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Edited Transcript of BMNM earnings conference call or presentation 8-Nov-19 3:00pm GMT

Q3 2019 Bimini Capital Management Inc Earnings Call

VERO BEACH Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Bimini Capital Management Inc earnings conference call or presentation Friday, November 8, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* George Hunter Haas

Bimini Capital Management, Inc. - President, CIO, CFO & Treasurer

* Robert E. Cauley

Bimini Capital Management, Inc. - Chairman, CEO & Secretary

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Conference Call Participants

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* Gary Christopher Ribe

Accretive Wealth Partners, LLC - Managing Partner, CIO & Chief Compliance Officer

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Presentation

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Operator [1]

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Good morning, and welcome to the Third Quarter 2019 Earnings Conference Call for Bimini Capital Management. This call is being recorded today, November 8, 2019.

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 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 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 other factors affecting forward-looking statements.

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

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Robert E. Cauley, Bimini Capital Management, Inc. - Chairman, CEO & Secretary [2]

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Thank you, operator. The third quarter of 2019 proved to be a very turbulent period for the markets, and to put the quarter in context, the continuation of the very volatile markets we've experienced since the fourth quarter of 2018. As the global economy continued its slowdown that started in 2018 and the U.S. manufacturing segment continued to cool, the markets expected the Federal Reserve would need to ease monetary policy in 2019.

Contributing to the slowdown both globally and domestically was the trade war between the U.S. and China. The trade war was meaningfully escalated when on August 1, 2019, the administration announced substantial increases to both the dollar amount of goods that would be subject to tariffs and the size of the tariffs themselves. The new tariffs were to go into effect on September 1. The markets reacted violently and several key market indicators reached new extreme levels, such as the yield on the German 10-year bond, the 30-year U.S. Treasury yield and many others. These extreme levels were reached in late August and early September before the market once again pivoted in reverse course as the yield on the 10-year U.S. Treasury note increased 44 basis points in a mere 8 trading days. Not surprisingly, the markets would reverse a few more times as one development after another buffeted the market, including a major attack on Saudi oil fields, the possible impeachment of President Trump, a major disruption in the overnight funding markets in mid-September, and finally, in October, potential end to the Brexit crisis and a tentative trade deal between the U.S. and China. And in response to these developments, the Federal Reserve lowered the Fed funds target range 3x on July 31, September 18, and finally, last week, October 30. At the moment, it appears the markets have calmed, and the Fed has stated they are done with their "mid-course correction" to monetary policy.

The Agency MBS market total return for the third quarter was 1.4%, although the return was negative 0.2% versus equivalent duration swaps and LIBOR. This is per data provided by Bank of America Merrill Lynch. The interest rates declining to near all-time lows, prepayment activity accelerated and is expected to continue to remain very high. Prepayment activity during the current cycle is approaching levels not seen since the summer of 2003, when prepayment activity reached the highest levels ever in terms of the MBA refinancing index and peak speeds on current coupon cohorts prepaid at 60 to 70 CPR. The MBA refinancing index peaked at approximately 22,755 on August 16 of 2019, barely more than 25% of the 10,000 level reached in 2003, but refinancing activity was not materially below 2003 levels. The spread of the current coupon 30-year mortgage to the 10-year U.S. Treasury reached 98.07 basis points on October 27, 2019 (sic) [August 27, 2019] and 102.47 basis points on October 22 of 2019. This is the highest spread since early 2012. With prepayment activity elevated and the continued poor quality of generic, TBA collateral, specified pools continue to outperform. Agency MBS asset performance trailed out of other non-Agency RMBS structured products as well as investment-grade corporates. High-yield corporates generated returns similar to Agency MBS of 1.2% outright and negative 0.1% versus comparable duration swaps and LIBOR. As we entered the fourth quarter of 2019, Agency MBS performance has been very directional: with poor performance when the rates markets rally, yields fall; and positive performance when rates increase. Even with the increases in rates at the end of the third quarter, available mortgage rates are still very low by historical standards and prepayment activity is expected to remain elevated.

