Bimini Capital Management, Inc. (OTCQB:BMNM) Q2 2022 Earnings Conference Call August 12, 2022 10:00 AM ET
Robert Cauley – Chairman, CEO & Secretary
Conference Call Participants
Good morning, and welcome to the Second Quarter 2022 Earnings Conference Call for Bimini Capital Management. This call is being recorded today, August 12, 2022.
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 of future events and 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.
Thank you, operator, and good morning. Good morning, and thank you for joining us to discuss Bimini’s Second Quarter 2022 Results. I’m going to give you a brief overview of the economic backdrop we faced during the quarter and then discuss our results.
During the latter part of the second quarter of 2022, inflation data drove a material change in Fed policy, interest rates and the outlook for the economy. This was the catalyst for the Fed to pivot even more (inaudible) did during the late 2020, ’21, early ’22 period to address high inflation by raising the Fed’s fund rate 200 basis points collectively at the May, June and July meetings. The market expects the Fed to continue raising the Fed funds rate by at least another 100 basis points by year-end.
Increases in the Fed’s fund rate are likely to affect the economic activity and the Fed has acknowledged their actions may lead to a recession. Sectors of the economy most sensitive to interest rates, such as housing, have already started to slow. The market appears to anticipate that the Fed will be able to contain inflation, and as a result, there will be a contraction in economic growth.
The combined effect more increases to the Fed funds rate and the presumption inflation will ultimately be contained by the Fed, albeit potentially at the expense of a recession. This caused the yield curve to invert, whereby short maturity US treasuries yield more than long-term US treasuries. This condition may persist for the balance of 2022 and into 2023.
Given these developments in the fixed income markets and the poor performance of Agency RMBS in particular, Orchid Island Capital reported a second quarter 2022 loss of $60.1 million and its shareholders’ equity declined from $592.4 million as of March 31, 2022, to $506.4 million as or June 30, 2022. The market conditions described above drove the loss as Agency RMBS underperformed comparable duration treasuries and Orchid’s hedge position.
The decline in shareholders’ equity may lead to reduced management fees at Bimini Advisors in the near term since the management fees are a function of Orchid’s equity.
Orchid also reduced its monthly dividend twice during the first quarter, so monthly dividend revenues on the company’s approximately 2.5 million shares declined from approximately $402.3 thousand to approximately $350.4 thousand during the second quarter.
However, as the third quarter unfolds, Orchid has appeared to weather the current market condition and it is poised to capitalize on the attractive returns that have become available. On Orchid’s second quarter earnings call last week, it was reported that Orchid’s book value had recovered by 5 or more percent so far in the third quarter.
Our advisory service revenues during the second quarter of 2022 of $3.3 million were 52% higher than the second quarter of 2021 and year-to-date revenues of $6.4 million are also 52% higher than the comparable period last year, reflecting a year-over -year increase in Orchid shareholders’ equity despite the decline during the second quarter of 2022.
The increase in advisory services revenue also reflects fees from Orchid related to repurchase agreement funding, settlement and margin maintenance services that we now perform for Orchid effective April 1, 2022.
With respect to the RMBS portfolio, as we discussed at the end of the first quarter, we took steps to reduce the RMBS portfolio at Royal Palm in response to adverse market conditions. In fact, the Agency RMBS portfolio at Royal Palm Capital decreased during the second quarter of 2022 by $16.1 million. The combined effect of net sales of $12.3 million, $2.1 million of paydowns and return on investment of the structured securities portfolio and $1.7 million of net realized and unrealized market-to-market losses.
As the second quarter of 2022 unfolds, our intention was to grow our cash position until we saw clear evidence the market has stabilized before redeploying our cash to resume growing the portfolio.
To date, the Agency RMBS market has recovered somewhat during the third quarter of 2022 likely beginning to rebuild the portfolio over the balance of the quarter.
Given the high cash balances that must be maintained for a hedged and leveraged RMBS portfolio due mainly to margin collectivity with both the portfolio and our hedges, we will be somewhat constrained in how aggressively we build the portfolio.
The combined portfolio in services revenue segments we operate at our Royal Palm Capital subsidiary have generated approximately $1.6 million of taxable income year-to-date.
As our strategy is focused on utilizing our significant tax net operating losses, we want to focus on remaining cash flow positive and maximizing our taxable income as we move forward. For this reason, we’ll be conservative in growing the portfolio.
As an alternative to RMBS assets, we occasionally consider adding to our Orchid shareholdings when the stock is trading at attractive levels but do not have unlimited capacity to do so. We currently operate under an exemption from a regulation as an investment company under the Investment Company Act of 1940 as our assets primarily consist of “qualifying” assets, which are mortgage-backed securities.
Because Orchid shares are not considered qualifying assets, we are limited in the amount of work stock we can own and maintain our current exempt status. As of June 30, 2022, Orchid shares represented approximately 7.9% of Bimini’s total assets of approximately $93.3 million. The company pursued an exemption from regulation under the act from the Securities and Exchange Commission that would allow the company to materially increase its holdings of shares of Orchid Island capital. However, the exemption was not granted.
With respect to share repurchase activity at Bimini. Bimini has purchased approximately 540.7 thousand shares through August 3, 2022, under the Rule 10b5-1 plan we adopted late in the third quarter of 2021. The all-in cost of the company to repurchase these shares is approximately $996,000 or nearly 40% of the $2.5 million authorized under the plan. The prior plan was more restrictive in certain respects and repurchases were relatively limited. The current plan provides our agent with greater flexibility, and that has accounted for the increased share repurchases to date.
Given the discount the book is currently trading relative to our book value, we view share repurchases as an attractive use of capital.
That concludes my prepared remarks. Operator, we can now turn the call over to questions.
Thank you, operator, and thank you, everybody. To the extent that somebody comes up with a question later, or you listen to the replay of the call and have a question, please feel free to reach out to us. Our number here at the office is 772-231-1400. Otherwise, we look forward to speaking with you next quarter.
Thank you, and have a good weekend.
Thank you all for your participation. This concludes today’s conference call. You may now disconnect your lines.