ORC - Earnings call transcript Q3 2017 | Orchid Island Capital, Inc.

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Operator

Good morning and welcome to the Third Quarter 2017 Earnings Conference Call for the Orchid Island Capital. This call is being recorded today, October 27, 2017. 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 the 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 annual report on Form 10-K. obligation changes such in in affecting statements. no reflect statements other assumes forward-looking results, actual assumptions Company to forward-looking update to factors The or changes

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

Robert Cauley

to done I'll and slide be slide done I so And the download the our would be you request go you, operator, call. if everybody in if already Thank that possible. of much to haven't website, our deck flipping as we we the as past, our readers for deck along, easier to follow through it'd obviously,

you order X. go today. kind If start of go, just of to the contents going on This of kind the just ready over Page conversations your are a to I'm is tables of

forward. results basically us. through then the counterparties first are I’ll for give will time for quarter. the is through manage affected backdrop portfolio backdrop Then, thing how I'll these financial performance. that then for over this provided the our our a how quarter and go go brief going a credit about This what developments I'll do we some we highlights and The of our the positioned describe through of characteristics, developments positions. the gives how we developments market our the hedge we finally, we us spend And to go chance financial during then basically going portfolio will overview talking see through

unrealized as $X.XX following Company available share lease We is or income and losses GAAP over quarter. our go for losses if for a this. that of What you've through gains of as been to reported the now that Turning both instruments quickly assets and aware, or of per hedge reported earnings income just known county. realized $X.XX means in statement. share, derivative per well all our and X, net long go any [indiscernible] mark-to-market what is you're the Slide We this

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this detail later little We on will a as said. go through I more in

value book a dividends is book had and $X.XX. share of which reported $X.XX value of $X.XX. our June We an declined XXth Our $X.XX or declared $X.XXX from $X.XX down economic to Year-to-date, we we XX.X% $X.XX return from is per annualized. un-annualized,

annualized. Our dividend $X.XX, paid results $X.XX in is gain not or a which of X.X%

you'll to let's talk development if X. Now, about Slide turn market

we note basically first show we and market, the XX-year into rate. rates The things the treasury here XX-year the have swap what happens

in the QX. see repeal reform, that March of can drivers By As very Care of confidence and Act, what quarter, optimism Affordable last the like. administration Act. stories. the the and the of Republicans you meaningful quarter, talk declining was White you the you look undermine in a viewed was really or surrounding the turmoil this of There first congress, seem case, the saw rally that In and started and when in There or that results, with develop And at Affordable it three late really the the infrastructure were recall optimism there was very the had basically, There early on, tail of was the continuation The was Republican of if a kind overtime, pessimism. of of what see year But exposed late and And basic tremendous first developed between two to things we as you do market as these we change the over administration was end administration. into swept tax amount the was September September Care even and of going going basically of XX-years reversing. tremendous three in depth up current we as amount slightly less get -- treasury, a Congress, the to several XX-year themselves. House less attempts the course the of were one unchanged The House to spending replacement cases these there Republican infighting eyes White yields points and than we would basis point. to done. the all course anything the turned of process quickly early of amongst case basically and basis failed even finished a the the the pro-business to had in of then swap itself and

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we X, here. Slide to mortgage through the have you can and in the tables Turning developments markets four go

do up go these can very core kind forever. lower lower as are attractive appealing was equally a view can our of and of performance dollar coupons. the mortgages mortgages that which first is just the it's then, lower from mortgages, look contrast tick stark beyond. result very, products but relevance the how holdings were on on to the of Bottom off do the and is poor seen are but specified not X% rate flat attractive the or dollar takeaway very that we've attractive. in has only price quarter is you Mortgage XX-year the these done top our X for the X% were relatively coupons, in These market and And slide quarter market market. securities. X, to extent Generally, X.X% particularly case to pools shows left role appeared over were drops addition the prices fixed rolling some, The Since low they at the were shows with of these roles really to the well. volatility spreads really and that and other for up quarter in of coupon the remarkably investors so fact left a a XX-year see X.X quite tend people don’t the spread tightening about that X.X, a in lot the over the be specified coupons. weak This tightened tight and backed seen little the in during and volume the which into this fact environment most end the trading of in have coupons and

