Orchid Island Capital (ORC) Tops Q3 EPS by 22c

October 29, 2020 5:40 PM

Orchid Island Capital (NYSE: ORC) reported Q3 EPS of $0.42, $0.22 better than the analyst estimate of $0.20.

Management Commentary

Commenting on the third quarter, Robert E. Cauley, Chairman and Chief Executive Officer, said, “COVID-19 continues to dominate the performance of the markets and economy. While both have recovered from the depths of March, especially the financial markets, the economy continues to languish. The recovery has proven to be very uneven, with some sectors back to or near pre-pandemic levels of activity while others remain far below with little prospect for getting back to those levels soon. The unemployment rate remains elevated – with the most recent read at 7.9% - as millions of Americans remain out of work.

“The Federal Reserve (the “Fed”) has taken, and continues to take, steps to support markets and the economy. For Orchid, the Fed’s asset purchase program provides tremendous support for the Agency RMBS market and minimizes the likelihood of another market disruption such as the one we witnessed this past March. However, much needed additional stimulus from Washington and the federal government has been absent since the end of the second quarter. The federal government will not provide another round of stimulus until after the presidential election. Interest rates continue to trade in a narrow range and at extremely low levels. The market expects the Fed Funds rate to remain at the effective lower bound near zero for an extended period of time, even more so after the Fed altered its monetary policy framework relating to inflation during the third quarter.

“Target investments in the Agency RMBS market continue to be bifurcated between the production coupons – the target of Fed asset purchases – and higher coupons in specified pool form. The TBA market for higher coupons remains weak as the sector lacks support from the Fed and prepayment speeds are extremely high, resulting in poor expected returns for investors. This leads investors to look to the specified pool market – with lower expected prepayment speeds – for attractive returns. With prepayment concerns paramount in the current environment, we continued to focus security selection on the specified pool market and to a lesser extent lower coupon, 30-year TBA securities that offered attractive carry potential via the dollar roll market. We continue to de-emphasize structured securities in this environment in light of high prepayment speeds, low implied volatility, and potential liquidity issues should market conditions deteriorate again.

“Since the economy cannot fully recover absent the containment of the COVID-19 pandemic, which is not expected to occur in the near term, current market conditions are likely to persist. As a result, we expect prepayment speeds will remain elevated, the Fed will be active in the Agency RMBS market with asset purchases, funding levels will remain low and the most attractive returns available will be either in the TBA dollar roll market with lower coupons or with specified pools in higher coupons. If this proves to be the case, we would anticipate book value volatility to remain low and relative performance to be driven by realized net interest margins. Accordingly, our focus will remain on managing premium amortization and therefore protecting the portfolio from excessive prepayments. We expect that the low level of rates, if realized, will keep funding levels low as well, and supportive of our net interest margin. Finally, our hedge strategy continues to shift towards more reliance on volatility linked instruments such as swaptions given the low levels of implied volatility reflected in market pricing.”

For earnings history and earnings-related data on Orchid Island Capital (ORC) click here.

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