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Orchid Island Capital Announces Fourth Quarter 2020 Results

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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 December 31, 2020.

Fourth Quarter 2020 Highlights

  • Net income of $16.5 million, or $0.23 per common share, which consists of:
    • Net interest income of $23.9 million, or $0.34 per common share
    • Total expenses of $2.8 million, or $0.04 per common share
    • Net realized and unrealized losses of $4.6 million, or $0.07 per share, on RMBS and derivative instruments, including net interest expense on interest rate swaps
  • Fourth quarter and full year total dividends declared and paid of $0.195 and $0.79 per common share, respectively
  • Since its initial public offering, the Company has declared cash dividends equaling $11.785 per common share
  • Book value per share of $5.46 at December 31, 2020
  • 4.0% economic gain on common equity for the quarter, or 15.8% annualized, comprised of $0.195 dividend per common share and $0.02 increase in net book value per common share, divided by beginning book value per share
  • Company to discuss results on Friday, February 26, 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 fourth quarter and full year results, Robert E. Cauley, Chairman and Chief Executive Officer, said, "Orchid Island Capital generated another quarter of strong returns for stockholders. For the fourth quarter, Orchid generated a 4.0% return based on a $0.02 per share increase in book value and $0.195 per share of dividends. This marks the third consecutive quarter of positive returns since the market turbulence of the first quarter – a product of the COVID-19 pandemic and its impact on the economy and financial markets. Orchid's strategy of focusing exclusively on Agency RMBS assets since inception with no credit exposure of any kind in any of our assets enabled Orchid to avoid the pitfalls so many around us suffered, in many cases leading to severe financial distress that many have yet to fully recover from. Managing our portfolio was never more challenging than what we experienced last March. Our asset selection acumen and disciplined investment style were put to the test, as was our liquidity management skills. During such periods, relationships with our credit counterparties and their confidence in us were critical. These relationships have been developed over nearly two decades and continue to pay dividends, especially in times of severe market stress like 2020. Since our difficulties last March were very temporary, we were able to quickly recover and capitalize on the many opportunities available in the market place over the balance of the year. In fact, in spite of the market disruptions of the first quarter, Orchid generated a positive 2.7% return for stockholders for the year based on a $0.63 per share decline in Orchid's share price since December 31, 2019, offset entirely by $0.79 per share of dividends.

"During the fourth quarter of 2020 we focused on maximizing returns on the portfolio by reducing the income draining effects of prepayments on our premium RMBS. We shifted the portfolio into lower coupon securities and in some cases shorter maturity securities as well. Our prepayment rate in the fourth quarter was 16.7 CPR, a 2.4 CPR increase over the third quarter of 2020. During the fourth quarter, the spread between mortgage rates available to borrowers and rates on an interpolated par priced mortgage backed security, or the primary/secondary spread, continued to compress and rates available to borrowers were the lowest ever experienced. As a result, we were quite happy with the prepayment performance of the portfolio. We were also able to enhance our returns for the fourth quarter by taking advantage of the TBA dollar roll market. With the Federal Reserve continuing their asset purchases at a rate of $40 billion of Agency RMBS per month, concentrated in production coupons, we continued to modestly expand our use of the very attractive financing offered by the TBA dollar roll market. Coupled with continued low financing in the traditional repo markets and our low prepayment rates, we were able to continue to generate attractive net interest margins for our stockholders in support of the dividend. During the fourth quarter, we were also able to raise approximately $36.1 million of additional capital from our at-the-market program at attractive prices relative to our book value while also accretive to earnings."

Details of Fourth Quarter 2020 Results of Operations

The Company reported net income of $16.5 million for the three month period ended December 31, 2020, compared with net income of $18.6 million for the three month period ended December 31, 2019. The portfolio remains concentrated in specified, fixed rate pools with favorable prepayment characteristics and, to a lesser extent, lower coupon TBAs. With very high refinancing incentives to borrowers as the primary/secondary interest rate spread continued to compress, the Company sold higher coupon fixed rate securities in favor of lower coupon fixed rate bonds and/or shorter maturity securities, again with lower coupons. Secondly, the Company increased its Agency RMBS portfolio over the course of the fourth quarter through capital raised through the at-the-market program. Interest income on the portfolio of specified pools was down slightly from the third quarter of 2020. The yield on our average MBS declined from 3.18% in the third quarter to 2.85% for the fourth quarter, repurchase agreement borrowing costs declined from 0.25% for the third quarter to 0.23% for the fourth quarter, and our net interest spread declined from 2.93% to 2.62% in the fourth quarter. The decline in net interest income from the MBS portfolio was offset by gains on long TBA positions of approximately $5.5 million.

