Orchid Island Capital, Inc. · NYSE:ORC
Orchid Island Capital — Investor Day (February 2015)
53 slides from Orchid Island Capital's investor day presentation, Feb 4, 2015
Slide 1: Analyst Day - February 2015
<-ORGHID!SLAND Analyst Day - February 2015
Slide 2: Disclaimers
Disclaimers FORWARD-LOOKING INFORMATION This presentation contains forward-looking statements and information. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by,
Slide 3: Business Model and Background
Business Model and Background 3
Slide 4: Overview
Overview Topic Point Slide Management Experience 5 Independent Directors 6 Challenges of the Traditional Model 7 Orchid Business Model 8 Capital Allocation Process 9 Security Selection and Considerations 10 - 15 Risk Mitigation 16 4
Slide 5: Experienced Management
Experienced Management Robert E. Cauley G. Hunter Haas, IV Jerry Sintes Chief Executive Officer, President and Chief Financial Officer, Secretary, Chief Vice President, Controller and Treasurer Chairman of the Board Investment Officer and Director Co-Founded Bimini 14 years of industry experience 27
Slide 6: Independent Directors
Independent Directors John B. Van Heuvelen W. Coleman Bitting Frank P. Filipps Ava L. Parker Position at Orchid: Director; Position at Orchid: Independent Position at Orchid: Independent Position at Orchid: Independent audit committee chair and director, compensation committee Director, member of au
Slide 7: Challenges of the Traditional Model
Challenges of the Traditional Model The traditional REIT investment model: Repo-funded pass-through securities Holders of premium priced Agency RMBS are Equity Issuances vs. Agency Prices(1) $ in 000s Dollars ($) Price Risk vulnerable to losses if prepayments rise 3,000 110 unexpectedly Agency Mor
Slide 8: The Orchid Island Business Model
The Orchid Island Business Model Model Overview Capital allocated to two sub-portfolios 1 A levered pass-through portfolio utilizing funding hedges 2 A structured securities portfolio The two sub-portfolios act as hedges for one another – enhancing book value stability Model Benefits Same expe
Slide 9: Capital Allocation Process
Capital Allocation Process Management seeks a certain rate profile based on market conditions and expectations Over time, market Portfolio is constructed – conditions or blending structured managements securities and hedged pass-through sub- expectations may portfolios to achieve the change desired
Slide 10: Creating the Desired Rate Profile
Creating the Desired Rate Profile Asset Selection Book Value Stability Embedded Leverage Structured Agency RMBS typically The combined portfolios exhibit far Strategy does not require as exhibit different sensitivity to less interest rate sensitivity and much explicit leverage, yet has a inter
Slide 11: Security Selection – Pass Through Portfolio
Security Selection – Pass Through Portfolio 1 Security Attribute 2 Examples 3 Risk Considerations Security Type of MBS, maturity, Fixed or ARM, 30 year, 15 Duration and convexity – Characteristics coupon, age year, premium or discount, extension risk new vs. seasoned Form of call protection
Slide 12: Specified Pool Payups (Ticks)
Wells Fargo Production Specified Pool Payups 140.00 120.00 100.00 80.00 Specified Pool Payups (Ticks) 60.00 40.00 20.00 - Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 (20.00) (40.00) FN 85k M
Slide 13: Security Selection – Structured Securities Portfolio
Security Selection – Structured Securities Portfolio 1 Security Attribute 2 Examples 3 Risk Considerations Security Type of security and IO vs IIO; PAC, XPAC, Interest rate duration, Characteristics structure Sequential, PT, Excess spread duration, convexity Servicing IO’s and IIO’s are leve
Slide 14: Security Holding Period Considerations
Security Holding Period Considerations A significant component of the security selection process is the decision of how long to own an asset Security Specific Factors to Consider: Prepayment models base prepayment projections on several variables. Prepayment behavior drives income generation and pr