all. of But fall look pay the and months of several of at And of year. this because Max of And stayed mortgages our Obviously, typical for the can balance originated take simply much These if so of is you were a to September trade particularly to what call these pools market quality of up so the also space form look at the with that's pay pool top throughout pay quickly. the lot quite performance the specified premiums. to that peers we've loan But to the only end strong. the you see try of market really at of, is very you rallying of even consistent the we pool quite of ups ups can those is that's buy. highest when back low raising there late, can well, pay after also the year, in it page, was strong. tend you fleeting. right, pay other tend highest the These protection you capital they is XX,XXX the is two the right pay probably call call new course protection just off, quite started And done in helped place this the they the the seen lasts up the have REIT If but It for K the they side to first kind at production. is not disappears there ups buying modest loans the fact by and spectrum the the more XXk quite buy. most did

Now, to our results. about I’ll financial talk start

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interest The second accounting. not use line expense. do hedge is We

absolute Company earnings those were about that talk to are and on stable the the than last but course externally little with they those So vary just respect with relatively a are managed, expenses, and $X.XX of grows fact are as flat column management number and lower most Fed puts overhead, fee of interest up. the non-variable, been creeping this bit size raising has does to rest that year. allocated then we’ll basis our were reflects of G&A a quarter This the expense finally as in year-over-year for these to so of we our the rates And more. are

side the broken down structure and only the year then interest coupon and portfolio inverse returns concentration pass-through very interest only the We comprised securities the pass-through has is On portfolio of high fixed high XX both the a with show we The return. portfolio generated rate sector. portfolio a -- right very for mortgages also a page, of by mortgages. run of the portfolio a securities. strong The

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hedge we I as capturing our Fed don’t I any so of This for hedges. earlier. any adjusted really interest As impact increases not the just said, use accounting, expense is is mentioned

there been So, some erosion. is -- slight it’s been

to capital went Turning strategies kind allocation remarkable out point of right of point the for unchanged forward forward basically to grew. out pass-through was much this I strategy so is see roll shows allocation two XX.X% to the that you and from the the XX, With quarter. our essentially portfolios. of here, Slide to can unchanged. the between slide a portfolios, two portfolio that the Nothing side will between roll respect capital XX.X% the the of The pass-through

mentioned, I the we did As capital change not allocations.

there and have inverse through just relatively greater for just interest that respect a see the you portfolio, of that they additions but increase interest into into this that go they a we in some We what were With more get bought to we'll flat. portfolio. on the what I can moments. were little So only will of details discussion we When now reflects talk in flat. few slight detail the leverage about only, did a

offset that’s losses. were principle purchases And return basically hit mark-to-market by that and their slide. just for So,

can is percentage right our our the allocation is you Slide various to end the show the portfolio Now into At sectors. to XX portfolio. of the that snapshot of point We'd the from the portfolio. the characteristics. the column the out third of we of the in the allocations quarter,

the disposition this, size have top there not you we XX into portfolio. the of of context give shows past. that better here. the just get but some I how now to are it's we details in go tables the four to been think just And of The Before Slide probably left

is as you quarter. So, the billion, the portfolio $X grown but allocations the shows between see it I increase overtime the the outstanding mentioned last The not the as left and because in in bottom during was did approximately sectors. leverage. We we've two grew, just can shares quarter that increase of slight

bottom it is space And want owned words been we slightly allocation rate and buying in that mentioned, do few call those although our we levels shot say are of unattractive call forms As to protection. quarter. generally Hunter the say and and and we probably to We've short relative of in were at just these few The show it notable you a then in short-term and rate a protection least over down within of forms terms like feeling to fixed will is at of of that don't the [Hunter], are is allocations and not value top right finally our the now quarters, our rich late. quite you see the what can the to continue about now. of securities. range about thing here right on strategies necessarily we shows at only moment. few XX securities fixed words structured the to high the as like slightly allocation answer a we've The will end securities securities up the portfolio high those this be structured taken the last we've the up away of pass-through have that the pay most year lower attractiveness. The the from I there coupon And portfolio. highest

