Orchid Island Capital Announces Third Quarter 2017 Results

VERO BEACH, Fla., Oct. 26, 2017 (GLOBE NEWSWIRE) -- 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 September 30, 2017.

Third Quarter 2017 Highlights

• Net income of $15.2 million, or $0.33 per common share, which consists of:
  - Net interest income of $26.3 million, or $0.58 per common share
  - Total expenses of $2.9 million, or $0.06 per common share
  - Net realized and unrealized losses of $8.3 million, or $0.18 per share, on RMBS and derivative instruments
• Third quarter total dividends declared and paid of $0.42 per common share
• Book value per share of $9.15 at September 30, 2017
• 3.7% economic gain on common equity for the quarter, or 14.7% annualized, comprised of $0.42 dividend per common share and $0.08 decrease in net book value per common share, divided by beginning book value per share
• Company to discuss results on Friday, October 27, 2017, at 10:00 AM ET
• Supplemental materials to be discussed on the call can be downloaded from the Company’s website

Details of Third Quarter 2017 Results of Operations

The Company reported net income of $15.2 million for the three month period ended September 30, 2017, compared with net income of $20.5 million for the three month period ended September 30, 2016.  The third quarter net income included net interest income of $26.3 million, net portfolio losses of $8.3 million (which includes realized and unrealized gains (losses) on RMBS and derivative instruments, and net interest expense realized in interest rate swaps), management fees and allocated overhead of $1.9 million, audit, legal and other professional fees of $0.2 million, accrued incentive compensation of $0.2 million, and other operating, general and administrative expenses of $0.6 million.

Capital Allocation and Return on Invested Capital

The Company allocates capital to two RMBS sub-portfolios, the pass-through RMBS portfolio (“PT RMBS”), and the structured RMBS portfolio, consisting of interest only (“IO”) and inverse interest-only (“IIO”) securities.  As of June 30, 2017, approximately 64% 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 September 30, 2017, the allocation to the PT RMBS portfolio was unchanged, remaining at approximately 64%.

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 September 30, 2017 and June 30, 2017, and the return on invested capital for each sub-portfolio for the three month period ended September 30, 2017.  The return on invested capital in the PT RMBS and structured RMBS portfolios was approximately 8.7% and (2.9)%, respectively, for the third quarter of 2017.  The combined portfolio generated a return on invested capital of approximately 4.5%.

Prepayments

For the quarter ended September 30, 2017, Orchid received $93.2 million in scheduled and unscheduled principal repayments and prepayments, which equated to a constant prepayment rate (“CPR”) of approximately 10.3%. 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 September 30, 2017 and December 31, 2016:

Financing, Leverage and Liquidity

As of September 30, 2017, the Company had outstanding repurchase obligations of approximately $3,710.1 million with a net weighted average borrowing rate of 1.37%.  These agreements were collateralized by RMBS with a fair value, including accrued interest, of approximately $3,932.6 million and cash pledged to counterparties of approximately $12.0 million. The Company’s leverage ratio at September 30, 2017 was 9.0 to 1. At September 30, 2017, the Company’s liquidity was approximately $174.6 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 outstanding borrowings under repurchase obligations at September 30, 2017. 

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 September 30, 2017, 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 September 30, 2017.

The table below presents information related to the Company’s interest rate swap positions at September 30, 2017.

The following table presents information related to our interest rate swaption positions as of September 30, 2017.

The following table summarizes our contracts to purchase and sell TBA securities as of September 30, 2017.

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 September 30, 2017.

Book Value Per Share

The Company's book value per share at September 30, 2017 was $9.15.  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 September 30, 2017, the Company's stockholders' equity was $414.4 million with 45,308,169 shares of common stock outstanding.

Stock Offerings

On August 2, 2017, we entered into another equity distribution agreement (the “August 2017 Equity Distribution Agreement”) with two sales agents pursuant to which we may 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 are deemed to be “at the market” offerings and privately negotiated transactions.  Through September 30, 2017, we have not issued any shares under the August 2017 Equity Distribution Agreement.

