Bimini Capital Management, Inc.
Q4 2021 Earnings Call Transcript

Published: 11 Mar 2022

[Operator:]

Hello, everyone, and welcome to the Fourth Quarter 2021 Earnings Conference Call for Bimini Capital Management. This call is being recorded today, March 11, 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 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. You will have the opportunity to ask a question at the end of the presentation. I would now like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir.

[Robert Cauley:]

Thank you, operator, and good morning. Good morning and thank you for joining us to discuss Bimini's fourth quarter 2021 results. I'm going to give you a very brief overview of the economic backdrop we faced during the fourth quarter, and then discuss our results. COVID-19 continued to impact the United States and the rest of the world during the fourth quarter of 2021, and into the first quarter of 2022. Despite the most recent wave of the pandemic, the Omicron variant, economic data has been very strong, causing the markets and the Fed to meaningfully revise expectations for the path of monetary policy in 2022, and beyond. The Fed focuses on two areas of economic performance, inflation and the labor market tied to the dual mandates of stable prices and maximum employment. With respect to inflation, the year-over-year Consumer Price Index rating increased from the 4% increase reported in September of 2021, to 5.43% in December of 2021. Core personal consumption expenditures, the Fed's preferred inflation measure, increased from 3.7% year-over-year to 4.85% between September and December of 2021. This led the Fed to formally declare that their assessment of inflation as transitory was no longer the case. The economic data reported, in late 2021, has strengthened further in early 2022. In particular, measures of inflation has accelerated from the trend of late 2021, and are very broad-based, as prices for essentially every category of goods and services are increasing. The employment data has also been very strong, exhibiting little effect from the Omicron variant. The Fed has signaled they're about to start an accelerated removal of the extreme monetary accommodation necessitated by the pandemic. In January of 2022, the FOMC announced they would end their net asset purchases in March, and that they were likely to start decreasing the reinvestment of their U.S. Treasury and MBS assets as they matured or repay starting shortly after their first rate hike. The first rate hike is expected next week. Current pricing in the futures market assumes the Fed will increase the Fed's fund rate at least six times by January of 2023 and by approximately 75 basis points more in 2023. Of course, monetary policy may be affected by developments in the Ukraine, especially with respect to inflation, commodity inflation predominantly, and growth, and in the EU, in particular. Over the course of the fourth quarter, interest rates increased, but the increases were not uniform as shorter maturity rates, typically more sensitive to anticipated increase in short-term rates administered by the Fed, increase more than longer-term rates. As inflation accelerated in the fourth quarter of 2021, and even more so in early 2022, this trend intensified. And currently, the spread between certain intermediate maturities, such as the five-year and seven-year maturities, trade at yields only marginally below longer-term rates, such as the 10-year U.S. Treasury. This flattening of the rates curve is typical as the economy strengthens and the market anticipates increases in short-term rates by the Fed. As economic and/or inflation data strengthen and the market anticipates progressively more increases in short-term rates, the curve could actually invert, whereby the intermediate rates, mentioned above, actually yield more than longer-term rates. So, that's the economic and rate backdrop, both for the fourth quarter and early 2022 as well. Now, I will discuss our results for the fourth quarter of 2021, and the outlook for 2022. Orchid Island had another strong quarter of capital raising as its average equity capital increased from $672.4 million during the third quarter, to $806.4 million for the fourth quarter of 2021. As a result, advisory service revenue increased 19% for the quarter. However, given the economic and rate outlook described above, the market is not likely to be conducive to additional capital raising for the time being. Further, with the rates hotter and the curves flatter, both Orchid's book value and net interest margin may be under pressure. This in turn could adversely affect both Bimini's advisory service revenue and dividend income over the course of the year. For the RMBS portfolio, the rate and economic backdrop, described above, led us to take a cautious approach. With interest rates increasing and the curve flattening, we opted to build our cash position and/or repurchases shares, as opposed to adding leverage to the balance sheet. As a result, the RMBS portfolio shrank slightly, by 6%, and net interest income declined by 5%. We will continue to take a very cautious approach to leverage in the RMBS portfolio as well as Orchid shares as we do not expect to add in the near-term. We anticipate these market conditions could persist for several quarters, and we will attempt to limit the risk of potential book value erosion. Currently, our revenue comfortably covers our expenses, and we are cash flow positive. So, our focus will be on attempting to protect our equity base. Prepayment speeds in the pass-through RMBS portfolio moderated during the fourth quarter as our CPR for the portfolio decreased from 15.5 CPR for the third quarter to 13.7 CPR for Q4. Our structured portfolio accelerated back to above 30 CPR in the fourth quarter, and the overall portfolio CPR was back above 21 CPR again, as it was for Q2 of 2021. We expect a moderation in speeds in 2022 as the rate environment has changed materially, as described above. Finally, dividend income from the Orchid shares was unchanged from the third quarter of 2021, but will be down in Q1 of 2022 as Orchid lowered its monthly dividend, in January, from per share. As mentioned above, the outlook for Orchid's dividend is not favorable given the flatness of the curve. With respect to share repurchases activity, Bimini has now repurchased approximately 262,000 shares under the Rule 10b5-1 plan we adopted late in the third quarter of 2021. The plan authorizes the purchase of up to 2.5 million worth of stock, and it has worked more efficiently than our prior 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 repurchase activity. Given the discount, the stock is currently trading to relative to our book value. We view share repurchases as an attractive use of cash, especially in light of the current market conditions described above. That concludes my prepared remarks. Operator, we can now open up the call to questions.