Slide 15: Security Holding Period Considerations
Security Holding Period Considerations Portfolio specific factors result from the risk management function and the desire to maintain stable book value Portfolio Specific Factors to Consider: The pay-ups for call protection can be very volatile and materially alter the convexity of a security. Thi
Slide 16: Risk Monitoring Process
Risk Monitoring Process The primary risk monitored is the expected impact on our book value of various interest rate shocks We use “Yield Book” to run the shocks and test the sensitivity of the portfolio to instantaneous parallel shifts of the entire term structure of rates. -Up and down scenarios
Slide 17: Tax and Income Recognition
Tax and Income Recognition 17
Slide 18: Overview
Overview Topic Point Slide Income Recognition: GAAP 19 - 28 Income Recognition: Tax 29 - 35 18
Slide 19: Income Recognition: GAAP
Income Recognition: GAAP 19
Slide 20: Sample IO – Buy Trade Ticket
Sample IO – Buy Trade Ticket 20
Slide 21: Sample IO – Yield Assumptions
Sample IO – Yield Assumptions 21
Slide 22: Sample IO – Projected Cash Flows
Sample IO – Projected Cash Flows 22
Slide 23: IO Accounting – GAAP
IO Accounting – GAAP Speed Assumption – Matches Realized Speeds Speed Assumption Speed Assumption Speed Assumption High Matches Realized Low Speed Assumption 21 CPR 18 CPR 15 CPR Yield Assumption 2.835% 6.481% 10.059% End of Quarter Mark to Payment Income Premium Carrying Remaining Market Cashflow M
Slide 24: IO Accounting – GAAP
IO Accounting – GAAP Speed Assumption – Above Realized Speeds Speed Assumption Speed Assumption Speed Assumption High Matches Realized Low Speed Assumption 21 CPR 18 CPR 15 CPR Yield Assumption 2.835% 6.481% 10.059% End of Quarter Mark to Payment Income Premium Carrying Remaining Market Cashflow Mar
Slide 25: IO Accounting – GAAP
IO Accounting – GAAP Speed Assumption – Below Realized Speeds Speed Assumption Speed Assumption Speed Assumption High Matches Realized Low Speed Assumption 21 CPR 18 CPR 15 CPR Yield Assumption 2.835% 6.481% 10.059% End of Quarter Mark to Payment Income Premium Carrying Remaining Market Cashflow Mar
Slide 26: Financial Reporting – Press Release
Financial Reporting – Press Release 26
Slide 27: Financial Reporting – Press Release
Financial Reporting – Press Release * * As of September 30, 2014 27
Slide 28: Financial Reporting – Form 10-Q
Financial Reporting – Form 10-Q 28
Slide 29: Income Recognition: Tax
Income Recognition: Tax 29
Slide 30: Sample Security – Pricing Assumptions
Sample Security – Pricing Assumptions 30
Slide 31: Sample Security – Projected Notional Balance at Pricing Date
Sample Security – Projected Notional Balance at Pricing Date 31
Slide 32: Adjusted Issue Price (AIP)
Adjusted Issue Price (AIP) $600,000,000 Security: FNS 404 2 $500,000,000 Pricing Speed: 250 PSA Issue Price: $27.00 $400,000,000 AIP $300,000,000 $200,000,000 $100,000,000 $- 0 60 120 180 240 300 360 Months Since Issue 32
Slide 33: IO Income Table – Tax
IO Income Table – Tax Original Issue Discount (OID) Pricing Yield Assumption 1.2% End of Quarter Remaining Mark to Adjusted OID Income Carrying Market Payment Date Cashflow Notional Market Issue Price Recorded Value Value Balance Gain/(Loss) Current OID and Initial Values $ 112,222,995 Market Value:
Slide 34: IO Income Table – Tax
IO Income Table – Tax Market Premium Pricing Yield Assumption 1.2% End of Quarter Market Taxable Remaining Remaining Mark to Adjusted OID Income Carrying Market Payment Date Cashflow Premium Income Market Notional Market Issue Price Recorded Value Value Amortization Recorded Premium Balance Gain/(Lo
Slide 35: IO Income Table – Tax
IO Income Table – Tax Market Discount Pricing Yield Assumption 1.2% End of Quarter Market Taxable Remaining Remaining Mark to Adjusted OID Income Carrying Market Payment Date Cashflow Discount Income Market Notional Market Issue Price Recorded Value Value Amortization Recorded Dsicount Balance Gain/