George Haas

of in Sure, which I Bob so time start continuation performed go inverse mid at expect rates spent and a IO then of to as pro-loan to balances and off down that had mortgage Those quarter in well. the that we jumbo think you in alluded in $XXX,XXX bank the start quite and as enough of to area. nicely. to rates rebound rebound, IOs earlier, came seven would positions in or as IOs the particular eight and poorly to $XXX,XXX securities months quarter sort buying We in year very the the relatively bit quite and saw down balances, have a third of since performed capital first first $XXX,XXX

of doesn’t has leave have the IOs lot really inverse the us X.X generic least options inverse sort is maximum it exception ones the off to So, of point. component Inverse of a more there is negative not duration, respect the for will IO extended out sort their of of and some Fannie it this IO we at have so extend IO IOs with room the with sort to much or of at of of Freddie, run left with of maybe recall we book. that what and to

in So risk on us in the that have particular like mix hedges the with puts LIBOR a that position we kind have more place. of those of assets we than books where

decrease or assets. of did So run-off hedges we the really number those increase that

at them risk time. to put might or relatively still don’t and which our which in hard it past run add likely this we’ll tighten We of position. less pieces If certainly take same to or they We’re point those IOs, we’ll so have are can less find of to just find prices. muddling but we more continue sort profile you off wouldn’t of on the most

won’t probably there. do too we So, much

towards coming raise be specified I particularly, grew we if pools if So, surprised the months capital. in any allocation wouldn’t our

Robert Cauley

Thanks.

I lot for whole Slide back portfolio. a moment, said, is this to here. not There as talk go is you about the If this snapshot of XX a

assets, as third the The back were the right don’t to apply column you the leverage structure XX.XX%, fix from see we to the allocation, is securities. rate push can

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now table. -- two Turning things this I we slide to did on XX, have

weighted sum, First, rates, our we just started we’ve longer our put on some maturity to borrowing our repo average average counterparties term weighted have repo. extended and

a XXX we to over where the of that’s pretty can to departure day you XX cases in the days year average in past XX XX weighted to or tended range. a maturity some exclusively year fund day As from see, somewhat is XX much

it up. hand, we we right the On see our leverage, took show can as you

the all. question why might be So is the And reason reduce following. would

dollars the X% And for that we in fix and the forward the we risk in how market rates that -- X%. nine things In on market coupon view will the market we feds, but this because positions of and show a the this earnings that long kind Fed going up XX, could high that to much the will that its it book the market is economy about hedge say is the -- any on sustain sustainably and at that going of below we to that was down point forth below few through The slide, words the rallying XX can the of start was rallying the words forward. back point asymmetric time X%. high end us of last the all about we a other the to fact profile the our this was hard so in and of September forward good comfortable hit all the means this around verge portfolio and in over were IO, have early hike going today just world to are When talk And market through shorts not our believe point. months got probably and that negative to out, of we priced going of in was market. As we slide like rate very is good duration, first much but in empirical that's future our year to phase taking the a year. so how the hikes value for X% concentration the demonstrated go see with going go market point Slide euro mortgages to that at Once pricing seems going like just real not so leverage we mentioned, make. I pricing that. decision what very rolling the for a to curve easy it and almost so positioning, absent seem talk pretty was the was our when today, price where we the XX% could but of the or and hard thought and been given easing, that about is

