Orchid Island Capital Announces First Quarter 2014 Results

VERO BEACH, Fla., May 1, 2014 (GLOBE NEWSWIRE) -- Orchid Island Capital, Inc. (NYSE MKT:ORC) ("Orchid" or the "Company"), a real estate investment trust ("REIT"), today announced results of operations for the three month period ended March 31, 2014.

First Quarter 2014 Highlights

• Net income of $3.6 million, or $0.71 per common share
• First quarter total dividend payments of $0.54 per common share
• Book Value Per Share of $12.47 at March 31, 2014
• 2.9% economic loss on common equity for the quarter, or 11.6% annualized, comprised of $0.54 dividend per common share and $0.93 decrease in net book value per common share, divided by beginning book value per share
• Company to discuss results on Friday, May 2, 2014, at 10:00 AM ET

Details of First Quarter 2014 Results of Operations

The Company reported net income of $3.6 million for the three-month period ended March 31, 2014, compared with net income of $0.4 million for the three month period ended March 31, 2013. The first quarter net income of $3.6 million included net interest income of $3.4 million, net gains of $0.8 million (which includes mark to market gains, realized gains on securities sold and losses on funding hedges), audit, legal and other professional fees of $0.1 million, management fees of $0.3 million, and other operating, general and administrative expenses of $0.2 million. During the first quarter of 2014, the Company sold mortgage-backed securities ("RMBS") with a market value at the time of sale of $141.3 million, resulting in realized gains of $0.9 million (based on security prices from December 31, 2013). The remaining net gain on RMBS was due to fair value adjustments for the period.

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 December 31, 2013, approximately 44% 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, 2014, the allocation to the PT RMBS had increased 12% to approximately 56%.

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, 2014 and December 31, 2013, and the return on invested capital for each sub-portfolio for the three month period ended March 31, 2014. The return on invested capital in the PT RMBS and structured RMBS portfolios was approximately 21.1% and 0.5%, respectively, for the first quarter of 2014. The combined portfolio generated a return on invested capital of approximately 9.5%. Due to the two secondary offerings completed during the quarter ended March 31, 2014, the capital allocated to the respective portfolios increased by over 100%. Accordingly, returns generated based on the beginning of period capital may be misleading. We have added the return on average capital deployed to address this issue.

Prepayments

For the quarter, Orchid received $10.4 million in scheduled and unscheduled principal repayments and prepayments, which equated to a constant prepayment rate ("CPR") of approximately 9.1% for the first quarter of 2014. Prepayment rates on the two RMBS sub-portfolios were as follows: (in CPR).

Portfolio

As of March 31, 2014, Orchid's RMBS portfolio consisted of $747.8 million of PT RMBS and structured RMBS at fair value and had a weighted average coupon of 4.13%. The following tables summarize Orchid's PT RMBS and structured RMBS as of March 31, 2014 and December 31, 2013:

Financing, Leverage and Liquidity

As of March 31, 2014, the Company had outstanding repurchase obligations of approximately $651.2 million with a net weighted average borrowing rate of 0.35%. These agreements were collateralized by RMBS with a fair value, including accrued interest, of approximately $691.7 million. The Company's leverage ratio at March 31, 2014 was 6.1 to 1, excluding the $39.5 million of payable for unsettled securities purchased at March 31, 2014. At March 31, 2014, the Company's liquidity was approximately $62.5 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 listing of outstanding borrowings under repurchase obligations at March 31, 2014.

Hedging

In connection with its interest rate risk management strategy, the Company economically hedges a portion of the cost of its repurchase agreement funding by entering into derivative financial instrument contracts. The Company has not elected hedging treatment under GAAP, and as such, all gains or losses on these instruments are reflected in earnings for all periods presented. As of March 31, 2014, such instruments were comprised of Eurodollar futures contracts with an average contract notional amount of $400.0 million and a weighted average fixed LIBOR rate of 2.01%, and an interest rate swaption agreement, giving the Company the option to enter into a pay fixed interest rate swap ("payer swaption"). The table below presents information related to the Company's Eurodollar futures contracts at March 31, 2014.

The table below presents information related to the Company's interest rate swaption position at March 31, 2014.

Dividends

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 IPO.

Book Value Per Share

The Company's Book Value Per Share at March 31, 2014 was $12.47. 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, 2014, the Company's stockholders' equity was $107.4 million with 8,611,665 shares of common stock outstanding.

Secondary Offerings

The Company completed a secondary offering of 1,800,000 common shares on January 23, 2014 at a price of $12.50 per share. The underwriters exercised their overallotment option in full for an additional 270,000 shares on January 29, 2014. The aggregate net proceeds to the Company were approximately $24.2 million which were invested in Agency RMBS securities on a leveraged basis.

The Company completed a secondary offering of 3,200,000 common shares on March 24, 2014 at a price of $12.55 per share. The underwriters exercised their overallotment option in full for an additional 480,000 shares on April 11, 2014. The aggregate net proceeds to the Company were approximately $44.0 million which were invested in Agency RMBS securities on a leveraged basis.