Book value increased by $0.02 per share as net income of $0.23 per share exceeded the dividend distribution of $0.195 per share, offset by the slightly dilutive effect of shares sold under the Company's at-the-market program of approximately $0.01 per share. The proceeds of the shares issued were deployed into our Agency RMBS portfolio, which benefited from tightening asset spreads and attractive returns available in the market. As a result, the new capital was accretive to earnings. The Company recorded net realized and unrealized losses of $0.07 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 fourth quarter, mark to market gains on our hedging instruments were offset by mark to market losses on our Agency RMBS assets. Absent mark to market losses related to premium lost from paydowns, the RMBS portfolio would have had a slightly positive mark to market gain as spreads on Agency RMBS tightened during the quarter. Expenses of $2.80 million in the fourth quarter decreased slightly from $2.85 million in the third quarter.

Details of Full Year 2020 Results of Operations

Orchid generated net income per share of $0.03 during 2020. The severe market dislocations in the first quarter required the Company to sell assets and unwind hedge positions to maintain adequate liquidity. The Company recorded $79.1 million of losses on derivative instruments and $25.0 million of realized losses on our Agency RMBS securities for the year, the overwhelming majority of which occurred in the first quarter. The Company was able to maintain adequate liquidity to survive the turmoil and was well positioned to benefit from the recovery in asset prices that occurred once the Federal Reserve intervened to stabilize the market. The Company's book value increased from $4.65 per share on March 31, 2020 to $5.46 per share on December 31, 2020 as spreads on our portfolio of specified Agency RMBS and lower coupon TBA securities tightened. The Company's stock price recovered as well, and we were able to raise additional capital at very modest discounts to book value and deploy the proceeds with very attractive investment opportunities and tightening asset spreads, and thus accretive to earnings. Our average RMBS holdings declined slightly in 2020 from 2019 and with available yields in the market declining as interest rates fell to all-time low levels, our yield on average MBS declined from 4.14% in 2019 to 3.45% for 2020. However, because our average cost of funding declined from 2.53% in 2019 to 0.78% for 2020, our net interest spread increased from 1.61% in 2019 to 2.67% for 2020. For the year we recorded $25.8 million of unrealized gains on Agency RMBS assets. The Company has also increased its use of TBA securities as they offer more attractive funding than the repurchase agreement funding we use for specified pools and do not require us to post collateral to our repo counterparties as a result of prepayments every month. The Company has transitioned our hedge positions away from a concentration in interest rate swaps to a more balanced blend of swaps and option based instruments, such as swaptions and/or swaption strategies involving long/short positions. The active management of these strategies enhances our liquidity management while also providing better protection for adverse rate movements. General and administrative expenses, inclusive of our management fee, increased slightly from $10.39 million in 2019 to $10.54 million in 2020.

Prepayments

For the quarter ended December 31, 2020, Orchid received $139.4 million in scheduled and unscheduled principal repayments and prepayments, which equated to a 3-month constant prepayment rate ("CPR") of approximately 20.1%. Prepayment rates on the two RMBS sub-portfolios were as follows (in CPR):

 

 

 

 

 

Structured

 

 

 

 

PT RMBS

 

RMBS

 

Total

Three Months Ended

 

Portfolio (%)

 

Portfolio (%)

 

Portfolio (%)

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

December 31, 2019

 

14.3

 

23.4

 

16.0

September 30, 2019

 

15.5

 

19.3

 

16.4

June 30, 2019

 

10.9

 

12.7

 

11.4

March 31, 2019

 

9.5

 

8.4

 

9.2

 

Portfolio

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

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Percentage

 

 

 

Average

 

 

 

 

 

 

 

of

 

Weighted

 

Maturity

 

 

 

 

 

Fair

 

Entire

 

Average

 

in

 

Longest

Asset Category

 

 

Value

 

Portfolio

 

Coupon

 

Months

 

Maturity

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

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

Adjustable Rate RMBS

 

$

1,014

 

0.0%

 

4.51%

 

176

 

1-Sep-35

Fixed Rate RMBS

 

 

3,206,013

 

89.3%

 

3.90%

 

342

 

1-Dec-49

Fixed Rate CMOs

 

 

299,205

 

8.3%

 