Slide 36: Hedging with Eurodollar Futures
Hedging with Eurodollar Futures 36
Slide 37: Overview
Overview Topic Point Slide Repo Funding 38 Hedge Options 39 - 40 Swaps 41 - 44 Eurodollar Futures 45 - 49 Total Return Scenarios 50 - 53 37
Slide 38: REITs and Repo
REITs and Repo Orchid and many other mortgage REITs rely almost exclusively on repo funding as their primary vehicle for leveraging equity or long term debt capital Example: ORC raises $100 million net equity capital Use of Proceeds: $600 million 5 year MBS assets -Assume purchase price of 100-00,
Slide 39: Common Hedge Alternatives
Common Hedge Alternatives Short Treasuries The most common duration Short Treasury Futures hedge for mortgage REITs is the pay fixed swap, however, Pay Fixed Swap shorting a series of Eurodollar futures yields Short Eurodollar Futures virtually identical economic Structured MBS Products results with
Slide 40: Orchid Island Tax Hedges
Orchid Island Tax Hedges Orchid Island designates all derivative financial instruments as hedges for federal income tax reporting purposes. Derivative financial instruments are not good REIT assets for the purposes of the income or asset tests. Failure to designate derivative instruments as hedg
Slide 41: Hedging with Swaps
Hedging with Swaps Hypothetical Portfolio Plus $570 million Pay Fixed Swap Funding Hedge IRS regulations generally prohibit REITs from hedging MBS assets Add $570 million pay fixed swap with a fixed rate of 1.35% vs. receiving floating 3-Month LIBOR Swap DV01 for $570 million notional balance
Slide 42: Swap Exhibit
Swap Exhibit 1 Source: Bloomberg 42
Slide 43: Swap Exhibit
Swap Exhibit 2 Source: Bloomberg 43
Slide 44: Swaps Table
Swaps Table Source: Bloomberg 44
Slide 45: Eurodollar Introduction
Eurodollar Introduction Contract Description and Hedging Each contract is a traded future on a 1 or 3 month LIBOR denominated deposit rate -For simplicity this presentation focuses on the quarterly contracts which cash settle on each March, June, September and December At the settlement date the
Slide 46: Eurodollar Introduction (Continued)
Eurodollar Introduction …Continued Eurodollar futures trade in $1 million dollar notional values per contract -To replicate the $570 million swap hedge the Company would sell-short 570 contracts for each sequential quarterly expiry over the next 20 quarters in order to achieve the desired 5 year h
Slide 47: Eurodollar Exhibit
Eurodollar Exhibit 1 Illustrative Eurodollar Position Long / Notional Current Implied Cumulative + 100 BP + 100 BP Initial Margin Initial Margin Contract Short Position Balance Price Forward Forward Rate Shock Price Shock P&L Per Contract Requirement EDH5 Comdty Short -570 (570,000,000) 99.73 0.27 0
Slide 48: Eurodollar Exhibit 2: Market Depth
Eurodollar Exhibit 2: Market Depth Source: Bloomberg 48
Slide 49: Dec Eurodollar Contract – Yield History
Dec 17 Eurodollar Contract – Yield History Source: Bloomberg 49
Slide 50: Total Rate of Return Scenarios
Total Rate of Return Scenarios 50
Slide 51: Taxable Income and Book Value
Taxable Income and Book Value Scenario A: LIBOR Remains at 25bps (Repo at 35bps) for 5 Years Beginning BV $10 / Share Swap Hedge Eurodollar Hedge MBS Repo Interest Expense Taxable Mark to Ending Annual Tot Interest Expense Taxable Mark to Ending Annualized Share Count Interest Interest Hedge Adjustm
Slide 52: Taxable Income and Book Value
Taxable Income and Book Value Scenario B: Forward Curve Exactly Realized Forward Repo / LIBOR Spread 10bps - Beginning BV $10 / Share Swap Hedge Eurodollar Hedge MBS Repo Interest Expense Taxable Mark to Ending Annual Tot Interest Expense Taxable Mark to Ending Annualized Share Count Interest Intere
Slide 53: Taxable Income and Book Value
Taxable Income and Book Value Scenario C: Realized +100bps Instantaneous Parallel Curve Shift - Repo / LIBOR Spread 10bps - Beginning BV $10 / Share Swap Hedge Eurodollar Hedge MBS Repo Interest Expense Taxable Mark to Ending Annual Tot Interest Expense Taxable Mark to Ending Annualized Share Count