Orchid Island Capital(US:ORC)2023-03-03 20:02Financial Performance - Net loss for the year ended December 31, 2022, was $258.5 million, or $6.90 per share, compared to a net loss of $64.8 million, or $2.67 per share, for 2021[273]. - For the three months ended December 31, 2022, the company reported a net loss of $3,463,000, with a net loss per share of $0.09[280]. - The total economic net interest income for the year ended December 31, 2022, was $62,216,000, reflecting a significant increase compared to the previous year[288]. - The company reported a net interest income of $62,216,000 for the year ended December 31, 2022, which is a significant improvement from the previous year[288]. - Economic net interest income for the year ended December 31, 2022 was $99.8 million, compared to $109.3 million in 2021[294]. - The company experienced a total of $(320,669) thousand in losses for the year ended December 31, 2022, compared to $(177,119) thousand in 2021[314]. Interest Income and Expense - Interest income for 2022 was $144.6 million, an increase from $134.7 million in 2021, while interest expense rose significantly to $61.7 million from $7.1 million in 2021[273]. - The net interest income decreased to $82.9 million in 2022 from $127.6 million in 2021, primarily due to losses on RMBS and derivative contracts totaling $320.7 million in 2022[273]. - The economic interest expense for the year ended December 31, 2022, was reported at $258,453,000, indicating a substantial increase from $64,760,000 in 2021[288]. - Interest expense on borrowings for the year ended December 31, 2022 was $61.7 million, up from $7.1 million in 2021, attributed to a 138 basis points increase in the average cost of funds[292]. - The average cost of funds for the year ended December 31, 2022 was 1.53%, compared to 0.15% in 2021, indicating a significant rise in borrowing costs[296]. Share Issuance and Repurchase - The company issued a total of 634,145 shares under the January 2020 Equity Distribution Agreement for gross proceeds of $19.8 million before its termination in August 2020[262]. - Under the August 2020 Equity Distribution Agreement, the company issued 5,498,730 shares for gross proceeds of approximately $150.0 million, netting about $147.4 million after commissions and fees[263]. - The stock repurchase program has authorized the repurchase of up to 6,183,601 shares, representing approximately 18% of the company's then outstanding shares[270]. - From inception through December 31, 2022, the company repurchased a total of 3,675,572 shares at an aggregate cost of approximately $64.8 million, with a weighted average price of $17.63 per share[271]. - By December 31, 2022, the company had issued a total of 7,052,188 shares under the October 2021 Equity Distribution Agreement for gross proceeds of approximately $119.6 million, netting approximately $117.6 million[352]. Investment Strategy - The company aims to provide attractive risk-adjusted total returns through capital appreciation and regular monthly distributions from its investments in Agency RMBS[259]. - The company operates to qualify as a REIT, generally avoiding U.S. federal income tax by distributing all REIT taxable income to stockholders[260]. - The company’s investment strategy involves allocating capital between traditional pass-through Agency RMBS and structured Agency RMBS to manage income stability and portfolio value[259]. - The company’s strategy includes investing in TBAs, which are forward contracts for the purchase or sale of Agency RMBS, representing off-balance sheet financing[284]. - The company’s structured RMBS strategy has been a core element of its investment approach, with no leverage applied to this portion of the portfolio[344]. Market Conditions and Risks - The Fed raised the Fed Funds target range to 4.50% at the end of 2022, an increase of 125 basis points during the fourth quarter[356]. - The market expects the Fed Funds rate to peak at approximately 5.125% by mid-2023 and remain above 5% throughout the balance of 2023[356]. - The Agency RMBS market returns for 2022 were negative, down 11.9%, but posted positive returns of 2.1% in the fourth quarter[359]. - Foreclosure starts in 2022 increased by 169% from 2021, although they remained 26% lower than pre-pandemic levels in 2019[363]. - The Agency RMBS sector is still trading at spread levels well above pre-pandemic levels, with risks associated with potential inflation re-acceleration[381]. Liquidity and Capital Management - Cash and cash equivalents as of December 31, 2022, were reported at $205,700,000, providing liquidity for operational needs[345]. - As of December 31, 2022, the company had unrestricted cash and cash equivalents of $205.7 million and unpledged securities of approximately $27.4 million available for margin calls and corporate purposes[415]. - The company faces liquidity risk due to financing long-term assets with shorter-term borrowings through repurchase agreements, which could lead to increased margin calls if the value of pledged assets decreases[415]. - The average life or duration of fixed-rate assets may extend if prepayment rates decrease, potentially leading to realized losses if the company is forced to sell assets to maintain liquidity[417]. Derivative Instruments and Hedging - The company utilized various hedging instruments, including Eurodollar and interest rate swaps, to manage interest rate risk effectively[281]. - The company employs a four-step process to determine the fair value of Agency RMBS, ensuring consistency with observed market prices[384]. - The company utilizes derivative instruments such as Fed Funds, T-Note, Eurodollar futures contracts, interest rate swaps, and TBA securities to manage interest rate risk and other exposures[388]. - The company has not elected to designate its derivative holdings for hedge accounting treatment, which affects the presentation of interest expense[282]. Prepayment and Interest Rate Risks - Prepayment risk is significant, as it can lead to a faster return of principal on investments, affecting net interest income due to reinvestment at potentially lower yields[413]. - Changes in the general level of interest rates can significantly impact net interest income and the value of the RMBS investment portfolio[401]. - Increased prepayment rates may negatively affect the value of Agency RMBS, particularly for interest-only securities, while positively impacting principal-only securities[373]. - The effective duration of the RMBS portfolio increased from 3.39 in 2021 to 5.58 in 2022, indicating greater sensitivity to interest rate changes[329].