During the third quarter of 2019, Bimini generated a pretax loss of $0.2 million, $0.8 million post-tax. For the 9-month period ended September 30, 2019, Bimini had pretax income of $1.3 million and after-tax income of $0.3 million. Of course, owing to our available net taxable -- excuse me, available tax net operating losses, Bimini does not have to actually pay federal or state income taxes. So this income is retained and a portion of our deferred tax asset to be utilized.

With respect to the portfolio operations at Royal Palm Capital, the portfolio declined by approximately $48 million or 23% to facilitate the repurchase of 1.1 million shares in connection with our modified Dutch auction tender offer, which closed in early July. Since quarter end, we have added to the portfolio and the portfolio is back to approximately the same size as it was on June 30, 2019. Interest income for the quarter was $1.6 million, also 23% below the $2.1 million reported for the second quarter of 2018. Mark-to-market gains on Royal Palm's Agency RMBS holdings of -- were $1.0 million, which were offset by $0.5 million of mark-to-market losses on our hedge instruments, resulting in approximately $0.5 million of net mark-to-market gains on the portfolio. Combined with net interest income of a portfolio of approximately $0.6 million, Royal Palm generated a 6.0% return on invested capital. The return figure compares very favorably to the return of the MBS index versus comparable duration treasuries or swaps of negative 0.2%. The hedge positions at Royal Palm were decreased early in the quarter in proportion to the decline in the portfolio due to the tender offer. The hedges remain concentrated in the front end of the curve, inside of 2 years, and the belly of the curve via short position in treasury futures.

In response to the need to shrink the portfolio to fund the tender offer earlier this year, we had to take -- we've taken several steps to monetize nonportfolio assets and deploy the proceeds into the portfolio. In late October, Bimini closed on a loan on our office building. The proceeds of approximately $0.7 million will be deployed into the RMBS portfolio of Royal Palm. In addition, Bimini has listed for sale our second building acquired before the financial crisis as not -- and not used in our business. The company has not entered into a sales agreement with the purchaser as of this date, but if the sale is consummated, the net proceeds will also be deployed into the RMBS portfolio of Royal Palm. The property currently has a carrying value of $0.5 million.

And finally, recall in 2018, we terminated certain securitizations consummated by our former mortgage company in 2004, and it deployed most of the proceeds in the portfolio as well. Certain of these proceeds have yet to be collected as they will have to be collected through Royal Palm's federal income tax return for calendar year 2018, owing to the way the trustee reported the terminations to the internal revenue service. Those funds have yet to be received, but once they are, they too will be reinvested into the portfolio.

As mentioned above, the events of the third quarter and early fourth quarter have driven rates back to levels last seen in the aftermath of Brexit in the summer of 2016. Prepayment activity across the MBS market has been very elevated, although Royal Palm, with our MBS portfolio heavily concentrated and specified pools and the capital allocation of the pass-through portfolio just over 90% at September 30, 2019, actual realized prepayments were lower across the pass-through portfolio. The pass-through portfolio prepaid at 9.5 CPR for the third quarter of 2019 versus 9.9 CPR for the second quarter. Inclusive of our structured securities, the overall speed for the portfolio was 10.5 CPR, the same as the second quarter. However, this level of prepayment activity is still higher than speeds we realized in prior quarters.

Finally, despite of the disruptions to the repo funding markets that emerged in September, Royal Palm continues to have ample access to funding, albeit at slightly elevated levels versus benchmarks such as Fed funds or SOFR, compared to levels prior to September.

Advisory services revenue increased by 8% during the third quarter of 2019 compared to the second quarter as the equity base of Orchid Island Capital increased by approximately 11% over the quarter. The growth in Orchid's capital base was primarily a result of a follow-on offering conducted by Orchid. On August 2, 2019, Orchid Island Capital closed on an equity offering with net proceeds of approximately $44.5 million. This should increase advisory service revenues going forward. Dividends on our holdings of shares in Orchid Island Capital were unchanged for the quarter at $0.4 million.