4.20%

 

331

 

15-Oct-44

Total Mortgage-backed Pass-through

 

 

3,506,232

 

97.6%

 

3.92%

 

341

 

1-Dec-49

Interest-Only Securities

 

 

60,986

 

1.7%

 

3.99%

 

280

 

25-Jul-48

Inverse Interest-Only Securities

 

 

23,703

 

0.7%

 

3.34%

 

285

 

15-Jul-47

Total Structured RMBS

 

 

84,689

 

2.4%

 

3.79%

 

281

 

25-Jul-48

Total Mortgage Assets

 

$

3,590,921

 

100.0%

 

3.90%

 

331

 

1-Dec-49

 

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

December 31, 2019

 

 

 

 

Percentage of

 

 

 

 

Percentage of

Agency

 

Fair Value

 

Entire Portfolio

 

 

Fair Value

 

Entire Portfolio

Fannie Mae

$

2,733,960

 

73.4%

 

$

2,170,668

 

60.4%

Freddie Mac

 

992,935

 

26.6%

 

 

1,420,253

 

39.6%

Total Portfolio

$

3,726,895

 

100.0%

 

$

3,590,921

 

100.0%

     

 

 

 

December 31, 2020

 

 

December 31, 2019

Weighted Average Pass-through Purchase Price

 

$

107.43

 

$

105.16

Weighted Average Structured Purchase Price

 

$

20.06

 

$

18.15

Weighted Average Pass-through Current Price

 

$

108.94

 

$

106.26

Weighted Average Structured Current Price

 

$

10.87

 

$

13.85

Effective Duration(1)

 

 

2.360

 

 

2.780

(1)

Effective duration is the approximate percentage change in price for a 100 bps change in rates. 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. An effective duration of 2.780 indicates that an interest rate increase of 1.0% would be expected to cause a 2.780% decrease in the value of the RMBS in the Company's investment portfolio at December 31, 2019. 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 December 31, 2020, the Company had outstanding repurchase obligations of approximately $3,595.6 million with a net weighted average borrowing rate of 0.23%. These agreements were collateralized by RMBS with a fair value, including accrued interest, of approximately $3,729.5 million and cash pledged to counterparties of approximately $58.8 million. The Company's leverage ratio at December 31, 2020 was 8.8 to 1. At December 31, 2020, the Company's liquidity was approximately $227.1 million, consisting of unpledged RMBS and unrestricted 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 December 31, 2020.

       

($ 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.

 

$

421,363

 

11.7%

 

0.22%

 

$

22,969

 

41

Mirae Asset Securities (USA) Inc.

 

 

362,434

 

10.1%

 

0.25%

 

 

19,762

 

30

Mitsubishi UFJ Securities (USA), Inc.

 

 

340,953

 

9.5%

 

0.24%

 

 

20,112

 

18

J.P. Morgan Securities LLC

 

 

335,287

 

9.3%

 

0.24%

 

 

19,157

 

70

ASL Capital Markets Inc.

 

 

291,724

 

8.1%

 

0.21%

 

 

870

 

35

Citigroup Global Markets, Inc.

 

 

222,559

 

6.2%

 

0.23%

 

 

11,966

 

12

Cantor Fitzgerald & Co.

 

 

214,128

 

6.0%

 

0.23%

 

 

11,203

 

24

RBC Capital Markets, LLC

 

 

163,155

 

4.5%

 

0.22%

 

 

9,311

 

12

Barclays Capital Inc

 

 

158,409

 

4.4%

 

0.23%

 

 

5,499

 

12

Daiwa Capital Markets America, Inc.

 

 

151,432

 

4.2%

 

0.24%

 

 

7,653

 

37

Merrill Lynch, Pierce, Fenner & Smith Inc.

 

 

150,672

 

4.2%

 

0.22%

 

 

5,783

 

14

ING Financial Markets LLC

 

 

126,331

 

3.5%

 

0.22%

 

 

7,115

 

14

ED&F Man Capital Markets Inc.

 

 

115,495

 

3.2%

 

0.22%

 

 

6,207

 

13

ABN AMRO Bank N.V.

 

 

109,827

 

3.1%

 

0.23%

 

 

3,267

 

13

Nomura Securities International, Inc.

 

 

104,422

 

2.9%

 

0.21%

 

 

5,954

 

48

South Street Securities, LLC

 

 

79,298

 

2.2%

 

0.28%

 

 

4,618

 

102

Goldman Sachs & Co.

