Orchid Island Capital Announces First Quarter 2021 Results

Rhea-AI Summary

Orchid Island Capital (NYSE:ORC) reported a net loss of $29.4 million for Q1 2021, equating to $0.34 per share. Key highlights include net interest income of $24.9 million and total expenses of $3.5 million. The company declared dividends of $0.195 per common share, with a book value of $4.94 per share as of March 31, 2021. The total return was -6.0%, driven by a $0.52 decline in book value per share. Orchid's portfolio adjustments led to a decrease in prepayment speeds from 20.1% to 12.0%. Management expects improved yield performance in the current higher rate environment.

Positive

• Net interest income increased by $1.0 million from Q4 2020.
• Reduced prepayment speeds from 20.1% to 12.0%, minimizing margin pressure.
• Enhanced liquidity with $218.1 million available, supporting financial stability.

Negative

• Net loss of $29.4 million, a significant impact on financial performance.
• Book value decreased by $0.52 per share, reflecting losses and dividend payments.
• Net realized and unrealized losses of $50.8 million on RMBS and derivatives.

Orchid Island Capital, Inc. (NYSE:ORC) ("Orchid” or the "Company"), a real estate investment trust ("REIT"), today announced results of operations for the three month period ended March 31, 2021.

First Quarter 2021 Highlights

• Net loss of $29.4 million, or $0.34 per common share, which consists of:
  • Net interest income of $24.9 million, or $0.29 per common share
  • Total expenses of $3.5 million, or $0.04 per common share
  • Net realized and unrealized losses of $50.8 million, or $0.60 per common share, on RMBS and derivative instruments, including net interest expense on interest rate swaps
• First quarter total dividends declared and paid of $0.195 per common share
• Book value per common share of $4.94 at March 31, 2021
• Total return of (6.0)%, comprised of $0.195 dividend per common share and $0.52 decrease in book value per common share, divided by beginning book value per common share
• Company to discuss results on Friday, April 30, 2021, at 10:00 AM ET
• Supplemental materials to be discussed on the call can be downloaded from the investor relations section of the Company’s website at https://ir.orchidislandcapital.com

Management Commentary

Commenting on the first quarter results, Robert E. Cauley, Chairman and Chief Executive Officer, said, “During the first quarter of 2021 the recovery from the pandemic accelerated rapidly. New cases of COVID-19 dropped, the distribution of the various vaccines ramped up rapidly and the U.S. government passed a $1.9 trillion stimulus package. The incoming economic data was also very strong, and markets reacted in kind. Equity markets reached new highs almost daily and interest rates increased dramatically. The Federal Reserve expressed their comfort with higher rates and a steep curve, stating the move was consistent with market expectations for a strong recovery, a recovery which in their eyes was a long way from complete.

“When we issued our earnings release for the fourth quarter of 2020 in February 2021, we were in the midst of repositioning our portfolio to minimize the impact of high prepayment speeds and their downward pressure on our net interest margin. During the remainder of the first quarter of 2021, we have continued to do so, and our portfolio in the first quarter had a three-month CPR of 12.0 versus 20.1 in the fourth quarter of 2020, a 40% decrease in realized speeds. The portfolio’s low-coupon bias has increased, and the concentration in higher quality specified pools has decreased as well. The combination of higher rates/lower dollar prices and the reduction in higher quality specified pools lowered the weighted average price of the portfolio by 2.8 basis points. We expect these developments to lead to lower premium amortization rates going forward. We believe that our current portfolio construction should perform well in the current, higher rate environment.

“The substantial move in the market and the increase in rates during the first quarter of 2021 negatively impacted our book value. As a result of the market move, we repositioned our hedge positions and eliminated our lower coupon dollar roll positions pending a stabilization in rates. Our hedge positions at March 31, 2021 consisted of option-based instruments such as swaptions or combinations of swaptions, interest rate swaps and TBA shorts and, since quarter end, futures, albeit to a lesser extent. Our leverage ratio remains at the low end of our target range as well. Absent another episode of extreme market volatility, we anticipate the portfolio should continue to generate attractive yields as it has in the past.”

Details of First Quarter 2021 Results of Operations

The Company reported net loss of $29.4 million for the three month period ended March 31, 2021, compared with net loss of $91.2 million for the three month period ended March 31, 2020. The Company increased its Agency RMBS portfolio over the course of the first quarter through capital raised through two follow-on offerings. Interest income on the portfolio was up approximately $1.0 million from the fourth quarter of 2020. The yield on our average MBS declined from 2.85% in the fourth quarter of 2020 to 2.66% for the first quarter of 2021, repurchase agreement borrowing costs declined from 0.23% for the fourth quarter of 2020 to 0.20% for the first quarter of 2021, and our net interest spread declined from 2.62% to 2.46% in the first quarter.