So, our we we basically instruments various show here. all that hedge use of

we rates position can each XX below contract top average where December our that. dollar we through up On the the show and a see contract have and billion left euro you on $X our of

the quite treasury the on hedges we top curve short, bit. on and seemed corner get that have in which same much We the appropriate just into right of market mortgages just and hiking discussion our and It is have which we out late August, because moved the around more a tightened out short bit is thought change we to part down We just the are trend. quite contract. when curve. to the the TBA the not Fed pricing headed took hedge of TY it was the XX-year like shown point we flattening XX-year that of the it the was whatever our used so We've like on million put and market leverage, future a about got be XXX flattened the was

those our the parts of of X negative and not in curve. the So, quite the the that have in mostly years any Below long end were curve. on swap $X place fact we the satisfaction slight billion X getting between mark-to-markets over were agreements, we on show we

our position swaption, swaps that were weighted to X.XX. August. we And Our is then average finally fix on added and swaption pay pay weighted in all those our below rate average fixes

perfect Fed done As we up on at the swap. so TY of like seem course some to We even X-year seen But some we've of of well. involves on had curve. these cases options entered both the extremely And the rally and changed opportunity our have well curve, point, the the have into form pay of done the lower have beyond to a on the X-year year I other those market hedges. plan one mentioned, positions. of our the that at the belly We priced curve a for interesting in off fixed two enter as is an basically a end to then whereby to put levels, into lead quarter this the the swaption the part of

And so frankly hedge. of one long in time of yield period that has an where faced our been need and and the of us we've all the a the things challenge the we've in been curve upward to it's for fact been slope peers

has are above So curve at levels been the realized the what that or or hedges of paying expense. recently, of year not current added And to fixed mean, we forward like, funding up our does out do meant either the interest which levels. they in at that all on and shorts swap closed dollar done cases, and the to and all these tend money we're entering our these in until

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receive Fed it that’s may that Our would prospect higher. go three LIBOR a XXX, likely And is our case rate in month XXX. which and fix there's three month in swaps have hike and LIBOR. the December Today, X.XX%, X.XX% of the of rate

for at contracts is out rate for dollar of X.XXX%. rate a this XXXX, of euro year the strike X.XX which had December money. Our contract the But least is that for

So, is swaps, our blended and based Euro XXXX for X.XX%. dollars rate on the the

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end So to in about the other takes If LIBOR Fed LIBOR points, price. the high Fed right point it about effective euro year another in mid relationship XXXs, it’s put hike in to would Fed if three the is month and now which funds get XX the would swap were our three our position to the basis is positions XXX funds closer month between at cushions to dollar XX, And words, XXX. that about hold of basis and place.

our we XXX% don’t Now, a liabilities. hedge of

would forth swaps all the funding of inclusive are TBA our of about about euro so and We swaption XX%. using hedges and XX% various of our dollars, and

a not they’re at side. first XXX%, it’s where at going while in but So, help actually hedges -- these expense interest point a least the actually have gone the time us for the on

Fed in kind that’s has on know, just can today, in you doing But earnings. yet for I all mentioned, there. rates our pressure I not apologized published expense but you economic this as information interest been it’s future. we some in on the and As and the puts We assets. some our raising so give in our yield our And prospects economic of I available we're it Q

first basis year the months a has the the XXXX points moved nine first points for from to XXX of basis this for year. of XXX For nine months the

XX So, it’s gone up points. by basis

basis XXX on a in assets XX highly so moved from increase XXX average to the probably of mix change coupons. basis basis yield points, Our reflects the the it’s point points has which MBS assets

points XX asset the it given declined we’re NIM the we by unlike the hedges net, back that help a going of Fed is forward least based going that risk, is talked the for really has lot change, well makes up that what how occur. that about us us we rates think And are So, we’ve had what high that have to start fact in the But on our what But mean also just going shape to reflecting teen. the question our taking been prepayment we typically to seasonal the some on actually positioning and to prudent forward, -- that see. at the margin they extent hedged. of we’re means interest now basically has that that’s net basis slowdown

reform. for senate but has the flattening some the mentioned been Thursday passed As it did of had night, we the that budget Yesterday, late. tax somewhat Last potential resolution way as for time, changed House that a well. which so cleared

So, actually now a tax potential meaningful what similar to for is be could we’ll knows potential there there is the but get, reform, which the economy.

