Orchid Island Capital, Inc.
Q2 2019 Earnings Call Transcript

Published: 26 Jul 2019

[Operator:]

Good morning, and welcome to the Second Quarter 2019 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, July 26, 2019. At this time, the company would like to remind the listeners that statements made during today's conference call relating to matters that are not historical facts are forward-looking statements, subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Listeners are cautioned that such forward-looking statements are based on information currently available on the 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 the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K. The company assumes no obligation to update such forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking statements.Now I would like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir.

[Robert Cauley:]

Thank you, Operator, and good morning, everyone. I hope everybody has had a chance to download our slide deck that we put up on our website, last night, and had a chance to review our earnings. I will now start to walk through the slide deck. Starting on Slide 3 with the table of contents, just an outline of what we will discuss today. As usual, we'll discuss highlights of our results for the quarter. Then we'll go into market developments, our financial results, our portfolio characteristics, credit counterparties and hedge positions and then give a brief -- speak a few words about our outlook and our strategy going forward.It's usual, kind of, the 4-step process. We try to highlight the developments in the market over the course of the quarter. And then with a particular focus on how those developments affected our results and positions that were made in the portfolio and then kind of conclude with how we see things going forward from here.Starting with the highlights of our results. We had net income per share of $0.07. We incurred $0.15 loss per share on net realized and unrealized gains and losses on RMBS and derivative instruments, including net interest income on our interest rate swaps.Earnings per share of $0.22, excluding realized and unrealized gains and losses on RMBS and derivative instruments, including net interest income on interest rate swaps. Book value per share was $6.63 on June 30, a slight decline of $0.19 from $6.82 at the end of the first quarter or 2.79%. In the second quarter, the company declared and subsequently paid $0.24 per share in dividends. Since our initial public offering, we have declared $10.545 in dividends per share. Economic return for the quarter was $0.05 or 73 basis points for the quarter, 2.9% annualized.Year-to-date economic return is 3.95%, 7.9% annualized. And over the course of the quarter, we issued 4,337,931 shares. On Slide 5, we show our results versus our peer group. The peer group is listed on the bottom, has changed somewhat over the years as certain REITs have either joined or left our space. Again, this data is on a book value basis, not stock price. As a result, the results tend to lag simply because we do not have all the book value numbers for our peers for the second quarter, the last quarter, and this report will be the first quarter of this year. On an inception to date basis the top line, Orchid has returned 12.3% versus the peer average. The peer average for that period has only 5 names

[Operator:]

[Operator Instructions]. Your first question comes from the line of Gary Rieve [ph].

[Unidentified Analyst:]

You mentioned the ATM program towards the end of your presentation. You guys are kind of nearly at the end of what you're authorized to do there. Is there any talk or thought on the part of the Board of upping that as you go -- as we go into the easing cycle?

[Robert Cauley:]

Yes, I think that's likely. We exhausted the program early in Q3. So we would anticipate, at some point, putting in place a new one and ATM has been an excellent vehicle for us.

[Unidentified Analyst:]

Okay. Great. And then in the quarter, I saw a couple of your competitors' quote, sort of, a prototype security. Any thoughts on that as a source of funding?

[Robert Cauley:]

We did look at those. Unfortunately, given our size, the coupons on those, whether it be preferred or convertible debt, they're pretty pricey. I think the bar for those to make a lot of sense is still a little too high. That could change, especially, if we were to have an aggressive easing cycle. But for now I think we're -- we don't really too excited about the potential returns from those.

[Unidentified Analyst:]

Got it. Got it. And you guys are a little bit above book today. Any thoughts on doing some type of placement potentially?

[Robert Cauley:]

You never know. We generally don't like to speak about those things, the dividend policy, capital raising. But as I said, it looks like the outlook is about to change and to the extent that it does. Obviously, it would be -- a steeping of the curve would be an attractive for us -- opportunity for us, and we would probably consider that.

[Unidentified Analyst:]

Yes. It seems like an opportunity to cash and leverage ahead of a more favorable cycle.

[Robert Cauley:]

Thank you.

[Operator:]

Your next question comes from the line of Christopher Nolan.

[Christopher Nolan:]

Bob, what was the issuance prices for the ATM, please?