Going forward, we anticipate the portfolio at Royal Palm will continue to grow, and when we'll report fourth quarter results, we are hopeful we will show year-over-year growth in the market value of the portfolio, this, in spite of the fact we had to shrink the portfolio by close to 25% to fund the tender offer. We will continue to position the portfolio for elevated levels of prepayment activity unless we see a material increase in rates. We assume the events that have led to the recent turmoil in the markets and the current low level of rates do not appear to be near resolution. This also reflects the fact that there are numerous forces at play: Brexit, impeachment, trade wars, global economic growth slowing, potential domestic growth slowdown and the 2020 presidential election. Resolution of all these issues over the near term seems unlikely. With respect to advisory services, revenue growth beyond what we experienced during the current quarter will depend, as always, on growth in the Orchid Island Capital base.

Before I conclude, I would like to say a few words about the trading activity in Bimini stock, specifically since the tender offer closed in early July. We loaded a graph of the trading activity in the stock since the beginning of 2018 on our website. I hope you've had a chance to see it, but if not, I can still go over it. Everything that I want to speak to is pretty self-evident, and you can look back at it after you've had a chance to and you can take my words and go from there. So I'll give everybody a second to pull the graph down, if not, I can just go over it. It's pretty straightforward.

On the chart, on the top, we show 2 things: on the red line is the rolling 90-day volume in the stock going back to the beginning of 2018, that's on the right-hand scale; and the blue line is the price of the stock, that's on the left-hand scale. Below that, we show the equity base of Orchid Island Capital as of the various reporting dates, starting with 12/31/17 through 9/30 of '19. As you can see, throughout the course of 2018, the equity base of capital was shrinking as interest rates were rising, and Orchid was experiencing slow book value decline. Looking at the top, you can see this was reflected in the price of Bimini stock, the blue line, as it slowly drifted lower, and this has really been the case with the price of Bimini stock since we did the IPO of Orchid in 2013. So for instance, when Orchid is growing, the stock price tends to drift higher, and when Orchid is declining, it tends to go down.

As you can see, the volume in the stock over the course of '18 was declining and got quite low by the end of the year. In May of 2019, we announced our modified Dutch tender offer. And as you can see, volume in the stock surged and the price rebounded to just below the bottom of the range. Now keep in mind, the red line in this graph is a 90-day rolling average, so it doesn't really change until after the tender rolls off. The tender closed on July 2. And as you can see, the price started to drift lower and has continued to drift lower, and volume in the stock has absolutely plummeted. And so the takeaway in our minds from this is that while the tender offer, by reducing the shares outstanding, will increase potential returns on equity in the future, it is taking the stock to the point where we don't even open every day. In fact, we generally open only 2 or 3 days a week. And volume is extremely low. We do have a share repurchase program in place. It was not materially effective, as many of you probably know. But I think going forward, even though we will continue to have the plan in place, the effectiveness should be materially diminished. And you'll note, in 2019, that the capital base of Orchid has been growing, which would typically be a positive for the stock. But in spite of that, the stock prices languished materially and volume has dropped. So I think our takeaway from this is that another tender offer in the near term is not likely.

That's it. Operator, with that, I'll open up the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Gary Ribe from Accretive Wealth Partners.

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Gary Christopher Ribe, Accretive Wealth Partners, LLC - Managing Partner, CIO & Chief Compliance Officer [2]

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I was just kind of curious, sort of given where everything -- where the stock is trading, if -- what is the time period if you wanted to maybe go back and try and do maybe another tender? Do you have to wait for the calendar year to roll over? Or is it 12 months?

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Robert E. Cauley, Bimini Capital Management, Inc. - Chairman, CEO & Secretary [3]

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I don't believe we have any restriction. To my knowledge, there isn't one. We certainly can verify that. But I think -- I mean, as I said, the cost benefit from us having to shrink the portfolio to the extent we did to fund it, because even though the capital base of the company is, say, $30 million or so, a lot of that is in the deferred tax asset. The actual liquid capital that can be deployed in the portfolio is much smaller, and we had to shrink by a quarter to do this. I think it's going to be -- for us, the bar is high to do another one of these in the near term. And if we did, the price would be extremely low level. And as I said, I mean the volume of the stock has really dropped precipitously. I think our [resort] for now is going to be -- go ahead.

