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Crexus Investment Corp. Message Board

mreitcmbs 5 posts  |  Last Activity: Apr 13, 2016 7:19 AM Member since: Nov 30, 2011
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  • Reply to

    BV 5.54 -vs- $1.60 price

    by lenndj62 Apr 6, 2016 12:10 PM
    mreitcmbs mreitcmbs Apr 13, 2016 7:19 AM Flag

    If management can sell ORC stock at a premium they will. On their conference calls, they always said they would ideally get their equity base to somewhere between 500 million and 1 billion. The smaller the equity base the more difficult it is to get economies of scale for the fixed costs of running the business and less likely creditors will give them favorable terms.

    I think in terms of valuation, BMNM has to have a much larger equity base to get it's "full valuation". While I agree the fundamentals support about a $3.00 share price, the fact the company is so small, it flies under the radar of most investors and has virtually zero institutional support. If they equity can get to the 150-200 million dollar mark at some point, I think it would get more fairly valued.

  • Reply to

    BV 5.54 -vs- $1.60 price

    by lenndj62 Apr 6, 2016 12:10 PM
    mreitcmbs mreitcmbs Apr 12, 2016 7:54 AM Flag

    The key term here is: Potential. While a higher multiple should be placed on the management fee earnings, I don't see them able to grow the asset base for the foreseeable future given the discount ORC stock trades at. Added to the fact that most mREITs trade at a sizable discount, we are in a slowly rising interest rate environment for potentially several years. I don't see the pressure on mREITs stock prices abating therefore this is just as much an unknown as valuing their RMBS portfolio above zero. I'm not trying to paint a bleak picture here, but I'm only placing value on known quantities.

    At some point, mREITs may trade above book value as their historical norm shows, but to get there I see a lot of pain in book value. The underlying RMBS trades at a premium and I don't see how, on average, these stocks can trade there again, unless its an attempt by investors at chasing high yield. The fundamentals simply do not support those valuations given the inherent risk these types of companies have because they pay a premium for an asset that pays out at par.

  • Reply to

    BV 5.54 -vs- $1.60 price

    by lenndj62 Apr 6, 2016 12:10 PM
    mreitcmbs mreitcmbs Apr 9, 2016 7:58 PM Flag

    No, the GAAP book value is 5.54 and the gain in book value is permanent. The only way the book value will decrease now is if losses are sustained against their portfolio or their projections on recoveries of their tax deferred asset change. That 5+ dollars gain in book value from the tax deferred asset is really just a guess by management on how much they can recover before they start to expire. We don't know if they were aggressive or conservative on their estimate as they haven't provided any projections.

  • Reply to

    BV 5.54 -vs- $1.60 price

    by lenndj62 Apr 6, 2016 12:10 PM
    mreitcmbs mreitcmbs Apr 9, 2016 2:05 PM Flag

    An off the cuff valuation....

    Because of the small size of their RMBS portfolio and the expenses associated with managing it (i.e. G&A), I would value place a zero value on this until it is larger.

    As for the management fees of about 4 million and dividends of about 2.1 for the 1.3 million shares of ORC owned, that provides a cashflow of 6.1 million across roughly 12.7 million shares or earnings of 48 cents for the next year (I'm stripping out the noise of the portfolio valuation as that's fairly volatile and I'm assuming it nets zero change in earnings over the next year).

    The next part is more of an opinion on what type of multiple should be assigned to those earnings based on the relative risk, but for the sake of simplicity, the real question is what would someone be willing to pay for a mortgage REIT that doesn't pay a dividend? Most of them currently trade at around a 6x multiple of earnings - but again, they pay a dividend. So if we present value the income stream between 5-10 years with an opportunity cost of 15% (generally around what mREITS have been trading) we come up with a valuation somewhere between $1.67 and $2.47.

    However, the above assumes nothing changes with the portfolio. If they are able to reinvest the 6 million a year into additional RMBS, the valuation will go up over time. Conversely, we have a taper tantrum like in Q2 of 2013, the portfolio could get crushed.

  • Reply to

    BV 5.54 -vs- $1.60 price

    by lenndj62 Apr 6, 2016 12:10 PM
    mreitcmbs mreitcmbs Apr 7, 2016 8:20 AM Flag

    The flaw in the logic above is that book value between the two companies is equal. In the case of ORC the book value comes from RMBS holdings which generate income whereas the stated book value of BMNM is over 90% a tax deferred asset due to the recent corporate restructuring from a REIT to a C-Corp which allows BMNM to use the 260+ million in net operating losses from the defunct subsidiary MORTCO. Essentially the $5.54 is the projected realizable value of the deferred tax asset over the course of the next several years until the net operating losses start to expire.

    So in essence, the value of BMNM is more closely tied to the following:

    1) Valuation of Bimini Advisors and its ability to generate meaningful fee income from managing ORC.
    2) The value of it's own RMBS portfolio and the income it generates Now this is where the tax deferred asset comes into play, it allows BMNM (as a C-Corp) to retain all of its earnings and pay virtually no taxes for several years until the net operating losses are completely used up. This part of the valuation will grow with each quarter provided the losses on the existing RMBS portfolio are less than the reinvested earnings.
    3) Valuation of the ORC shares (currently around 1.3 million shares) that BMNM owns.

    My expectation is that over the next several years you will see an accretion of the stock price closer to the stated book value. Having said that - an investment in this stock is a marathon, not a 40 yard dash.

    Disclosure: Long 100k shares