Orchid Island Capital Announces First Quarter 2020 Results

VERO BEACH, Fla., April 30, 2020 (GLOBE NEWSWIRE) -- Orchid Island Capital, Inc. ORC ("Orchid" or the "Company"), a real estate investment trust ("REIT"), today announced results of operations for the three month period ended March 31, 2020.

Impact of the COVID-19 Pandemic

Beginning in March 2020, the global pandemic associated with the novel coronavirus COVID-19 ("COVID-19") and related economic conditions began to impact our financial position and results of operations. As a result of the economic, health and market turmoil brought about by COVID-19, the Agency RMBS market experienced severe dislocations. This resulted in falling prices of our assets and increased margin calls from our repurchase agreement lenders. In order to maintain sufficient cash and liquidity, reduce risk and satisfy margin calls, we were forced to sell assets at levels significantly below their carrying values. We timely satisfied all margin calls. The Agency RMBS market largely stabilized after the Federal Reserve announced on March 23, 2020 that it would purchase Agency RMBS and U.S. Treasuries in the amounts needed to support smooth market functioning. The following summarizes the impact COVID-19 has had on our financial position and results of operations through March 31, 2020.

Largely as a result of actions taken by the Federal Reserve (the "Fed") in late March, Agency RMBS valuations have increased since March 31, 2020 and the market for these assets has stabilized.

Our manager has invoked its Disaster Recovery Plan and its employees are working remotely. Prior planning resulted in the successful implementation of this plan and key operational team members maintain daily communication. We do not anticipate incurring additional material costs, nor have we identified any operational or internal control issues related to this remote working plan.

Details of First Quarter 2020 Results of Operations

The Company reported a net loss of $91.2 million for the three month period ended March 31, 2020, compared with net income of $10.6 million for the three month period ended March 31, 2019.  The first quarter net loss included net interest income of $19.1 million, net portfolio losses of $108.2 million (which includes realized and unrealized losses on RMBS and derivative instruments, and net interest income realized on interest rate swaps), management fees and allocated overhead of $1.7 million, audit, legal and other professional fees of $0.3 million, and other operating, general and administrative expenses of $0.1 million.

Capital Allocation and Return on Invested Capital

The Company allocates capital to two RMBS sub-portfolios, the pass-through RMBS portfolio, consisting of mortgage pass-through certificates issued by Fannie Mae, Freddie Mac or Ginnie Mae (the "GSEs") and collateralized mortgage obligations ("CMOs") issued by the GSEs ("PT RMBS"), and the structured RMBS portfolio, consisting of interest-only ("IO") and inverse interest-only ("IIO") securities.  As of December 31, 2019, approximately 80% of the Company's investable capital (which consists of equity in pledged PT RMBS, available cash and unencumbered assets) was deployed in the PT RMBS portfolio.  At March 31, 2020, the allocation to the PT RMBS portfolio increased by 8% to approximately 88%.

The table below details the changes to the respective sub-portfolios during the quarter, as well as the returns generated by each.

The tables below present the allocation of capital between the respective portfolios at March 31, 2020 and December 31, 2019, and the return on invested capital for each sub-portfolio for the three month period ended March 31, 2020.  The return on invested capital in the PT RMBS and structured RMBS portfolios was approximately (21.9)% and (18.2)%, respectively, for the first quarter of 2020.  The combined portfolio generated a return on invested capital of approximately (21.1)%.

Prepayments

For the quarter ended March 31, 2020, Orchid received $142.3 million in scheduled and unscheduled principal repayments and prepayments, which equated to a 3-month constant prepayment rate ("CPR") of approximately 11.9%. Prepayment rates on the two RMBS sub-portfolios were as follows (in CPR):

Portfolio

The following tables summarize certain characteristics of Orchid's PT RMBS and structured RMBS as of March 31, 2020 and December 31, 2019:

Financing, Leverage and Liquidity

As of March 31, 2020, the Company had outstanding repurchase obligations of approximately $2,810.2 million with a net weighted average borrowing rate of 1.35%.  These agreements were collateralized by RMBS with a fair value, including accrued interest, of approximately $2,947.6 million and cash pledged to counterparties of approximately $22.2 million. The Company's leverage ratio at March 31, 2020 was 9.3 to 1. At March 31, 2020, the Company's liquidity was approximately $170.3 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, 2020. 