[Robert Cauley:]

I don't have those in front of me, but our book was 6.82% at the end of the third -- or the first quarter and 6.63%. I want to say, it was somewhere in the high 6.50s on average, but don't quote me on that yet.

[Christopher Nolan:]

Yes, I am getting 6.60% or so.

[Robert Cauley:]

Yes, so it was slightly below book. As I said, the typical cost of capital in the ATM is about 1.8%. So it added about 1% that quarter, 1.5% to that.

[Christopher Nolan:]

Got you. Also, I saw that you had an increase in allocation to 30-year 5% coupons, was that the specified pool that you were talking about?

[Robert Cauley:]

Yes, very much so. And it's -- in these cases, we're going to buy higher quality call protection because of the prices. And another thing is, we've been looking for some bonds that are little more seasoned so they're off the ramp, so they're much more predictable. We don't have to take that ramp risk, if you will. And so that's what we added in that bucket there, loan balance and season pools.

[Christopher Nolan:]

Final question. Reading the management commentary in the earnings release, it seems like you guys are very much in the camp that there will be a rate cut. What happens if there's not a rate cut?

[Robert Cauley:]

Well, as we said, and I quote, like I said it was a calculated risk and it was. I think at this point -- well, if there isn't one, obviously, something has to change. The market pricing today is for about 2.5 eases by the end of the year. It would have to -- it's really a function of -- if the Fed doesn't cut next week, and it not much of that, but what would they say. So in other words, when Chairman Paul has his press conference, what does he say in the statement, how does he respond to questions. If he could convince the market that we've changed our thinking again, and we don't really care about what's going on in Europe or trade tensions, we're just focused on the domestic economy and the data we've seen in this month, whether it's GDP today or durable goods yesterday, payrolls at the beginning of the month, even the CPI number in the middle of the month, if they change back to that and they say, based on that there's no need to ease, the market has to move. The five year treasury can't be 50 basis points or 40 basis points inside Fed funds in that case. So you would have a meaningful sell-off in the belly and in probably the long end of the curve. And as I mentioned, while that might not be great for our capital raising, our NIM or anything, ATM and that kind of stuff, that is how we've hedged ourselves. So our hedge is concentrated in the belly and in the long end of the curve. So that would have to be -- that's certainly a nonzero probability, but that would do I think a lot to undermine the credibility of the Fed.And then I think the subsequent effect of that would be a much higher risk premium being priced into the market. Because now the market would have to price in the fact that the Fed is somewhat of a random unpredictable animal that can change its thought process on a dot. And they did do that for some extent in the fourth quarter, but that I think was a result of a lot of market pressure. There's certainly no market pressure for them to do so now, so if they were to do so, I think the risk tenure would be materially higher than it is now, and that would not be a good outcome.

[Christopher Nolan:]

So is it fair to say that you guys are assuming a 50 bp cut in the second half of the year?

[Robert Cauley:]

I wouldn't say -- we'll see how it goes. I think 25 is a very high probability. And there's likely to be more beyond that, but it remains to be seen. The other thing, I think, is while the market pricing is looking out through the balance of this year, even in the 2020, my view is that once we get to second quarter of 2020, I think the market focus is going to shift to the election and the expected outcome. In my mind, the outcome of next year's election is binary. In other words, the outcomes depending on which party takes the White House are materially different. One being more pro-growth, the other not so pro-growth. And I think the market will start to price that in, as I said mid next year. So I think the Fed's in the driver seat until then, but after that, I think it will change. So whether we get 1, 2 or 3 remains to be seen. I suspect we'll probably get 2. Because I think the Fed is focused on the fact that inflation is low, global economies are weak, and there's a lot of uncertainty with respect to trade. And it's not for so long now, we've been talking about trade tensions between U.S. and China or U.S. and Mexico and Canada. And now you have tension between U.S. and Europe or between Japan and Korea. So it's spreading and it's not generally a good thing for the global economy.

[Operator:]

[Operator Instructions]. I'm showing no further questions at this time. I would now like to turn the conference back to Robert Cauley.

[Robert Cauley:]

Thank you, operator, and thank you, everyone. Appreciate you taking the time to listen in today. To the extent other questions come up after the call, please feel free to call us or if you're listening to the replay, our number in the office is 772-231-1400. Thank you for your time. We'll speak to you next quarter. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.