Orchid Island Capital Paid A 16.2% Annualized Dividend For Q4, But Lost Book Value
- Orchid Island Capital pays a juicy 16.2% annual dividend. The current monthly dividend is $0.18 per common share.
- The book value fell from $13.27 on September 30, 2014 to $13.05 on December 31, 2014 (-$0.22 or -1.66%).
- For FY2014 the book value declined from $13.40 per common share on December 31, 2013 to $13.05 per common share on December 31, 2014 (-2.61%).
- Given the 16.2% dividend, shareholders still got a great return on their investment.
Orchid Island Capital Inc. (NYSE:ORC ) is a mortgage REIT. It invests in traditional pass through Agency RMBS and structured Agency RMBS such as CMOs (collateralized mortgage obligations), IOs (interest only securities), IIOs (inverse interest only securities), POs (principal only securities), and other types of structured Agency RMBS. ORC is externally managed by Bimini Advisors LLC, a wholly-owned subsidiary of Bimini Capital Management Inc. (OTCQB:BMNM ). With a 16.2% annual dividend, this should be interesting to many income investors. ORC was founded in 2010. It IPO'd February 21, 2013 for $15 per share.
From a strictly book value and dividend standpoint, ORC lost -$0.22 per share in book value in Q4 2014 (from $13.27 per share on September 30, 2014 to $13.05 per share on December 31, 2014). For FY2014 ORC lost -$0.35 per share in book value (from $13.40 on December 31, 2013). The above were book value losses of -1.66% and -2.61% respectively. Given that the dividend paid investors about 16.12% for FY2014 (+$2.16 per share), investors got a total return of about 13.51%. Most income investors would be happy with this return.
The above result seems great; and perhaps it is when you consider the terrible FY2013 most mortgage REITs experienced. However, when you look at the book value decrease from the IPO date to December 31, 2014, the nearly -$2 decrease is disturbing. It may pay to look at the portfolio. The December 31, 2014 portfolio is below.
This at first appears to be much improved from the portfolio of September 30, 2014 seen below .
However, when you observe that the number of shares outstanding increased from 13,024,449 common shares on September 30, 2014 to 16,699,656 common shares on December 31, 2014, the result is no so good. The total mortgage assets fair value increased +31.76%. The number of common shares outstanding increased +28.22%. This is only slightly less than the mortgage assets fair value gain. Plus other losses have to be subtracted out of the mortgage assets fair value gains.
The hedging cost for example is one. The notional value of the hedges as of December 31, 2014 was $1.135B for total mortgage assets fair value of about $1.549B. ORC does not appear to be overly hedged. However, if it still lost book value when its major holding of 30 year fixed rate Agency RMBS with an average weighted coupon of 4.56% should have gained about 1%. one has to question the management a little bit. The leverage at the end of Q3 2014 was 7.3x (or excluding certain uncompleted transactions it was 6.3x). This combined with the gain in value of the main RMBS holding should have led to a good book value gain for the company.
The portfolio CPR (constant prepayment rate) of 9.81% as of September 30, 2014 did go up to 10.53% as of December 31, 2014. However, this is not enough of a change to explain the difference. Rather the hedging appears to be a more likely culprit. The following risk measures tables indicate ORC's expected book value changes given certain interest rate movements.
As investors can see, the hedging is set up to lose book value whether the interest rates goes up or down. It is just set up to lose more when the interest rates go up. This makes me worry significantly about ORC.
Many other mortgage REITs gain in book value when interest rates fall. For example, American Capital Agency Corp. (NASDAQ:AGNC ) had already gained
$0.20 (+0.78%) per common share through November 30, 2014; and it almost surely ended Q4 2014 with a higher gain than that. With its 12.1% dividend, its return will be about equal to ORC's for Q4 2014. However, I (and likely other investors) am comforted by the fact that its hedging has allowed it to gain book value as interest rates have declined. The fact that ORC models that it won't is discouraging; and it makes me wonder how well the modeling will work when interest rates go up. The more predictable nature of AGNC makes me like it better.
Another factor investors should take into account is the overall book value losses of almost $2 per common share since the IPO in February 2013. These losses were mitigated to a large degree by the fact that ORC has been growing its number of shares outstanding dramatically. The number at IPO was 2,360,000 shares. The number as of December 31, 2013 was 3,341,665 shares (a 41.6% increase in less than a year). The number as of December 31, 2014 was 16,699,656 common shares (an approximate +400% increase). You can hide a lot of mistakes when you are increasing equity at this rate. In other words, new equity will not have lost money yet. Keep in mind that book value decreased in FY2014 by -$0.35 per common share. ORC did yield an approximate 13.5% total economic return for FY2014; but it does not give me as warm and fuzzy a feeling as AGNC.
Keep in mind the 10 year US Treasury Note yield decreased over 2014 from 3.03% on December 31, 2013 to 2.17% on December 31, 2014 (-86 bps). If ORC's management chooses to lose book value during a relatively constantly decreasing interest rate environment, that diminishes my faith in them.
AGNC's management seems to be reading the market better; and it seems more likely to do the right thing in the future. Given that it is viewed as a Blue Chip mortgage REIT, investors may want to give it the nod over ORC at this point. Still you can't squawk too much about a 13.5% total economic return by ORC for 2014.
The two year chart of ORC provides some technical direction for a trade/investment.
The chart shows a weakening uptrend, if that. ORC has been consolidating for the last six months. It is trading at $13.32 as of the close on January 20, 2015. This is slightly above the book value of $13.05 per common share as of December 31, 2014.
When many other Agency mortgage REITs are trading at a discount to book value, I prefer ones like AGNC that are trading at large discounts to book value. AGNC's book value was $25.74 as of November 30, 2014. Its stock price as of the close on January 20, 2015 was $21.47. It would have to rise +$4.27 (almost +20%) per common share just to equal its book value of November 30, 2014; and that book value has likely risen since that date. When AGNC has a better management team, I can't justify buying ORC over AGNC. Although some people may wish to keep holding ORC, I would trade it in on AGNC. AGNC is trading at a huge discount to book value; and it is being guided by mortgage REIT guru, Gary Kain.
NOTE: Some of the fundamental fiscal data above is from Yahoo Finance.
Good Luck Trading/Investing.
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