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, 2020, such instruments were comprised of Eurodollar and Treasury note ("T-Note") futures contracts and interest rate swap agreements. 

The table below presents information related to the Company's Eurodollar and T-Note futures contracts at March 31, 2020.

The table below presents information related to the Company's interest rate swap positions at March 31, 2020.

The following table presents information related to our interest rate swaption positions as of March 31, 2020.

Dividends

In addition to other requirements that must be satisfied to qualify as a REIT, we must pay annual dividends to our stockholders of at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains. We intend to pay regular monthly dividends to our stockholders and have declared the following dividends since our February 2013 IPO.

Peer Performance

The table below presents total return data for Orchid compared to a selected group of peers for periods through December 31, 2019.

Book Value Per Share

The Company's book value per share at March 31, 2020 was $4.65.  The Company computes book value per share by dividing total stockholders' equity by the total number of shares outstanding of the Company's common stock. At March 31, 2020, the Company's stockholders' equity was $308.1 million with 66,236,639 shares of common stock outstanding.

The range of the Company's estimated book value per share as of April 29, 2020 was $5.09 - $5.19.  The Company computes book value per share by dividing total stockholders' equity by the total number of shares outstanding of the Company's common stock. At April 29, 2020, the Company's estimated stockholders' equity range was $337.0 million to $343.7 million with 66,236,639 shares of common stock outstanding. The Company's estimated book value per share and estimated stockholders' equity as of April 29, 2020 and estimated second quarter-to-date total return are preliminary, subject to change, and have not been audited or verified by any third party. The market price used to compute the fair market value of the PT RMBS and structured RMBS positions were obtained from JP Morgan Pricing Direct. Swap and futures marks were obtained from the Chicago Mercantile Exchange ("CME") closing marks. Swaption marks were obtained from the counterparty to the trade and verified internally for reasonableness. Closing TBA prices were obtained from Bloomberg.

Stock Offerings

On August 2, 2017, we entered into an equity distribution agreement (the "August 2017 Equity Distribution Agreement") with two sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $125,000,000 of shares of our common stock in transactions that were deemed to be "at the market" offerings and privately negotiated transactions.  We issued a total of 15,123,178 shares under the August 2017 Equity Distribution Agreement for aggregate gross proceeds of $125.0 million, and net proceeds of approximately $123.1 million, net of commissions and fees, prior to its termination in July 2019.

On July 30, 2019, we entered into an underwriting agreement (the "Underwriting Agreement") with Morgan Stanley & Co. LLC, Citigroup Global Markets Inc. and J.P. Morgan Securities LLC, as representatives of the underwriters named therein, relating to the offer and sale of 7,000,000 shares of our common stock at a price to the public of $6.55 per share. The underwriters purchased the shares pursuant to the Underwriting Agreement at a price of $6.3535 per share. The closing of the offering of 7,000,000 shares of common stock occurred on August 2, 2019, with net proceeds to us of approximately $44.2 million after deduction of underwriting discounts and commissions and other estimated offering expenses payable by us.

On January 23, 2020, we entered into an equity distribution agreement (the "January 2020 Equity Distribution Agreement") with three sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate amount of $200,000,000 of shares of our common stock in transactions that are deemed to be "at the market" offerings and privately negotiated transactions.  Through March 31, 2020, we issued a total of 3,170,727 shares under the January 2020 Equity Distribution Agreement for aggregate gross proceeds of $19.8 million, and net proceeds of approximately $19.4 million, net of commissions and fees.