Management Commentary

Commenting on the third quarter, Robert E. Cauley, Chairman and Chief Executive Officer, said, “As we entered the first quarter of 2017, risk assets were performing very well as the Trump Administration took office and appeared to be very pro-business.  The markets looked forward to a roll back of recently expanding regulations across many industries, a new and hopefully improved health care act, tax reform and possibly much needed infrastructure spending to refurbish the nation’s aging roads, highways, bridges and airports.  While the Trump Administration made bold promises, very little has been delivered.  Market optimism was quickly replaced with pessimism.  Political infighting among the Trump Administration and congressional Republicans has generally been the cause, as has turmoil within the White House itself.   Geopolitical events surfaced in early April, specifically on the Korean peninsula.  These events kept the market on edge and induced sporadic flight to quality rallies as headlines hit the market from time to time. Incoming inflation data since March was below expectations.  In the case of the core Consumer Price Index (“CPI”) measure, the year over year figure moved from 2.3% in January 2017 to 1.7% by May and has stayed there through September.  The yield on the 10-year US Treasury rate hit its year to date low on September 7, 2017, closing at 2.04%, and nearly broke below the psychologically important 2% level intra-day. However, there was a perceptible change in market sentiment in early September, and the market reversed course into the end of the third quarter and early fourth quarter.  The Trump Administration managed to strike a deal with Congress – predominantly Democratic members ironically – to avoid a government shut-down by raising the debt ceiling and passing a continuing resolution to fund the government into December.

“In spite of the low inflation readings described above, the Federal Reserve (the “Fed”) remains convinced these readings are being driven by temporary or transitory phenomenon, and that inflation will reverse and head back towards their two percent target over the medium term.  At the conclusion of their meeting on September 20^th, the Fed was quite clear they expect to hike their target rate again at the December meeting baring surprise outcomes to the downside.  The market accepts this outcome as highly likely – as reflected in Fed Funds futures pricing.  However, using the same measure, the market does not expect the Fed to raise rates in 2018 and beyond to the extent the Fed expects.  As a result, the combination of benign inflation readings currently coupled with hawkish Fed expectations has caused the yield curve to flatten significantly during the third quarter – through the lows seen in late June – to multi-year lows.  A second order effect of these developments has occurred in the equity and risk markets as they continue to perform exceedingly well.  The major equity indices in the US make record new highs almost daily of late.

“The RMBS market performed well in the third quarter as a result of low volatility, tight trading spreads across most comparable asset classes and demand from asset managers and REIT’s easily replacing the lost demand expected from the Fed’s tapering of their asset purchases. Current coupon, 30-year fixed rate mortgage backed securities are trading at their tightest spread to comparable duration U.S. Treasuries since early 2014.   As long as these conditions persist, we do not believe that the market will be likely to suffer a material widening of spreads to comparable duration U.S. Treasuries, even as the Fed has started to trim their asset purchases.  The risk to this outcome appears to be inflation exceeding market expectations, which should allow the Fed to carry out their professed intentions to raise rates three times in 2018 and more so in the years after. This would also put upward pressure on volatility and longer-term rates, both expected to negatively impact MBS performance.

“The impact of these developments on our portfolio and results were not material in the third quarter.  While higher coupon, fixed rate mortgage backed securities – our core holding – did not perform as well as lower coupon, fixed rate mortgages, market demand for the various forms of call protection was robust, and pay-up premiums increased during the quarter.  As a result, mark to market gains (losses) were approximately $(3.6) million net, and $3.1 million excluding the effects of prepayments on the pass-through portfolio.  The flattening of the U.S. Treasury curve negatively impacted our longer dated hedges, and our TBA shorts underperformed due to the tightening of at or near par priced, 30-year fixed rate mortgage backed securities.  The net of these developments reduced our book value by $0.08, after giving effect to dividends declared in the quarter.  The flattening of the curve, and higher funding levels, put slight downward pressure on our net interest spread as well.  Going forward, we expect the slope of the U.S. Treasury curve and our net interest spread to be driven by inflation readings – either consistent with Fed expectations, a negative outcome, or a continuation of what we have seen for the last seven months.  The impact on longer term rates of the tapering of asset purchases – both by the Fed and the ECB – will also be critical.” 

Earnings Conference Call Details

An earnings conference call and live audio webcast will be hosted Friday, October 27, 2017, 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 4094969.  The supplemental materials may be downloaded from the investor relations section of the Company’s website. 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 November 27, 2017.

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 (ii) structured Agency RMBS, such as CMOs, 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, inflation, the effect of actions of the U.S. government, including the Fed, market expectations 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 September 30, 2017, and December 31, 2016, and the unaudited quarterly results of operations for the nine and three months ended September 30, 2017 and 2016.  Amounts presented are subject to change.