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Gary Christopher Ribe, Accretive Wealth Partners, LLC - Managing Partner, CIO & Chief Compliance Officer [4]

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Yes. Can I ask why you need to shrink the portfolio to do that versus maybe selling a little bit of Orchid?

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Robert E. Cauley, Bimini Capital Management, Inc. - Chairman, CEO & Secretary [5]

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We could sell the Orchid stock, yes. That's definitely another option. We could do that. It's been a mixed result on the investment. I mean it's -- we've had a period of rising rates for all this period. Now that it's kind of turned around, we kind of have a more positive outlook on that stock as we do our portfolio. So I mean that's a possibility. But our focus is more on being able to deploy all available funds into the portfolio to grow it. Because we're only -- we're getting inside the 10 years before the deferred tax assets go away. And we have a long way to go in terms of portfolio growth to get to a point where we can meaningfully utilize those deferred tax assets. And I think that if we continue to do repetitive tenders, you'll increase the potential ROE in the stock, but at the same time, you're decreasing the chance that you'll actually ever utilize the deferred tax assets.

We're at a point now where it's -- we're not projecting being able to utilize all of the deferred tax assets. That's why we have a valuation allowance against the deferred tax asset. And I think if we were to have to -- for instance, even selling the Orchid stock and taking away that dividend stream, that's just inhibiting our ability to do that even more -- basically anything. Whether it's selling Orchid stock or reducing the size of the portfolio, it inhibits our ability to do that. I think we've monetized to the fullest extent possible all the nonportfolio assets. I think we're -- yes, that's kind of the limit in that regard.

That's really the trade-off. I mean it's just the trade-off. It's -- yes, you -- it's better in the long-term ROE of the stock to do so, but it is inhibiting your ability to utilize the deferred tax assets. At some point, you'll -- they're chunky. I'm sure you've seen the Qs and the Ks, but we'll lose significant amounts of those starting in 2027 and '28. 2029 is the last year. That's actually quite a small amount that year. It's really -- we're inside 10 years of the meaningful model of those deferred tax assets.

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George Hunter Haas, Bimini Capital Management, Inc. - President, CIO, CFO & Treasurer [6]

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Yes. And just to chime in. If you reduce the number of shares outstanding, but then you have to write-off the deferred tax asset, now all you've done is magnify the loss that's going to happen when you do that.

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Robert E. Cauley, Bimini Capital Management, Inc. - Chairman, CEO & Secretary [7]

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Yes.

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Gary Christopher Ribe, Accretive Wealth Partners, LLC - Managing Partner, CIO & Chief Compliance Officer [8]

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Okay. And you mentioned having the building across the street listed for -- I assume, it's across the street, for sale.

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Robert E. Cauley, Bimini Capital Management, Inc. - Chairman, CEO & Secretary [9]

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Yes.

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Gary Christopher Ribe, Accretive Wealth Partners, LLC - Managing Partner, CIO & Chief Compliance Officer [10]

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What is your asking price for it?

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Robert E. Cauley, Bimini Capital Management, Inc. - Chairman, CEO & Secretary [11]

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We started out at 6 95. Probably going to end up selling it somewhere in the low-5s.

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Operator [12]

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Thank you. And I am showing no further questions from our phone lines. I'd like to turn the conference back over to Robert Cauley for any closing remarks.

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Robert E. Cauley, Bimini Capital Management, Inc. - Chairman, CEO & Secretary [13]

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Thank you, operator. Thank you, everybody, for taking the time to listen. To the extent you don't have a question now but do so in the future, or you listen to the replay and have a question, we are always available. The number in the office is (772) 231-1400. Thank you, and we look forward to speaking to you next time.

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Operator [14]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.