 

 

77,823

 

2.2%

 

0.22%

 

 

4,376

 

47

BMO Capital Markets Corp.

 

 

69,598

 

1.9%

 

0.22%

 

 

3,942

 

42

Lucid Cash Fund USG LLC

 

 

51,655

 

1.4%

 

0.27%

 

 

4,171

 

14

Austin Atlantic Asset Management Co.

 

 

25,465

 

0.7%

 

0.26%

 

 

1,135

 

4

J.V.B. Financial Group, LLC

 

 

23,556

 

0.7%

 

0.23%

 

 

1,249

 

15

Total / Weighted Average

 

$

3,595,586

 

100.0%

 

0.23%

 

$

176,319

 

31

(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 and other hedging 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 December 31, 2020, such instruments were comprised of U.S. Treasury note ("T-Note") and Eurodollar 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 December 31, 2020.

($ 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

 

1.03%

 

0.18%

 

$

(424)

U.S. Treasury Note Futures Contracts (Short Positions)(2)

 

 

 

 

 

 

 

 

 

 

March 2021 5-year T-Note futures

 

 

 

 

 

 

 

 

 

 

(Mar 2021 - Mar 2026 Hedge Period)

 

$

69,000

 

0.72%

 

0.67%

 

$

(186)

(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 $126.16 at December 31, 2020. The contract value of the short position was $87.1 million.

 

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

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

Net

 

 

 

 

 

 

 

Fixed

 

Average

 

 

Estimated

 

Average

 

 

 

Notional

 

Pay

 

Receive

 

 

Fair

 

Maturity

Expiration

 

 

Amount

 

Rate

 

Rate

 

 

Value

 

(Years)

> 3 to ≤ 5 years

 

$

620,000

 

1.29%

 

0.22%

 

$

(23,760)

 

3.6

> 5 years

 

 

200,000

 

0.67%

 

0.23%

 

 

(944)

 

6.4

 

 

$

820,000

 

1.14%

 

0.23%

 

$

(24,704)

 

4.3

 

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

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Option

 

Underlying Swap

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

Weighted

 

 

 

 

 

 

 

 

Average

 

 

 

 

Average

 

Adjustable

 

Average

 

 

 

 

 

 

Fair

 

Months to

 

 

Notional

 

Fixed

 

Rate

 

Term

Expiration

 

 

Cost

 

 

Value

 

Expiration

 

 

Amount

 

Rate

 

(LIBOR)

 

(Years)

Payer Swaptions - Long

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

≤ 1 year

 

$

3,450

 

 

$

5

 

 

2.5

 

$

500,000

 

0.95

%

 

3 Month

 

4.0

> 1 year ≤ 2 years

 

 

13,410

 

 

 

17,428

 

 

17.4

 

 

675,000

 

1.49

%

 

3 Month

 

12.8

 

 

$

16,860

 

 

$

17,433

 

 

11.0

 

$

1,175,000

 

1.26

%

 

3 Month

 

9.0

Payer Swaptions - Short

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

≤ 1 year

 

$

(4,660

)

 

$

(7,730

)

 

5.4

 

$

507,700

 

1.49

%

 

3 Month

 

12.8

     

The following table summarizes our contracts to purchase and sell TBA securities as of December 31, 2020.

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

 

 

 

 

 

 

 

Net

 

 

 

Amount

 

 

Cost

 

 

Market

 

 

Carrying

 

 

 

Long (Short)(1)

 

 

Basis(2)

 

 

Value(3)

 

 

Value(4)

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

30-Year TBA securities:

 

 

 

 

 

 

 

 

 

 

 

 

2.00%

 

$

465,000

 

 

$

479,531

 

 

$

483,090

 

 

$

3,559

 

3.00%

 

 

(328,000

)

 

 

(342,896

)

 

 

(343,682

)

 

 

(786

)

 

 

$

137,000

 

 

$

136,635

 

 

$

139,408

 

 

$

2,773

 

(1)

Notional amount represents the par value (or principal balance) of the underlying Agency RMBS.

(2)

Cost basis represents the forward price to be paid (received) for the underlying Agency RMBS.

(3)

Market value represents the current market value of the TBA securities (or of the underlying Agency RMBS) as of period-end.

(4)

Net carrying value represents the difference between the market value and the cost basis of the TBA securities as of period-end and is reported in derivative assets (liabilities) at fair value in our balance sheets.

 

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.

