Orchid Island Capital(ORC) - 2024 Q3 - Quarterly Results

markdown [Third Quarter 2024 Overview](index=1&type=section&id=Third%20Quarter%202024%20Overview) Orchid Island Capital reported a net income of $17.3 million and a 2.10% total return for Q3 2024, with management noting the Federal Reserve's policy adjustments and attractive investment opportunities [Third Quarter 2024 Financial Highlights](index=1&type=section&id=Third%20Quarter%202024%20Results) Orchid Island Capital reported a net income of $17.3 million, or $0.24 per common share, for the third quarter of 2024. The company declared and paid dividends of $0.36 per share. Book value per common share decreased to $8.40, resulting in a total return of 2.10% for the quarter Q3 2024 Key Financial Metrics | Metric | Value | Per Share | | :--- | :--- | :--- | | Net Income | $17.3 million | $0.24 | | Net Interest Income | $0.3 million | < $0.01 | | Total Expenses | $4.3 million | $0.06 | | Net Realized/Unrealized Gains | $21.2 million | $0.29 | | Dividends Declared & Paid | - | $0.36 | | Book Value (at Sep 30, 2024) | - | $8.40 | | Total Return | 2.10% | - | - The company maintained a strong liquidity position with **$326.7 million** in cash and unpledged securities, representing approximately **50%** of stockholders' equity[2](index=2&type=chunk) - Borrowing capacity exceeded the outstanding repurchase agreement balance of **$5.23 billion**, spread across 25 active lenders[2](index=2&type=chunk) [Management Commentary](index=1&type=section&id=Management%20Commentary) Management noted that the Federal Reserve's tight monetary policy is showing desired effects on inflation and the labor market, leading to a 50 basis point rate cut in September. The company generated a 2.1% economic return and maintained its $0.12 monthly dividend. The portfolio remains focused on a barbell strategy with 30-year fixed-rate Agency RMBS, though this was not optimal for the quarter's rate environment. Management sees current investment opportunities as attractive, with potential for improvement if the Fed continues to ease policy - The Federal Reserve reduced the overnight funding rate by **50 basis points** in late September, but recent economic data suggests the pace of future cuts may be slower than market expectations[2](index=2&type=chunk) - The company's portfolio positioning is a barbell strategy focused on 30-year, fixed-rate Agency RMBS, with longer-duration hedges. This was suboptimal during Q3 as interest rates decreased, but management views a bear-steepening yield curve as the greatest risk[3](index=3&type=chunk) - The company raised additional capital through its ATM program, increasing the portfolio size while maintaining leverage. Management believes hedged net-interest spreads are ample relative to the current dividend level[4](index=4&type=chunk) [Operational and Portfolio Analysis](index=1&type=section&id=Operational%20and%20Portfolio%20Analysis) The company achieved a significant net income turnaround in Q3 2024, with increased prepayment rates and a growing, predominantly fixed-rate RMBS portfolio showing decreased interest rate sensitivity [Results of Operations](index=1&type=section&id=Details%20of%20Third%20Quarter%202024%20Results%20of%20Operations) The company's net income of $17.3 million in Q3 2024 marked a significant turnaround from a net loss of $80.1 million in Q3 2023. The yield on average Agency RMBS rose to 5.43% from 5.05% in the prior quarter, while borrowing costs also increased to 5.62% from 5.34%. The $0.18 per share decrease in book value was a result of the $0.36 dividend per share exceeding the $0.24 net income per share Q3 2024 vs Q3 2023 Performance | Metric | Q3 2024 | Q3 2023 | | :--- | :--- | :--- | | Net Income (Loss) | $17.3 million | ($80.1 million) | Q3 2024 vs Q2 2024 Interest Rate Metrics | Metric | Q3 2024 | Q2 2024 | | :--- | :--- | :--- | | Yield on Average Agency RMBS | 5.43% | 5.05% | | Repurchase Agreement Borrowing Costs | 5.62% | 5.34% | [Prepayments](index=2&type=section&id=Prepayments) In Q3 2024, the company received $137.7 million in principal repayments, equating to a 3-month constant prepayment rate (CPR) of 8.8%. This represents an acceleration from 7.6% in the previous quarter and 6.0% a year ago Total Portfolio Constant Prepayment Rate (CPR) Trend | Quarter Ended | Total Portfolio CPR (%) | | :--- | :--- | | **September 30, 2024** | **8.8** | | June 30, 2024 | 7.6 | | March 31, 2024 | 6.0 | | December 31, 2023 | 5.5 | | September 30, 2023 | 6.0 | [Portfolio Composition](index=2&type=section&id=Portfolio) As of September 30, 2024, the company's total mortgage assets grew to a fair value of $5.44 billion, up from $3.89 billion at year-end 2023. The portfolio is overwhelmingly comprised of Fixed Rate RMBS (99.7%), with a weighted average coupon of 4.94%. The portfolio's effective duration decreased to 3.490 from 4.400 at the end of 2023, indicating lower sensitivity to interest rate changes Portfolio Composition by Fair Value ($ in thousands) | Asset Category | Sep 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Fixed Rate RMBS | $5,427,069 | $3,877,082 | | Interest-Only Securities | $15,382 | $16,572 | | Inverse Interest-Only Securities | $353 | $358 | | **Total Mortgage Assets** | **$5,442,804** | **$3,894,012** | Portfolio Characteristics Comparison | Metric | Sep 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Weighted Average Coupon | 4.90% | 4.30% | | Weighted Average Maturity | 325 months | 331 months | | Effective Duration | 3.490 | 4.400 | [Financing and Hedging](index=3&type=section&id=Financing%20and%20Hedging) The company maintains strong liquidity and manages its $5.23 billion repurchase obligations with a diversified lender base, employing various derivative instruments to hedge interest rate risk [Financing, Leverage and Liquidity](index=3&type=section&id=Financing%2C%20Leverage%20and%20Liquidity) As of September 30, 2024, the company had $5.23 billion in outstanding repurchase obligations at a weighted average rate of 5.24%, with borrowings spread across 25 counterparties. The adjusted leverage ratio was 8.0 to 1. Liquidity remained strong at $326.7 million, consisting of cash and unpledged RMBS Financing and Leverage Summary (Sep 30, 2024) | Metric | Value | | :--- | :--- | | Repurchase Obligations | $5,230.9 million | | Net Weighted Average Borrowing Rate | 5.24% | | Adjusted Leverage Ratio | 8.0 to 1 | | Liquidity (Cash & Unpledged RMBS) | $326.7 million | - The company's repurchase agreements are collateralized by RMBS with a fair value of approximately **$5.46 billion** and **$9.2 million** in cash[8](index=8&type=chunk) - The company maintains relationships with 25 different lenders for its repurchase obligations, with the largest counterparty, ABN AMRO Bank N.V., representing **7.29%** of the total[9](index=9&type=chunk) [Hedging Strategy](index=4&type=section&id=Hedging) The company uses a variety of derivative instruments to hedge its interest rate risk, including T-Note and SOFR futures, interest rate swaps, and to-be-announced (TBA) securities. These hedges are not designated for hedge accounting under GAAP, so all gains and losses are reflected in current earnings - The company's hedging strategy aims to protect against a rise in interest rates on its repurchase agreement funding[10](index=10&type=chunk) - As of September 30, 2024, the hedging portfolio consisted of U.S. Treasury note (T-Note) futures, SOFR futures, interest rate swaps, and contracts to sell TBA securities[10](index=10&type=chunk) [Futures Contracts](index=4&type=section&id=Futures%20Contracts) As of September 30, 2024, the company held short positions in 10-year T-Note futures with a notional amount of $12.5 million and various SOFR futures contracts with expirations from December 2024 to March 2027. The total open equity on these futures positions represented a cumulative loss Futures Positions Summary (Sep 30, 2024) | Contract Type | Total Notional Amount ($ thousands) | Total Open Equity ($ thousands) | | :--- | :--- | :--- | | 10-year T-Note Futures | $12,500 | $(88) | | SOFR Futures | $1,050,000 | $(2,057) | [Interest Rate Swaps](index=4&type=section&id=Interest%20Rate%20Swaps) The company held interest rate swap positions with a total notional amount of $3.49 billion. These swaps have an average maturity of 5.7 years, with the company paying a weighted average fixed rate of 2.78% and receiving a weighted average floating rate of 5.37% Interest Rate Swap Positions (Sep 30, 2024) | Expiration | Notional Amount ($ thousands) | Avg. Fixed Pay Rate | Avg. Receive Rate | Avg. Maturity (Years) | | :--- | :--- | :--- | :--- | :--- | | > 1 to ≤ 5 years | $1,450,000 | 1.69% | 5.41% | 3.6 | | > 5 years | $2,036,800 | 3.55% | 5.35% | 7.2 | | **Total** | **$3,486,800** | **2.78%** | **5.37%** | **5.7** | [TBA Securities](index=5&type=section&id=TBA%20Securities) As of September 30, 2024, the company had short positions in 30-year TBA securities with a notional amount of $300 million. These positions had a net carrying value of $2.168 million, representing an unrealized gain TBA Short Positions (Sep 30, 2024) | Security | Notional Amount ($ thousands) | Net Carrying Value ($ thousands) | | :--- | :--- | :--- | | 30-Year TBA 3.0% | $(300,000) | $2,168 | [Capital Management and Shareholder Returns](index=5&type=section&id=Capital%20Management%20and%20Shareholder%20Returns) The company actively manages capital through consistent dividend payments, equity offerings, and share repurchases, while strategically allocating capital to its pass-through RMBS portfolio for shareholder returns [Dividends](index=5&type=section&id=Dividends) The company maintains a policy of paying regular monthly dividends to meet REIT requirements. Year-to-date for 2024, dividends of $1.200 per share have been declared, totaling $76.7 million. A dividend of $0.12 per share was declared on October 16, 2024 - To qualify as a REIT, the company must pay annual dividends of at least **90%** of its REIT taxable income[16](index=16&type=chunk) Annual Dividends Per Share | Year | Per Share Amount ($) | | :--- | :--- | | 2024 (YTD) | 1.200 | | 2023 | 1.800 | | 2022 | 2.475 | | 2021 | 3.900 | [Book Value Per Share](index=5&type=section&id=Book%20Value%20Per%20Share) The company's book value per common share was $8.40 as of September 30, 2024. This was calculated based on total stockholders' equity of $656.0 million and 78,082,645 common shares outstanding Book Value Calculation (Sep 30, 2024) | Metric | Value | | :--- | :--- | | Total Stockholders' Equity | $656.0 million | | Common Shares Outstanding | 78,082,645 | | **Book Value Per Share** | **$8.40** | [Capital Allocation and Return on Invested Capital](index=6&type=section&id=Capital%20Allocation%20and%20Return%20on%20Invested%20Capital) As of Q3 2024, 97.1% of investable capital was allocated to the pass-through (PT) RMBS portfolio, an increase from 96.2% in the prior quarter. For the quarter, the PT RMBS portfolio generated a 5.1% return on invested capital, while the structured RMBS portfolio had a (0.2)% return. The combined portfolio generated a return of 4.9% Capital Allocation (% of Total) | Portfolio | Sep 30, 2024 | June 30, 2024 | | :--- | :--- | :--- | | Pass-Through (PT) RMBS | 97.1% | 96.2% | | Structured RMBS | 2.9% | 3.8% | Return on Invested Capital (For Q3 2024) | Portfolio | Return on Invested Capital | | :--- | :--- | | Pass-Through (PT) RMBS | 5.1% | | Structured RMBS | (0.2)% | | **Combined Portfolio** | **4.9%** | [Stock Offerings](index=7&type=section&id=Stock%20Offerings) Under