Orchid Island Capital Inc (ORC) 2014 Q1 法說會逐字稿

Good morning, and welcome to the first-quarter 2014 earnings conference call for Orchid Island Capital Incorporated. This call is being recorded today, Friday, May 2, 2014. At this time, the Company would like to remind the listeners that statements made during today's conference call (inaudible) 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 to such forward-looking statements are based on information currently available under management's good faith. Belief with respect to future events are subject to risks and uncertainties that could cause actual performance or results to differ materially from these expressed in such forward-looking statements. Important factors that could cause such (inaudible) are described in the Company's filings and 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 further factors affecting forward-looking statements.

Now I would like to turn the call -- conference over to the Company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Go ahead, sir.

Thanks, operator. Orchid Island Capital had a very busy first quarter of 2014. We completed two secondary offerings in January and again in March, an increase of size of the Company by over 100%. With the deployment of the proceeds, we were able to reposition the portfolio to simultaneously take advantage of the current market environment and position ourselves for the market developments we anticipate over the balance of the year.

Harsh winter weather conditions are considered to have led to a depressed economic data around the year end and into the first quarter of 2014. And when the GDP data for the quarter was released on April 30, 2014, we learned the economy only grew at a 0.1% annualized quarter-over-quarter rate. The weak economic data observed caused the market to rally sharply in January, but the yield on the 10-year treasury rallied from just over 3% at year-end 2013 to under 2.6% in early February. Since then, the market had settled into a well-defined range as the yield on 10-year notes has hovered between 2.6% and 2.8% for 13 weeks now.

Volatility in the market has come off as expected, and prepayment schemes as measured by the MBS conventional refinancing index have stayed out of the low 1500s all year. This leads to a very conducive market for MBS investing and coupon clipping. This has occurred in the face of reduced purchases by the Federal Reserve. With refinancing very low, supply of MBS has decreased accordingly, and the reduced demand on the part of the Federal Reserve has not had the impact on MBS spreads many feared.

With the ultimate end of MBS purchases by the Federal Reserve clearly in sight, most multi-sector fixed-income investors are underweight in their allocation to agency MBS. The resulting selling has had some impact on MBS spreads, as the conventional 30-year fixed-rate current coupon mortgage trades had a wider spread in 10-year swaps than it did at the beginning of the year. However, the reduced supply of MBS has had its -- kept its spread from widening further. Market participants are currently split on what the eventual end of the Federal Reserve purchase will mean for MBS prices, but we think the current underweight by multi-sector fixed-income investors will lead to buying when and if MBS spreads widen and the Federal Reserve purchases stop. Accordingly, we do not anticipate meaningful widening absent in other external events.

We have completed a deployment of $68.2 million of net proceeds with the two offerings in the first quarter, including the exercise of the underwriters' overallotment option on April 8, 2014 of 480,000 additional shares. Our leverage ratio is approximately 6.1 to the -- 6.8, I'm sorry, to 1 versus 7.1 at December 31, 2013. The leverage ratio at March 31, 2014 was 6.1 to 1. It did not reflect settlement of certain MBS purchases or the issuance of shares in capital rates as a result of the overallotment option in early April.

We continue to favor fixed-rate MBS over arms, either hybrid arms or certain reset arms. Our fixed-rate allocation was approximately 83% of the portfolio at March 31, 2014, versus approximately 69.9% at December 31, 2013. But in the fixed-rate sub portfolio, our holdings remain concentrated in 30-year securities, as the allocation has moved from 54.6% of the portfolio at December 31, 2013 to 57.0% at March 31, 2014.

The bulk of the increase in our fixed-rate allocation came in 15- and 20-year maturity buckets. Our allocation of 20-year securities increased from 8.9% at December 31, 2013 to 14.1% at March 31, 2014. And the 15-year allocation led from 6.3% at December 31, 2013 to 11.9% at March 31, 2014. In both cases, we increased the weighted average coupon by approximately 40 basis points as well.