(in thousands, except per share data)

Year

 

 

 

Per Share

Amount

 

 

Total

2013

 

 

$

1.395

 

$

4,662

2014

 

 

 

2.160

 

 

22,643

2015

 

 

 

1.920

 

 

38,748

2016

 

 

 

1.680

 

 

41,388

2017

 

 

 

1.680

 

 

70,717

2018

 

 

 

1.070

 

 

55,814

2019

 

 

 

0.960

 

 

54,421

2020

 

 

 

0.790

 

 

53,570

2021 - YTD(1)

 

 

 

0.130

 

 

11,079

Totals

 

 

$

11.785

 

$

353,042

(1)

On January 14, 2021, the Company declared a dividend of $0.065 per share to be paid on February 24, 2021. On February 10, 2021, the Company declared a dividend of $0.065 per share to be paid on March 29, 2021. The dollar amount of the dividend declared in February 2021 is estimated based on the number of shares outstanding at February 25, 2021. The effect of these dividends are included in the table above, but are not reflected in the Company's financial statements as of December 31, 2020. 

 

Peer Performance

The tables below present total return data for Orchid compared to a selected group of peers based on stock price performance for periods through December 31, 2020 and based on book value performance for periods through September 30, 2020.

 

Portfolio Total Rate of Return Versus Peer Group Average - Stock Price Performance

 

 

 

 

 

 

ORC Spread

 

 

ORC

 

 

 

Over / (Under)

 

 

Total Rate

 

Peer

 

Peer

 

 

of Return(1)

 

Average(1)(2)

 

Average(3)

One Year Total Return

 

5.3%

 

(13.4)%

 

18.7%

Two Year Total Return

 

12.5%

 

(8.4)%

 

20.9%

Three Year Total Return

 

(10.4)%

 

(8.0)%

 

(2.4)%

Five Year Total Return

 

16.2%

 

22.9%

 

(6.7)%

Inception to Date (2/13/2013 - 12/31/2020)

 

20.1%

 

4.1%

 

16.0%

Source: SEC filings and press releases of Orchid and Peer Group

(1)

Source of total rate of return for each period is the Bloomberg COMP page and includes reinvested dividends for each period noted.

(2)

The peer average is the unweighted, simple, average of the total rate of return for each of the following companies in each respective measurement period: AGNC, NLY, ANH, AAIC, ARR, CMO, CHMI and DX.

(3)

Represents the total rate of return for Orchid minus peer average in each respective measurement period.

 

Portfolio Total Rate of Return Versus Peer Group Average - Book Value Performance

 

 

 

 

 

 

ORC Spread

 

 

ORC

 

 

 

Over / (Under)

 

 

Total Rate

 

Peer

 

Peer

 

 

of Return(1)

 

Average(1)(2)

 

Average(3)

One Year Total Return

 

0.9%

 

(11.7)%

 

12.6%

Two Year Total Return

 

(4.3)%

 

(9.0)%

 

4.7%

Three Year Total Return

 

(7.3)%

 

(9.9)%

 

2.6%

Five Year Total Return

 

1.3%

 

(2.4)%

 

3.7%

Inception to Date (3/31/2013 - 12/31/2020)(4)

 

11.9%

 

(1.4)%

 

13.3%

Source: SEC filings and press releases of Orchid and Peer Group

(1)

Total rate of return for each period is change in book value per share over the period plus dividends per share declared divided by the book value per share at the beginning of the period.

(2)

The peer average is the unweighted, simple, average of the total rate of return for each of the following companies in each respective measurement period: AGNC, NLY, ANH, AAIC, ARR, CMO, CHMI and DX.

(3)

Represents the total rate of return for Orchid minus peer average in each respective measurement period.

(4)

Peer book values are not available for Orchid's true inception date (2/13/2013). Because all peer book values are not available as of Orchid's true inception date (2/13/2013), the starting point for Orchid and all of the peer companies is 3/31/2013.

 

Book Value Per Share

The Company's book value per share at December 31, 2020 was $5.46. 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 December 31, 2020, the Company's stockholders' equity was $415.3 million with 76,073,317 shares of common stock outstanding.

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"), inverse interest-only ("IIO") securities and principal only securities ("POs"), among other types of structured Agency RMBS. As of September 30, 2020, approximately 92% 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 December 31, 2020, the allocation to the PT RMBS portfolio increased 1% to approximately 93%.