its June 2024 "at the market" (ATM) equity distribution agreement, the company issued 15.3 million shares through September 30, 2024, raising gross proceeds of $128.6 million. This follows the completion of a prior March 2023 agreement that raised $228.8 million - The company entered a new **$250 million** ATM equity distribution agreement in June 2024[27](index=27&type=chunk) - Through September 30, 2024, the company raised net proceeds of approximately **$126.5 million** under the June 2024 agreement[27](index=27&type=chunk) [Stock Repurchase Program](index=8&type=section&id=Stock%20Repurchase%20Program) The company has an active stock repurchase program with no termination date. During the first nine months of 2024, the company repurchased 396,241 shares at an aggregate cost of $3.3 million, for a weighted average price of $8.30 per share. The remaining authorization under the program is for 6,183,601 shares - The Board of Directors last increased the stock repurchase program authorization on October 12, 2022, bringing the remaining authorization to **6,183,601** shares[28](index=28&type=chunk) Stock Repurchases (Nine Months Ended Sep 30, 2024) | Metric | Value | | :--- | :--- | | Shares Repurchased | 396,241 | | Aggregate Cost | ~$3.3 million | | Weighted Average Price | $8.30 per share | [Summarized Financial Statements](index=8&type=section&id=Summarized%20Financial%20Statements) The company's balance sheet reflects significant growth in assets and liabilities, primarily mortgage-backed securities and repurchase agreements, while the income statement shows a strong turnaround to net income driven by gains on RMBS and derivatives [Balance Sheets](index=9&type=section&id=BALANCE%20SHEETS) As of September 30, 2024, total assets increased to $5.92 billion from $4.26 billion at year-end 2023, primarily driven by a significant increase in mortgage-backed securities. Total liabilities also grew to $5.26 billion from $3.80 billion, mainly due to higher repurchase agreements. Consequently, total stockholders' equity rose to $656.0 million from $469.9 million, though book value per share declined from $9.10 to $8.40 due to an increase in shares outstanding Balance Sheet Summary ($ in thousands) | Account | Sep 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | **Total Assets** | **$5,916,493** | **$4,264,947** | | Mortgage-backed securities | $5,442,804 | $3,894,012 | | Cash, cash equivalents | $333,717 | $200,289 | | **Total Liabilities** | **$5,260,469** | **$3,795,002** | | Repurchase agreements | $5,230,871 | $3,705,649 | | **Total Stockholders' Equity** | **$656,024** | **$469,945** | | Book value per share | $8.40 | $9.10 | [Statements of Comprehensive Income](index=10&type=section&id=STATEMENTS%20OF%20COMPREHENSIVE%20INCOME%20(LOSS)) For the three months ended September 30, 2024, the company reported net income of $17.3 million ($0.24 per share), a significant improvement from a net loss of $80.1 million (-$1.68 per share) in the same period last year. This was driven by a shift from large losses to gains on RMBS and derivative contracts. The average economic interest rate spread improved to 2.47% from 1.33% year-over-year, while the adjusted leverage ratio decreased from 9.5:1 to 8.0:1 Quarterly Income Statement Summary ($ in thousands) | Metric | Q3 2024 | Q3 2023 | | :--- | :--- | :--- | | Net interest income (expense) | $340 | $(8,598) | | Gains (losses) on RMBS/derivatives | $21,249 | $(66,890) | | **Net income (loss)** | **$17,320** | **$(80,132)** | | Basic/diluted EPS | $0.24 | $(1.68) | Key Performance Metrics (Q3 2024 vs Q3 2023) | Metric | Q3 2024 | Q3 2023 | | :--- | :--- | :--- | | Average yield on RMBS | 5.43% | 4.51% | | Average economic cost of funds | 2.96% | 3.18% | | Average economic interest rate spread | 2.47% | 1.33% | | Adjusted leverage ratio (period end) | 8.0:1 | 9.5:1 |