Orchid Island Capital Inc Reports Mixed Results Amidst Interest Rate Volatility
Net Income: Q4 net income of $27.1 million, down from $34.9 million in Q4 2022.
Book Value: Increased to $9.10 per share at the end of Q4 2023 from $8.92 at the end of Q3 2023.
Portfolio Adjustments: Reduced Agency RMBS portfolio from $4.5 billion to $3.9 billion during Q4 2023.
Interest Income: Decreased by approximately $0.6 million in Q4 2023 compared to the previous quarter.
Net Interest Spread: Improved to (0.44)% in Q4 2023 from (0.93)% in Q3 2023.
Dividends: Continued monthly dividends, aligning with REIT income distribution requirements.
Leverage and Liquidity: Adjusted leverage ratio of 7.9 to 1 and liquidity of approximately $200.4 million as of December 31, 2023.
On February 1, 2024, Orchid Island Capital Inc (NYSE:ORC), a real estate investment trust specializing in residential mortgage-backed securities (RMBS), released its 8-K filing, detailing its financial results for the fourth quarter and full year ended December 31, 2023. The company navigated a challenging interest rate environment, resulting in a mixed performance with a notable increase in book value.
Company Overview
Orchid Island Capital Inc invests in RMBS across the United States, with principal and interest payments guaranteed by government-sponsored entities. The company's investment portfolio includes traditional pass-through Agency RMBS and structured Agency RMBS, such as collateralized mortgage obligations and interest-only securities.
Performance and Challenges
During the fourth quarter of 2023, Orchid Island Capital reported a net income of $27.1 million, a decrease from the $34.9 million reported in the same period of the previous year. The company strategically reduced its Agency RMBS portfolio size by approximately 15.7%, focusing sales on longer duration discount securities. This adjustment was in response to the volatile interest rate environment and the performance of mortgage securities.
The company's book value per share increased from $8.92 at the end of the third quarter to $9.10 at the end of the fourth quarter. Orchid's management attributes this improvement to the company's proactive measures, including a reduction in leverage and a strategic shift in the portfolio composition towards higher coupon securities.
Financial Highlights
Orchid Island Capital's financial achievements in the fourth quarter are underscored by an increase in its economic interest spread, which rose from 1.33% at the end of the third quarter to 2.35% at year-end. This metric is particularly important for a REIT like Orchid, as it reflects the profitability of the spread between the income generated by its RMBS assets and the cost of funding.
"As we enter 2024 the steps taken in 2023 should serve us well. We have reduced our exposure to lower coupon securities and increased the weighted average coupon of the portfolio... Our hedge strategy has protected our funding costs from increasing too high as the Fed raised overnight funding costs towards 5.5%," said Robert E. Cauley, Chairman and Chief Executive Officer.
Financial Metrics and Analysis
Key financial details from the income statement reveal that interest income on the portfolio for the full year 2023 was approximately $177.6 million, with a yield on average Agency RMBS of 4.28%. The repurchase agreement interest expense for the year was $201.9 million, with an average cost of 5.07%.
The company's leverage and liquidity position as of December 31, 2023, showed an adjusted leverage ratio of 7.9 to 1, with liquidity of approximately $200.4 million. This liquidity is a critical metric for Orchid, as it provides the flexibility to manage its portfolio and meet obligations without being forced to sell assets in unfavorable market conditions.
Orchid Island Capital's performance in the fourth quarter indicates a company adapting to market conditions with a focus on stabilizing and improving its financial position. The company's strategic portfolio adjustments and hedging strategies have positioned it to potentially benefit from any future rate cuts by the Federal Reserve.
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Explore the complete 8-K earnings release (here) from Orchid Island Capital Inc for further details.
This article first appeared on GuruFocus.