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

(in thousands)

Portfolio Activity for the Quarter

 

 

 

 

 

Structured Security Portfolio

 

 

 

 

 

Pass-Through

 

Interest-Only

 

Inverse Interest-

 

 

 

 

 

 

 

Portfolio

 

Securities

 

Only Securities

 

Sub-total

 

Total

Market value - September 30, 2020

 

$

3,509,571

 

 

$

30,796

 

 

$

-

 

$

30,796

 

 

$

3,540,367

 

Securities purchased

 

 

1,846,531

 

 

 

832

 

 

 

-

 

 

832

 

 

 

1,847,363

 

Securities sold

 

 

(1,508,306

)

 

 

-

 

 

 

-

 

 

-

 

 

 

(1,508,306

)

Losses on sales

 

 

(465

)

 

 

-

 

 

 

-

 

 

-

 

 

 

(465

)

Return of investment

 

 

n/a

 

 

 

(2,769

)

 

 

-

 

 

(2,769

)

 

 

(2,769

)

Pay-downs

 

 

(136,615

)

 

 

n/a

 

 

 

n/a

 

 

n/a

 

 

 

(136,615

)

Premium lost due to pay-downs

 

 

(13,408

)

 

 

n/a

 

 

 

n/a

 

 

n/a

 

 

 

(13,408

)

Mark to market gains (losses)

 

 

891

 

 

 

(163

)

 

 

-

 

 

(163

)

 

 

728

 

Market value - December 31, 2020

 

$

3,698,199

 

 

$

28,696

 

 

$

-

 

$

28,696

 

 

$

3,726,895

 

 

The tables below present the allocation of capital between the respective portfolios at December 31, 2020 and September 30, 2020, and the return on invested capital for each sub-portfolio for the three month period ended December 31, 2020. The return on invested capital in the PT RMBS and structured RMBS portfolios was approximately 5.4% and (0.7)%, respectively, for the fourth quarter of 2020. The combined portfolio generated a return on invested capital of approximately 4.9%.

($ in thousands)

Capital Allocation

 

 

 

 

Structured Security Portfolio

 

 

 

 

Pass-Through

 

Interest-Only

 

Inverse Interest-

 

 

 

 

 

 

Portfolio

 

Securities

 

Only Securities

 

Sub-total

 

Total

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market value

 

$

3,698,199

 

 

$

28,696

 

 

$

-

 

$

28,696

 

 

$

3,726,895

 

Cash

 

 

299,506

 

 

 

-

 

 

 

-

 

 

-

 

 

 

299,506

 

Borrowings(1)

 

 

(3,595,586

)

 

 

-

 

 

 

-

 

 

-

 

 

 

(3,595,586

)

Total

 

$

402,119

 

 

$

28,696

 

 

$

-

 

$

28,696

 

 

$

430,815

 

% of Total

 

 

93.3

%

 

 

6.7

%

 

 

0.0%

 

 

6.7

%

 

 

100.0

%

September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market value

 

$

3,509,571

 

 

$

30,796

 

 

$

-

 

$

30,796

 

 

$

3,540,367

 

Cash(2)

 

 

133,694

 

 

 

-

 

 

 

-

 

 

-

 

 

 

133,694

 

Borrowings(3)

 

 

(3,281,303

)

 

 

-

 

 

 

-

 

 

-

 

 

 

(3,281,303

)

Total

 

$

361,962

 

 

$

30,796

 

 

$

-

 

$

30,796

 

 

$

392,758

 

% of Total

 

 

92.2

%

 

 

7.8

%

 

 

0.0%

 

 

7.8

%

 

 

100.0

%

(1)

At December 31, 2020, there were outstanding repurchase agreement balances of $20.6 million secured by IO securities. We entered into these arrangements to generate additional cash available to meet margin calls on PT RMBS; therefore, we have not considered these balances to be allocated to the structured securities strategy.

(2)

At September 30, 2020, cash was decreased by unsettled purchases of approximately $113.7 million, which have already been reflected in the market value of the portfolio.

(3)

At September 30, 2020, there were outstanding repurchase agreement balances of $22.7 million secured by IO securities. We entered into these arrangements to generate additional cash available to meet margin calls on PT RMBS; therefore, we have not considered these balances to be allocated to the structured securities strategy.