Management Commentary

Commenting on the first quarter, Robert E. Cauley, Chairman and Chief Executive Officer, said, "Orchid Island Capital had a very busy first quarter of 2014. The events that unfolded in 2013, starting with the initial hints by the Federal Reserve in the late spring of 2013 that they would begin to taper their asset purchases, and ending with the December 2013 announcement of the reduced purchases beginning in January 2014, resulted in interest rates at the end of 2013 well above the levels seen at the beginning of the year. Prices of most fixed rate RMBS were down sharply at year end, premiums for call protected securities collapsed and prepayment speeds slowed appreciably - with the mortgage bankers refinance index falling from over 5,000 late in 2012 to under 1,500 in December of 2013. These events put considerable downward pressure on the book values of most Agency RMBS REITs and led many to reduce the size of their balance sheets and/or significantly increase their hedges. We were not forced to do either and were able to reposition our portfolio during the fourth quarter of 2013 to take advantage of the market conditions. As a result, we were able to access the capital markets twice during the first quarter of 2014 when investment opportunities were quite compelling. We completed two secondary offerings – in January and again in March – and increased the size of the Company by over 100%. With the deployment of the proceeds, we were able to reposition the portfolio to best take advantage of the current market environment and position ourselves for the market developments we anticipate over the balance of the year.

"Harsh winter weather conditions are widely considered to have led to depressed economic data around year end and into the first quarter of 2014. The weak economic data observed caused the market to rally sharply in January as the yield on the ten year treasury rallied from just over 3.0% at year-end 2013 to under 2.60% in early February. Since then the market has settled into a well-defined range as the yield of the ten year note has hovered between 2.60% and 2.80% for 13 weeks now. Volatility in the market has come off as expected, and prepayment speeds – as measured by the RMBS conventional refinancing index - have stayed at or below 1,500 during the quarter. This leads to a very conducive market for RMBS investing and coupon clipping. This has occurred in the face of reduced purchases by the Federal Reserve. With refinancing activity very low, supply of RMBS has decreased accordingly and the reduced demand on the part of the Federal Reserve has not had the impact on RMBS spreads many feared. With the ultimate end of RMBS purchases by the Federal Reserve clearly in sight, most multi-sector fixed income investors are underweight in their allocations to Agency RMBS. The resulting selling has had some impact on RMBS spreads, as the conventional 30 year fixed rate current coupon mortgage trades at a wider spread to 10 year swaps than it did at the beginning of the year. However, the reduced supply of RMBS has kept this spread from widening further. Market participants are currently split on what the eventual end of Federal Reserve purchases will mean for RMBS prices, but we think the current underweight by multi-sector fixed income investors will lead to buying when and if RMBS spreads widen as Federal Reserve purchases stop. Accordingly we do not anticipate meaningful widening absent another external event.

"As for the portfolio, we have completed the deployment of the $68.2 million of net proceeds from the two offerings in the first quarter, including the exercise of the underwriters' over-allotment option on April 11, 2014 of 480,000 additional shares.  Our leverage ratio was 6.1:1 at March 31, 2014 and stands at approximately 6.8:1 today versus 7.1:1 at December 31, 2013. The leverage ratio at March 31, 2014 did not reflect the settlement of certain RMBS purchases or the deployment of the proceeds from the exercise of the underwriters' over-allotment option in early April. We have continued to increase our allocation to fixed rate RMBS away from ARM's – both hybrid ARM's and short reset ARM's. Our fixed rate allocation was approximately 83% of the portfolio at March 31, 2014 versus approximately 69.9% at December 31, 2013. Within the fixed rate sub-portfolio, our holdings are concentrated in 30 year securities and, to a much lesser extent 20 year securities. We have purchased most of our 30 year fixed rate securities with some form of call protection – predominantly low loan balance collateral. The pay-up premiums of these securities are significantly lower than we have observed for several years and these securities offer very attractive returns in the event of a rally in rates – the outcome least expected by market participants. As with the end of the year, most position indicators we track indicate the market is still positioned for higher rates and there remains the risk the market could be surprised by a rally – what traders call the "pain trade". The weighted average coupon of our fixed rate position was 4.27% at March 31, 2014 versus 4.05% at December 31, 2013. Our allocation to 15 year securities remains low as well as the weighted average maturity of the fixed rate sub-portfolio is 311 months at March 31, 2014 versus 323 months at December 31, 2013. The allocation to structured RMBS was reduced from 56.0% at December 31, 2013 to 44.2% at March 31, 2014. The primary focus has been on higher coupon 30 year collateral – predominantly 4.5% fixed rates. The other area is 15 year securities - as we anticipate the belly of the curve – or the 3 to 7 year maturity range – will lead the sell-off as the economy recovers, thus increasing 15 year rates in relation to 30 year rates. The spread between 5 and 10 year treasury rates has already decreased by over 30 basis points year to date. Most of the additions have been IO securities as the IIO allocation remains near 1.4% of the portfolio. As for our funding hedges, we continue to use Eurodollar futures contracts with maturities out approximately 5 years and have added a payer swaption with a one year option period struck on the five year part of the curve. 

"Going forward we anticipate prepayment speeds will remain low and rates to gradually increase as the economy recovers. The curve is likely to continue to flatten as the market anticipates the eventual beginning of rate increases by the Federal Reserve. In the event that we are wrong and RMBS prices rally, we have substantial protection from higher prepayments from the call-protected securities we have added, and if the curve steepens our higher coupon and IO positions should benefit."

Earnings Conference Call Details

An earnings conference call and live audio webcast will be hosted Friday, May 2, 2014, 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 37102775. 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 for approximately one year.

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 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 March 31, 2014, and December 31, 2013, and the unaudited quarterly results of operations for the calendar quarters ended March 31, 2014 and 2013. Amounts presented are subject to change.