Stock Repurchase Program

On July 29, 2015, the Board of Directors passed a resolution authorizing the repurchase of up to 2,000,000 shares of the Company's common stock.  As part of the stock repurchase program, shares may be purchased in open market transactions, including through block purchases, privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. Open market repurchases will be made in accordance with Exchange Act Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of open market stock repurchases. The timing, manner, price and amount of any repurchases is determined by the Company in its discretion and is subject to economic and market conditions, stock price, applicable legal requirements and other factors. On February 8, 2018, the Board of Directors approved an increase in the stock repurchase program for up to an additional 4,522,822 shares of the Company's common stock. The authorization does not obligate the Company to acquire any particular amount of common stock, and the program may be suspended or discontinued at the Company's discretion without prior notice.

Since inception of the program through March 31, 2020, the Company repurchased a total of 5,665,620 shares under the stock repurchase program at an aggregate cost of approximately $40.3 million, including commissions and fees, for a weighted average price of $7.11 per share. However, we did not repurchase any shares of our common stock during the three months ended March 31, 2020. As of March 31, 2020, the remaining authorization under the repurchase program is for up to 857,202 shares of the Company's common stock.

Management Commentary

Commenting on the first quarter, Robert E. Cauley, Chairman and Chief Executive Officer, said, "The trajectory of the global and domestic economy changed dramatically during the late stages of the first quarter of 2020.  The global pandemic caused by the coronavirus and the Covid-19 respiratory illness spread quickly and forced businesses and governments to take steps that nearly shut the economy down outside of the most essential services. The initial impact was felt in the financial markets, starting with the equity market which entered bear market conditions in the shortest period ever (measured as the time the market needed to reach a 20% decline).  Interest rates followed as yields across the curve reached record low levels and the Fed lowered the target range for the Fed Funds rate to 0.0% - 0.25%.  The rapid declines in rates across the curve resulted in significant margin call activity on Orchid's various hedge positions. The Company meaningfully reduced its hedge position over the month of March to reduce the Company's exposure to additional margin calls and in anticipation that rates are likely to remain quite low for the foreseeable future.

"As it became clear economic activity was on the verge of collapse, business and investors moved to raise cash as quickly as possible. The resulting selling of financial assets drove prices down quickly and margin calls became numerous, forcing levered investors to reduce leverage.  Assets traded in the most liquid markets or in a gain position were the first to be sold.  The Agency RMBS market, the sole market the Company invests in, was one such market that witnessed the first wave of selling (in addition to U.S. Treasuries).  Orchid moved quickly to sell assets to meet anticipated margin calls and retain adequate liquidity levels.  Throughout the market turmoil, Orchid was able to maintain unrestricted cash and unencumbered assets in the same proportion to its portfolio size and equity base that is has historically. This allowed Orchid to meet all margin calls, as we have throughout our history.

"The mortgage REIT sector was one of the sectors most severely impacted by the pervasive panicked selling and many REITs were unable to meet all of their margin calls.  Fortunately, since we have no exposure to any form of mortgage credit or mortgage origination/servicing, Orchid was not among this group.

"Given the importance of the mortgage market to the U.S. economy, particularly the Agency RMBS market, the breakdown of the market prompted the Fed to intervene by, among other things, purchasing more U.S. Treasuries and Agency RMBS in an effort to stabilize the market.  While the Fed's initial steps proved inadequate, eventually, on March 23, 2020, the Fed announced an essentially unlimited asset purchase program for U.S. Treasuries and Agency RMBS.  The Fed went on to introduce many other facilities to support additional markets over the following days and weeks.  However, the action on March 23rd stabilized the Agency RMBS market and asset prices quickly began to recover.  The Company was able withstand the disruption to the Agency RMBS market, although it did realize approximately $28.4 million of losses on the assets sold and book value on a per share basis was reduced by approximately 25.8%. At this time, Orchid appears to have stabilized and expects to largely continue to operate as before, albeit with a portfolio approximately 17.9% smaller than the portfolio as of December 31, 2019.  Orchid declared a 100% cash dividend for the month of April on April 8th and intends to continue to pay monthly cash dividends going forward. We regret the April dividend was reduced from $0.08 to $0.055, but the reduction in the size of the portfolio mandated this decision.