As two growth acceleration quarters straight the over the in economy, we mentioned, we’ve of some seen X%. of growth

late of very, been data economic very has the strong. of All

starts from up as that earnings to to it be asset our well. possible creep would the that higher in curve an market yields re-steep and positive perspective is both allows and that the slightly So

us. the for what we could that and but tell, positioning think offset effect this So, case, is open it's see have are going up the the of to will some appropriate we would time that We environment for to finally don’t Operator, We see be Fed. the that our hedges the know we're questions. That's are call done with much benefit for presentation. it. can glad pretty

Operator

Christopher our the of Ladenburg comes Instructions] from Thalmann. first [Operator from Nolan question And line

begin may sir. You

Christopher Nolan

Quick Is the question on if money? in to Fed correct your that go the tightens December and futures start correct? comments. say that the really Is euro/dollar it to

Robert Cauley

the where X.X about breakeven than will But be those three Fed the Fed hikes the December whether average given assuming pretty LIBOR. year course year next Not get would X.XXX% one, one index is out would do for much is hikes or still it's quite, it's hikes know don’t X.X would is closer. hike, off getting that of actually with the the money. be is underlying what It of strike but money two that none. next more and weighted we We in

George Haas

other quarterly Also to effect, our have pretty some get XXX% curve, not front say turned many we way. starts dramatically the hikes worth to taken term hike, on take to end of something increase or noting that positions. not if well hedged steps funding normal we longer it the are the December pace goes we before and a doesn’t very but it So, of it in of

a put we XXXs. a that lower So million at I on think of basis don’t struck year repo $XXX worth know, one in it sort rate the in few blended was in of lows the I the

those that we've still been not into January. by is December a rates The the XXX so XXX% us to also XXX should and and we've in money and hike the over. locking rolling be area the of So taking priced of kind been advantage in well in which take

Christopher Nolan

then guys equity slowed looks you your quarter. Is down And issuance this it that correct? like really

George Haas

Yes.

Robert Cauley

capital fact the Yes, price stock of most then we was one very the not active a This things. just tightening peers pools. of were up in had premiums the some as fact the secondly in on pay of trading put high pressure through the a product quarter of very mortgage in book base, was some and was our at specified to two lot that that raising you know for and value premium

combination -- so. So, necessarily opportunities book do out the a it's due the just really good on kind of in price modest stock to and was to think of We just peers. our not of it attractive to investment crowding premium time the

George Haas

also in assets different since relatively widening than in stock quarter we a -- holds prices I trading end quarter. that well creates and then mortgage we’ve dynamic saw the We've a third in today. that seen think If especially our

Christopher Nolan

Should fair to expect a on we amount have liquidity of cash deployed? that sheet. the balance You be

Robert Cauley

affect Not it in just would be purchases security typically modestly above necessarily, keep it. timing, like that unsettled -- might we the just can where

do reflective today that of not we there capital reach is September capital XX. eminent raising, is not, would have not as to balance new investments unless of The much I raising. into So, cash too

Christopher Nolan

XX-year in XX-year question, your decreasing your exposure short. comments you dictated to Final you that futures and going TBA were

the you fair to part that it steeper yield a year the in for curve? sort is expecting So, XX of say curve

Robert Cauley

ago week a tightening or very Those shorts had the curve. of Well, mortgages we are same happen, we did getting talk about at two such owned flattening the -- [indiscernible] pronounced time. and so I don't were people a

So, that it way, the continue sense we’re a that duration shorting to curve. magnitude is -- impact X% And it to have TBAs, coupon, to of which really seems pretty just didn’t long assets. hedge make point by the that the shorting in we're

to the to market you the to with X% the the around extent and other year turned mortgage would meaningfully So, coupled expect it XX factor tightening. extent that been had went that way,

thought quite very, was the the effective of volatility curve and belly and was just the as was into The most out the strong had low sensitive instrument pricing Fed also led to is right. of curve Fed, middle swaptions. long-term market the rallying it expectations we The the we and more So, September. was very early the belly into of entered the rally some hedges curve

into. an just to was get that so trade And easy

effective hedges at So more time. they just seem be to the

George Haas

I in just chime if could Yes, on that.