 

($ in thousands)

Returns for the Quarter Ended December 31, 2020

 

 

 

 

Structured Security Portfolio

 

 

 

 

Pass-Through

 

Interest-Only

 

Inverse Interest-

 

 

 

 

 

 

Portfolio

 

Securities

 

Only Securities

 

Sub-total

 

Total

Income / (loss) (net of borrowing cost)

 

$

23,921

 

 

$

(39

)

 

$

-

 

$

(39

)

 

$

23,882

 

Realized and unrealized (losses) / gains

 

 

(12,980

)

 

 

(163

)

 

 

-

 

 

(163

)

 

 

(13,143

)

Derivative gains

 

 

8,538

 

 

 

n/a

 

 

 

-

 

 

n/a

 

 

 

8,538

 

Total Return

 

$

19,479

 

 

$

(202

)

 

$

-

 

$

(202

)

 

$

19,277

 

Beginning Capital Allocation

 

$

361,962

 

 

$

30,796

 

 

$

-

 

$

30,796

 

 

$

392,758

 

Return on Invested Capital for the Quarter(1)

 

 

5.4

%

 

 

(0.7

)%

 

 

-

 

 

(0.7

)%

 

 

4.9

%

Average Capital Allocation(2)

 

$

382,041

 

 

$

29,746

 

 

$

-

 

$

29,746

 

 

$

411,787

 

Return on Average Invested Capital for the Quarter(3)

 

 

5.1

%

 

 

(0.7

)%

 

 

-

 

 

(0.7

)%

 

 

4.7

%

(1)

Calculated by dividing the Total Return by the Beginning Capital Allocation, expressed as a percentage.

(2)

Calculated using two data points, the Beginning and Ending Capital Allocation balances.

(3)

Calculated by dividing the Total Return by the Average Capital Allocation, expressed as a percentage

 

Stock Offerings

On August 4, 2020, we entered into an equity distribution agreement (the "August 2020 Equity Distribution Agreement") with four sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate amount of $150,000,000 of shares of our common stock in transactions that are deemed to be "at the market" offerings and privately negotiated transactions. Through December 31, 2020, we issued a total of 9,848,513 shares under the August 2020 Equity Distribution Agreement for aggregate gross proceeds of approximately $52.5 million, and net proceeds of approximately $51.6 million, net of commissions and fees. Subsequent to December 31, 2020 through February 25, 2021, we issued a total of 308,048 shares under the August 2020 Equity Distribution Agreement for aggregate gross proceeds of approximately $1.6 million.

On January 20, 2021, we entered into an underwriting agreement (the "Underwriting Agreement") with J.P. Morgan Securities LLC (the "Underwriter"), relating to the offer and sale of 7,600,000 shares of our common stock. The Underwriter purchased the shares of common stock from us pursuant to the Underwriting Agreement at $5.20 per share. In addition, we granted the Underwriter a 30-day option to purchase up to an additional 1,140,000 shares of our common stock on the same terms and conditions, which the Underwriter exercised in full on January 21, 2021. The closing of the offering of 8,740,000 shares of our common stock occurred on January 25, 2021, with net proceeds to us of approximately $45.3 million after deduction of estimated offering expenses.

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 (the "Exchange Act"). 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 December 31, 2020, the Company repurchased a total of 5,685,511 shares at an aggregate cost of approximately $40.4 million, including commissions and fees, for a weighted average price of $7.10 per share. During the year ended December 31, 2020, the Company repurchased a total of 19,891 shares at an aggregate cost of approximately $0.1 million, including commissions and fees, for a weighted average price of $3.42 per share. However, we did not repurchase any shares of our common stock during the three months ended December 31, 2020. As of December 31, 2020, the remaining authorization under the repurchase program is for up to 837,311 shares of the Company's common stock.

Earnings Conference Call Details

An earnings conference call and live audio webcast will be hosted Friday, February 26, 2021, at 10:00 AM ET. The conference call may be accessed by dialing toll free (833) 794-1168. International callers dial (236) 714-2726. The conference passcode is 9406887. 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 https://ir.orchidislandcapital.com and an audio archive of the webcast will be available until March 29, 2021.

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 and CMOs, such as mortgage pass-through certificates issued by the GSEs and (ii) structured Agency RMBS, such as IOs, IIOs and POs, 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, portfolio positioning and repositioning, hedging levels, dividends, growth, the supply and demand for Agency RMBS, the effect of actions of the U.S. government, including the Federal Reserve, market expectations, 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.

Summarized Financial Statements

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

 

ORCHID ISLAND CAPITAL, INC.