Book value decreased by $0.52 per share in the first quarter of 2021, reflecting our net loss of $0.34 per share, combined with the dividend distribution of $0.195 per share. The Company recorded net realized and unrealized losses of $0.60 per share on Agency RMBS assets and derivative instruments, including net interest expense on interest rate swaps. As interest rates increased over the course of the first quarter, mark to market gains on our hedging instruments were offset by mark to market losses on our Agency RMBS assets.

Prepayments

For the quarter ended March 31, 2021, Orchid received $123.9 million in scheduled and unscheduled principal repayments and prepayments, which equated to a 3-month constant prepayment rate (“CPR”) of approximately 12.0%. Prepayment rates on the two RMBS sub-portfolios were as follows (in CPR):

			Structured
		PT RMBS	RMBS	Total
Three Months Ended		Portfolio (%)	Portfolio (%)	Portfolio (%)
March 31, 2021		9.9	40.3	12.0
December 31, 2020		16.7	44.3	20.1
September 30, 2020		14.3	40.4	17.0
June 30, 2020		13.9	35.3	16.3
March 31, 2020		9.8	22.9	11.9

Portfolio

The following tables summarize certain characteristics of Orchid’s PT RMBS and structured RMBS as of March 31, 2021 and December 31, 2020:

($ in thousands)
					Weighted
			Percentage		Average
			of	Weighted	Maturity
		Fair	Entire	Average	in		Longest
Asset Category		Value	Portfolio	Coupon	Months		Maturity
March 31, 2021
Fixed Rate RMBS	$	4,297,731	99.1%	2.95%	335		1-Mar-51
Total Mortgage-backed Pass-through		4,297,731	99.1%	2.95%	335		1-Mar-51
Interest-Only Securities		35,521	0.8%	3.98%	264		25-May-50
Inverse Interest-Only Securities		5,284	0.1%	3.77%	311		15-Jun-42
Total Structured RMBS		40,805	0.9%	3.93%	275		25-May-50
Total Mortgage Assets	$	4,338,536	100.0%	3.02%	331		1-Mar-51
December 31, 2020
Fixed Rate RMBS	$	3,560,746	95.5%	3.09%	339		1-Jan-51
Fixed Rate CMOs		137,453	3.7%	4.00%	312		15-Dec-42
Total Mortgage-backed Pass-through		3,698,199	99.2%	3.13%	338		1-Jan-51
Interest-Only Securities		28,696	0.8%	3.98%	268		25-May-50
Total Structured RMBS		28,696	0.8%	3.98%	268		25-May-50
Total Mortgage Assets	$	3,726,895	100.0%	3.19%	333		1-Jan-51

($ in thousands)
		March 31, 2021					December 31, 2020
				Percentage of					Percentage of
Agency		Fair Value		Entire Portfolio			Fair Value		Entire Portfolio
Fannie Mae	$	3,439,588		79.3%		$	2,733,960		73.4%
Freddie Mac		898,948		20.7%			992,935		26.6%
Total Portfolio	$	4,338,536		100.0%		$	3,726,895		100.0%

			March 31, 2021			December 31, 2020
Weighted Average Pass-through Purchase Price		$	107.56		$	107.43
Weighted Average Structured Purchase Price		$	18.69		$	20.06
Weighted Average Pass-through Current Price		$	106.14		$	108.94
Weighted Average Structured Current Price		$	13.83		$	10.87
Effective Duration (1)			4.090			2.360

(1)

Effective duration of 4.090 indicates that an interest rate increase of 1.0% would be expected to cause a 4.090% decrease in the value of the RMBS in the Company’s investment portfolio at March 31, 2021. An effective duration of 2.360 indicates that an interest rate increase of 1.0% would be expected to cause a 2.360% decrease in the value of the RMBS in the Company’s investment portfolio at December 31, 2020. These figures include the structured securities in the portfolio, but do not include the effect of the Company’s funding cost hedges. Effective duration quotes for individual investments are obtained from The Yield Book, Inc.

Financing, Leverage and Liquidity

As of March 31, 2021, the Company had outstanding repurchase obligations of approximately $4,181.7 million with a net weighted average borrowing rate of 0.18%. These agreements were collateralized by RMBS with a fair value, including accrued interest, of approximately $4,285.9 million and cash pledged to counterparties of approximately $102.6 million. The Company’s leverage ratio at March 31, 2021 was 9.1 to 1. At March 31, 2021, the Company’s liquidity was approximately $218.1 million, consisting of unpledged RMBS (excluding the value of the unsettled purchases) and cash and cash equivalents. To enhance our liquidity even further, we may pledge more of our structured RMBS as part of a repurchase agreement funding, but retain the cash in lieu of acquiring additional assets. In this way we can, at a modest cost, retain higher levels of cash on hand and decrease the likelihood we will have to sell assets in a distressed market in order to raise cash. Below is a list of our outstanding borrowings under repurchase obligations at March 31, 2021.