The weighted average coupon for our 30-year holdings increased from 4.26% to 4.54%. Most of our 30-year fixed-rate securities have some form of call protection, predominantly low loan balance collateral. The payout premiums are these securities are still significantly lower than the (inaudible) for several years. And these securities offer very attractive returns in the event of a rally of rates, as the outcome least expected by market participants.

We still believe the primary risk to the market remains the rally in rates, as most position indicators we track indicate the market is still positioned for higher rates. The significant additions of call-protected securities offer excellent protection for such an event will also require and slow premium amortization, at least (inaudible) to both new and collateralized by loans that tend to prepay slower than more generic collateral.

Our short reset on allocation is down to 6/10 of 1% at March 31, 2014 versus 1.5% at December 31, 2013. And the hybrid arm allocation was 10.1% at March 31, 2014 versus 21.7% at December 31, 2013. Realized prepayment fees on our pass-through MBS for the quarter declined to 4.2 CPR versus 5.3 CPR during the fourth quarter of 2013 and 9.2 CPR for the first quarter of 2013. The allocation of capital restructured MBS was reduced to 56% at December 31, 2013 to 44.2% at March 31, 2014.

Within the structured MBS portfolio, we are favoring two sectors. The primary focus has been on higher coupon 30-year collateral, predominantly 4.5% fixed rate. The other area is to 15 (inaudible) securities, as we anticipate the belly of the curve for the three- to seven-year maturity range will lead to selloff as the economy recovers, thus increasing 15-year rates in relation to 30-year rates. The spread between the five- and 10-year treasury rates has already increased by over 30 basis points year to date. Most of the additions to the structured MBS (inaudible) portfolio in the first quarter have been higher securities as the IO -- inverse IO allocation remains near 1.5% of the portfolio.

As for our funding hedges, we continue to use (inaudible) futures contracts, with maturities out approximately five years, and we have a added a payer swaption with a one-year option period struck from the five-year part of the curve.

Going forward, we anticipate containment speeds will remain low, and rates to gradually increase as the economy recovers. The curve is likely to continue to flatten as the market anticipates the eventual beginning of rate increases by the Federal Reserve. As I mentioned, we do not anticipate a material reaction in the markets for the eventual end of the Federal Reserve's MBS asset purchases. In the event we are wrong and rates market rally, we have substantial protection from our containments from the call protection securities we have added. And if the curve steepens, our higher coupon in IO (inaudible) should benefit.

That concludes my prepared remarks. Operator, I will turn it over to questions, please.

Thank you. (Operator Instructions) David Walrod, Ladenberg.

The expense line in your release, can you break out those individual expenses like you do in the Q, or should we just wait for the Q?

We could probably break those out. Most of them, I can tell you, were relatively stable. Obviously, the management fee went up in conjunction with the capital raise. But the line items that we show in our queues -- which are management fees, directors' fees, and liability insurance; audit, legal, and other professional fees; directly, operating expenses and other expenses. The bulk of the change was in the management fee. Directors' fees will change slightly because we went over $100 million. Going forward -- what else?

David, this is Hunter. I believe most of those fees are broken out in the first paragraph of the text of the press release.

Okay. Okay, I'll get there, then. What was the weighted average share count for the quarter?

5.094 million.

Okay. And then the capital raise that you did in March, you said that was -- was that mostly deployed in March? Or I know there was the underwriters chew that was -- came in April. So when were all those proceeds fully deployed?

Yes, we were almost fully invested by the end of March for an additional 480,000 shares associated with that underwriter's option that you've mentioned. We have deployed most of that. Have a little bit of dry powder, if you will, sitting around waiting for the right investments in the structured security space. But [rates], by and large, has been deployed.

Okay. All right. Thank you.

Thanks, Dave.

(Operator Instructions) I'm not showing further questions at this time.

Alrighty. Thank you all again for your time. To the extent somebody has questions that come up after the call, please call us at the office. We will be available and willing to take all of your questions. And as always, we thank you for your time and interest in Orchid Island Capital, and we will talk to you again next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect, and have a great weekend.