection and lower leverage.
- The company’s modeled sensitivity at March 31 estimated that a 100-basis-point rate increase would reduce portfolio market value by 0.50% and equity by 3.84%; a 100-basis-point decline was also estimated to reduce portfolio value by 0.24% and equity by 1.89%. These are model-based estimates for a static portfolio and exclude possible changes in spreads and other market factors.
- Key risks include interest-rate and spread movements, prepayment and extension risk, short-term repo funding and rollover availability, margin calls and collateral haircuts, derivative performance, and counterparty default. Repo agreements averaged 22 days to maturity; the company reported that it met all margin-call requirements at quarter-end.
- After quarter-end, the Manager began providing certain repo trading, clearing and administrative services on April 1 under an amended agreement, for additional fees. On April 13, Orchid declared a $0.045 per-share dividend payable May 27; this was not reflected in the March 31 financial statements.
- The company reported no material changes to its previously disclosed risk factors, no material pending legal proceedings, and effective disclosure controls as of quarter-end.
Important facts for investors to verify
- Review the drivers of the $361.0 million RMBS loss and the extent to which hedge gains may offset future asset-value declines.
- Check current book value per share, share price relative to book value, and the impact of any subsequent market moves; the filing says the shares had traded below book value since late 2021.
- Assess repo maturity, rollover terms, collateral haircuts, margin-call capacity and available unencumbered assets. At March 31, unrestricted cash was $297.2 million and unpledged securities were approximately $3.7 million.
- Reconcile the reported Q1 dividend of $0.155 per share with the filing’s $0.200 2022 year-to-date figure, which includes the post-quarter $0.045 declaration.
- Consider the assumptions and limitations behind management’s non-GAAP economic interest measures and interest-rate sensitivity models.