"The Agency RMBS market performed very well on a relative basis during the first quarter of 2020 and in particular, during the early weeks of the Covid-19 crisis.  The Agency RMBS market total return for the quarter was 2.8% and -0.9% versus equivalent duration swaps and LIBOR (per data published by Bank of America Merrill Lynch/ICE Data Indices).  This return ranks third on a total return basis versus all other major fixed income sectors and major domestic equity index returns, trailing only U.S. Treasuries and Agency CMBS.  In fact, these three sectors were the only three to post positive returns for the quarter.  On an excess return versus equivalent duration swaps and LIBOR, Agency RMBS ranked second behind only U.S. Treasuries.

"With respect to the outlook for the economy and financial markets, the economy remains entrenched in a steep contraction and, despite assertions by both the Fed and the Trump administration that they will do whatever it takes to stabilize the economy and markets, there is no assurance that they will be able to do enough.  There remains too much uncertainty at this point to predict when the economy will recover, or to what extent it will recover.  Another uncertainty is the level of prepayment activity.  U.S. Treasury rates are at their lowest level ever, as is the Freddie Mac 30-year mortgage survey rate which has been just above 3.3% for the last three weeks.  This would imply refinancing activity could surge.  However, the impact of the pandemic has meaningfully impacted the ability of many Americans to meet their monthly mortgage payments.  There is also the impact of social distancing and shelter in place orders on the ability to execute the closing of a new loan.  These two forces work in opposite directions, so we will see the net result over the next few months.  Orchid's portfolio retains significant call protection in the securities we own, so we believe we are well positioned to withstand elevated levels of prepayments.  We also have the benefit of lower funding costs to cushion the blow of a reduced portfolio size.  Going forward, our goal is to continue to generate an attractive dividend rate and solid returns for our stockholders."
   
Earnings Conference Call Details

An earnings conference call and live audio webcast will be hosted Friday, May 1, 2020, at 10:00 AM ET.  The conference call may be accessed by dialing toll free (877) 341-5668.  International callers dial (224) 357-2205.  The conference passcode is 7184266.  The supplemental materials may be downloaded from the investor relations section of the Company's website at www.orchidislandcapital.com. A live audio webcast of the conference call can be accessed via the investor relations section of the Company's website at www.orchidislandcapital.com, and an audio archive of the webcast will be available until June 1, 2020.

About Orchid Island Capital, Inc.

Orchid Island Capital, Inc. is a specialty finance company that invests on a leveraged basis in Agency RMBS. Our investment strategy focuses on, and our portfolio consists of, two categories of Agency RMBS: (i) traditional pass-through Agency RMBS and CMOs, such as mortgage pass-through certificates issued by the GSEs, and (ii) structured Agency RMBS, such as IOs, IIOs and principal only securities, among other types of structured Agency RMBS. Orchid is managed by Bimini Advisors, LLC, a registered investment adviser with the Securities and Exchange Commission.

Forward Looking Statements

Statements herein relating to matters that are not historical facts, including, but not limited to statements regarding interest rates, liquidity, pledging of our structured RMBS, funding levels and spreads, prepayment speeds, refinancing activity, portfolio positioning and repositioning, investment and operating strategy, hedging levels, the supply and demand for Agency RMBS, the effect of actions of the U.S. government, including the Fed, market expectations, future dividends, the success of, and costs associated with, the implementation of our remote working policy, the stock repurchase program and general economic conditions, are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The reader is cautioned that such forward-looking statements are based on information available at the time and on management's good faith belief with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in such forward-looking statements. Important factors that could cause such differences are described in Orchid Island Capital, Inc.'s filings with the Securities and Exchange Commission, including its most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Orchid Island Capital, Inc. assumes no obligation to update forward-looking statements to reflect subsequent results, changes in assumptions or changes in other factors affecting forward-looking statements.

CONTACT:
Orchid Island Capital, Inc.
Robert E. Cauley, 772-231-1400
Chairman and Chief Executive Officer
www.orchidislandcapital.com

Summarized Financial Statements

The following is a summarized presentation of the unaudited balance sheets as of March 31, 2020, and December 31, 2019, and the unaudited quarterly results of operations for the three months ended March 31, 2020 and 2019.  Amounts presented are subject to change.