[Operator:]

Now, we have a question from , who is a Private Investor. Seth, your line is open. Please go ahead.

[Unidentified Analyst:]

Yes, hi, there, Bob. I was just wondering if you might be able to give some color on the expenses line for this quarter.

[Robert Cauley:]

They were increased. That was -- basically management bonuses were just a little higher this year. Otherwise, normal fluctuation and expenses, audit fees, some of our trading expenses were up slightly this year as well, but that's basically the gist of the change.

[Unidentified Analyst:]

Got you. So, going forward from a quarterly -- it's just more a question of a bonus at the end of the year rather than this, for first through third quarter obviously enough from what we had been thinking?

[Robert Cauley:]

Yes.

[Unidentified Analyst:]

Got you, makes sense.

[Robert Cauley:]

It is obviously.

[Unidentified Analyst:]

Okay, okay. That's helpful. And then, any details on the economics behind the internalization of the funding and custody operations? I saw you doing that and saw some information just on the revenue that can be produced from that, but I'm just curious on the expense side, what that might look like going forward?

[Robert Cauley:]

Yes, it's going to be pretty much a wash initially, for Orchid that is, as working with Royal, it probably becomes cheaper, progressively cheaper, but when it was put in place, it was kind of a wash for Orchid. It's just something we just wanted to gain greater control over. And it's just -- you know, we've had a phenomenal relationship with ABM going back to our inception at Bimini in . And it was because of the work that they did, that we hired Pat Doyle, who was the -- He was the guy that we started within 2023 or 2003, and we've known him for such a long time, it was just a natural that we were going to internalize that function that he would be the guy to do so. And so, it's really -- it's on a -- like I said on an expense or cost basis, it's a wash, it may be somewhat cheaper over time as we grow because it is scaled to the size of the repo balance, just allows us to have a little more control over the process.

[Unidentified Analyst:]

Okay, okay, that's helpful. And then, just in terms of your application for exemption from the Investment Company Act, I'm just -- is the intention at Royal Palm then to when you're allocating capital to MBS to allocate through Orchid, going forward, is that the hope? And I guess, just trying to understand the tension obviously as a Bimini investor I'm interested in Orchid trading at a price, where you can be issuing shares and the tension between that and allocating capital to the portfolio. I guess I'm just curious on the comments there.

[Robert Cauley:]

Yes, well, March of 2020 we kind of highlighted the risk of the portfolio when you're pursuing a strategy as we are, and you're trying to grow organically and try to utilize NOLs. So, if that exemptive relief were granted, we would probably tend to own more shares of Orchid on an unlevered basis. It's more efficient from the cash use perspective, because you don't have to maintain very large cash balances to meet margin calls as they occur. And it's basically a patchwork, if you will, on the same strategy. So, we would be owning in effect the same portfolio, only just owning it in share form. Now, as we expect the price, obviously with Orchid shares are trading at a premium, there's a kind of a trade-off, if we were to acquire share of Orchid, you would be paying more than 100 cents on the dollar, but you would also be getting if they -- if you could buy it directly from Orchid, you would be gaining a management fee on that as well. And if it's trading at a discount, then obviously you're buying it for less than 100 cents on the dollar. So, there would have to be some finessing, if you will, of that process. But we think in the short-term, if that relief were granted, it would be -- allow us to grow kind of de-risk our growth, if you will, because owning shares of Orchid on an unlevered basis allows us to fully invest our cash. And since it's a tax-based strategy, fluctuations in the value of Orchid shares would have no tax impact, right, because they would be unrealized gains or losses. And we just think it would be a better way to grow the portfolio over the course of the remaining life of the NOLs. Now, as we approach the end of that, those NOLs we've stated in the past, it would be our intention to try to spin-off Royal Palm. In that case, then we would have to reintroduce a portfolio there, and it would probably you have to have a slightly differentiated strategy from Orchid, otherwise we would basically just be a clone of Orchid. So, the goal there would be to reestablish a portfolio there with a slightly differentiated strategy in anticipation of a spin-off, but between here and there, we're basically looking at if we can just take some of the risk out of the strategy, so that we can grow the portfolio on a more uniform basis, and not suffer the occasional hiccup that we did like in March of 2020.

[Unidentified Analyst:]

Okay. That's really helpful. I appreciate it. Thanks so much for the time.

[Robert Cauley:]

Sure, sure.

[Operator:]

Thank you. We have no further questions. So, I'll hand back over to Robert for any closing remarks.

[Robert Cauley:]

Thank you, Operator, and thank you everyone for taking the time. To the extent a question comes to you later or you didn't get a chance to listen to the call live and would like to ask a question, please feel free to do so. Our office number is 772-231-1400. We'll be here to take your call. Otherwise, we look forward to talking to you at the end of the first quarter. Thank you.

[Operator:]

Thank you everyone for joining today's call. You may now disconnect your lines, and have a lovely day.