BALANCE SHEETS

($ in thousands, except per share data)

(Unaudited - Amounts Subject to Change)

 

 

 

 

 

 

 

 

 

December 31, 2020

 

December 31, 2019

ASSETS:

 

 

 

 

 

 

Total mortgage-backed securities

 

$

3,726,895

 

$

3,590,921

Cash, cash equivalents and restricted cash

 

 

299,506

 

 

278,655

Accrued interest receivable

 

 

9,721

 

 

12,404

Derivative assets, at fair value

 

 

20,999

 

 

-

Receivable for securities sold

 

 

414

 

 

-

Other assets

 

 

516

 

 

100

Total Assets

 

$

4,058,051

 

$

3,882,080

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Repurchase agreements

 

$

3,595,586

 

$

3,448,106

Dividends payable

 

 

4,970

 

 

5,045

Derivative liabilities, at fair value

 

 

33,227

 

 

20,658

Accrued interest payable

 

 

1,157

 

 

11,101

Due to affiliates

 

 

632

 

 

622

Other liabilities

 

 

7,188

 

 

1,041

Total Liabilities

 

 

3,642,760

 

 

3,486,573

Total Stockholders' Equity

 

 

415,291

 

 

395,507

Total Liabilities and Stockholders' Equity

 

$

4,058,051

 

$

3,882,080

Common shares outstanding

 

 

76,073,317

 

 

63,061,781

Book value per share

 

$

5.46

 

$

6.27

 
 

ORCHID ISLAND CAPITAL, INC.

STATEMENTS OF OPERATIONS

($ in thousands, except per share data)

(Unaudited - Amounts Subject to Change)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

Three Months Ended December 31,

 

 

2020

 

2019

 

2020

 

2019

Interest income

 

$

116,045

 

 

$

142,324

 

 

$

25,893

 

 

$

37,529

 

Interest expense

 

 

(25,056

)

 

 

(83,666

)

 

 

(2,011

)

 

 

(20,022

)

Net interest income

 

 

90,989

 

 

 

58,658

 

 

 

23,882

 

 

 

17,507

 

(Losses) gains

 

 

(78,317

)

 

 

(24,008

)

 

 

(4,605

)

 

 

3,841

 

Net portfolio income

 

 

12,672

 

 

 

34,650

 

 

 

19,277

 

 

 

21,348

 

Expenses

 

 

10,544

 

 

 

10,385

 

 

 

2,798

 

 

 

2,736

 

Net income

 

$

2,128

 

 

$

24,265

 

 

$

16,479

 

 

$

18,612

 

Basic and diluted net income per share

 

$

0.03

 

 

$

0.43

 

 

$

0.23

 

 

$

0.29

 

Weighted Average Shares Outstanding

 

 

67,210,815

 

 

 

56,328,027

 

 

 

70,532,822

 

 

 

63,124,260

 

Dividends Declared Per Common Share:

 

$

0.790

 

 

$

0.960

 

 

$

0.195

 

 

$

0.240

 

 

 

 

Three Months Ended December 31,

Key Balance Sheet Metrics

 

2020

 

2019

Average RMBS(1)

 

$

3,633,631

 

$

3,705,920

Average repurchase agreements(1)

 

 

3,438,444

 

 

3,631,042

Average stockholders' equity(1)

 

 

396,016

 

 

393,748

Leverage ratio(2)

 

 

8.8:1

 

 

8.8:1

 

 

 

 

 

 

 

Key Performance Metrics

 

 

 

 

 

 

Average yield on RMBS(3)

 

 

2.85%

 

 

4.05%

Average cost of funds(3)

 

 

0.23%

 

 

2.21%

Average economic cost of funds(4)

 

 

0.91%

 

 

1.78%

Average interest rate spread(5)

 

 

2.62%

 

 

1.84%

Average economic interest rate spread(6)

 

 

1.94%

 

 

2.27%

(1)

Average RMBS, borrowings and stockholders' equity balances are calculated using two data points, the beginning and ending balances.

(2)

The leverage ratio is calculated by dividing total ending liabilities by ending stockholders' equity.

(3)

Portfolio yields and costs of funds are calculated based on the average balances of the underlying investment portfolio/borrowings balances and are annualized for the quarterly periods presented.

(4)

Represents the interest cost of our borrowings and the effect of derivative agreements attributed to the period related to hedging activities, divided by average borrowings.

(5)

Average interest rate spread is calculated by subtracting average cost of funds from average yield on RMBS.

(6)

Average economic interest rate spread is calculated by subtracting average economic cost of funds from average yield on RMBS.

 

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