we think getting our coming what low the was, down as in were rates -- saw X%, I gets convexity the that pretty portfolio was towards bad.

those assets. of we we a sensitive So, I mentioned IOs, have some of have jumble lot prepaid

So, of want if X%, psychological in. be notes future treasury necessary where to not of barrier sort to it the rates were breakthrough hedging is with

tightening volatility is very was third the into So, the -- crazy into low. like quarter, mortgage

of or of more was bit product good exposure little MBS so maybe buy So was treasury low, [indiscernible] function wanted our really that a out was basis hedges. very into were One, treasury where and by shift a it product reduced getting we back back opportunity to a MBS to -- then more was our we back. thought that really hedges anything. than

also So, into more convexity hedges hedges. just to purchase expect would, based we year into we portfolio the more straight rationing to would X improve us of allow bit as would a selloff opposed a And X rally, the a conditional convexity hedges year -- now bought we through portfolio have of option a but little positive and as swaptions. or the of that then underperform because MBS we

Robert Cauley

increasing money of in the they their durations could increasing And the of -- from as out position an at were so they go relatively too sort were off. to of sold low sort being where rate

Operator

Our next David the comes from line Instructions] question of JonesTrading. [Operator you. Thank Walrod from

You may begin.

David Walrod

second quarter, quarter? the the that capital of quarter. was wasn’t of raising in was You in the capital there quarter the in that it third hangover the deployment from third second a was that quite bit or lot but done there a raised earnings or Was any drag leftover realized mentioned in

Robert Cauley

downward Yes, but month. loaded. that effects typically only There pressure, basically. is capital so case was and the June. for of especially was lasts Most that was But back in it May slight July raising that it

David Walrod

know this little results speed your then to think impact said quantify bit. of quarter you you down, move you I uptick on backed the in that And up ticked speeds? but the have a attempted

Robert Cauley

with, slightly we the last million don’t most interest we a as And the probably terms that and X.X because premium outstanding. about under $X directly you quarter premium shares number down and value million it's into in amortize about XX pay at the it a option, be one above law income. of million Well, was have fair we suite the know, call they'll

increase, X% we in impact. expect But on definitely or so X% hit modest And September the year-to-date I don't early quarter. had as some as do -- low slightly So in it said, forget, rates to this X.XX% the that I've in reverse close. we

high So in watermark the I would for the so to well, speeds structure and the past the that be expect year.

methodology the our using premium so And peaked even amortization for year. probably was

George Haas

hold. moved costing or than years to bullish And the XXX the had going recent the also IO seems part of which the slowdown have or we base has speeds pretty are next XX-year in expect portfolio rate especially on in X a we've the treasury -- the the to going are are in see been now was rates One, over our in we We're would particularly as we've season or more nature where of just of into like seasonal book. more it terms the levels of downs levels mortgage -- been pay -- at previously and case. speeds declines above just very X so pronounced months X has

Operator

from Ladenburg have question Mr. And Thalmann. the line from Nolan we Christopher of follow-up a

may You begin, sir.

Christopher Nolan

Dave answered question. my Actually, just

much. very you thank So,

Robert Cauley

you thank Chris, Hi,

Operator

for showing I'm closing any remarks. like questions to would now this no I Cauley And time. at call the back Mr. further Robert turn to

Robert Cauley

later at extent I call questions office. the the To any questions, XXX-XXX-XXXX. otherwise end we and to you. free and to in any has to the Operator. the listen to anybody you Thank you, they of don’t feel they to the to call forward is questions speaking always pop Thank us take have number look The willing reply live up just the or year. listen

Operator

your participation And conference. have Everyone conclude disconnect. a thank program. gentlemen, great all in the does and may you Ladies for day. today's This you

Orchid Island Capital (ORC) 27 Oct 172017 Q3 Earnings call transcript