($ in thousands)
						Weighted			Weighted
		Total				Average			Average
		Outstanding		% of		Borrowing		Amount	Maturity
Counterparty		Balances		Total		Rate		at Risk(1)	in Days
Wells Fargo Bank, N.A.	$	404,493		9.7%		0.17%	$	19,971	14
Mirae Asset Securities (USA) Inc.		382,677		9.2%		0.19%		19,637	62
J.P. Morgan Securities LLC		368,853		8.8%		0.18%		20,891	152
ASL Capital Markets Inc.		353,065		8.4%		0.15%		18,697	25
Mitsubishi UFJ Securities (USA), Inc.		338,980		8.1%		0.22%		22,561	18
RBC Capital Markets, LLC		279,377		6.7%		0.17%		12,107	37
ABN AMRO Bank N.V.		226,566		5.4%		0.15%		7,640	35
Cantor Fitzgerald & Co.		223,019		5.3%		0.18%		11,141	28
Citigroup Global Markets, Inc.		213,195		5.1%		0.18%		10,344	42
Nomura Securities International, Inc.		209,661		5.0%		0.18%		6,278	27
ED&F Man Capital Markets Inc.		209,572		5.0%		0.20%		11,285	59
Barclays Capital Inc		152,630		3.6%		0.17%		3,658	42
ING Financial Markets LLC		148,152		3.5%		0.20%		8,029	13
Merrill Lynch, Pierce, Fenner & Smith Inc		144,398		3.5%		0.17%		6,979	14
South Street Securities, LLC		104,768		2.5%		0.24%		5,404	64
Goldman Sachs & Co.		100,860		2.4%		0.17%		5,045	38
Daiwa Capital Markets America, Inc.		98,315		2.4%		0.16%		4,542	37
BMO Capital Markets Corp.		90,021		2.2%		0.15%		3,605	14
Austin Atlantic Asset Management Co.		49,470		1.2%		0.19%		2,030	1
Lucid Cash Fund USG LLC		49,289		1.2%		0.22%		4,308	15
J.V.B. Financial Group, LLC		34,319		0.8%		0.20%		1,783	24
Total / Weighted Average	$	4,181,680		100.0%		0.18%	$	205,935	43

(1)

Equal to the sum of the fair value of securities sold, accrued interest receivable and cash posted as collateral (if any), minus the sum of repurchase agreement liabilities, accrued interest payable and the fair value of securities posted by the counterparties (if any).

Hedging

In connection with its interest rate risk management strategy, the Company economically hedges a portion of the cost of its repurchase agreement funding against a rise in interest rates by entering into derivative financial instrument contracts. The Company has not elected hedging treatment under U.S. generally accepted accounting principles (“GAAP”) in order to align the accounting treatment of its derivative instruments with the treatment of its portfolio assets under the fair value option election. As such, all gains or losses on these instruments are reflected in earnings for all periods presented. At March 31, 2021, such instruments were comprised of Eurodollar and Treasury note (“T-Note”) futures contracts, interest rate swap agreements, interest rate swaption agreements, and to-be-announced (“TBA”) securities transactions.

The table below presents information related to the Company’s Eurodollar and T-Note futures contracts at March 31, 2021.

($ in thousands)
			Average		Weighted		Weighted
			Contract		Average		Average
			Notional		Entry		Effective			Open
Expiration Year			Amount		Rate		Rate			Equity(1)
Eurodollar Futures Contracts (Short Positions)
2021		$	50,000		1.01%		0.21%		$	(301)
Treasury Note Futures Contracts (Short Positions)(2)
June 2021 5-year T-Note futures
	(Jun 2021 - Jun 2026 Hedge Period)	$	69,000		0.88%		1.17%		$	1,036

(1)		Open equity represents the cumulative gains (losses) recorded on open futures positions from inception.
(2)		T-Note futures contracts were valued at a price of $123.40 at March 31, 2021. The contract value of the short position was $85.1 million.

The table below presents information related to the Company’s interest rate swap positions at March 31, 2021.

($ in thousands)
				Average					Net
				Fixed		Average			Estimated		Average
		Notional<

FAQ

What were Orchid Island Capital's financial results for Q1 2021?

Orchid Island Capital reported a net loss of $29.4 million for Q1 2021, with a net interest income of $24.9 million and total expenses of $3.5 million.

What was the book value per share for Orchid Island Capital on March 31, 2021?

The book value per share for Orchid Island Capital was $4.94 as of March 31, 2021.

How much dividend did Orchid Island Capital declare in Q1 2021?

Orchid Island Capital declared a dividend of $0.195 per common share in Q1 2021.

What is Orchid Island Capital's total return for Q1 2021?

The total return for Orchid Island Capital in Q1 2021 was -6.0%, consisting of dividend distribution and a decline in book value.

What changes did Orchid Island Capital make to its portfolio in Q1 2021?

Orchid Island Capital reduced prepayment speeds in its portfolio and repositioned to mitigate high prepayment risks.