IPO Preview: Orchid Island Capital

| About: Orchid Island (ORC)

Based in Vero Beach, Florida, Orchid Island Capital (proposed symbol ORC) scheduled an $83 million IPO with a market capitalization of $144 (on a fully diluted basis) at the price range mid-point of $11 for Friday, July 22, 2011. The full IPO calendar for the week of July 18th includes seven IPOs.

BUSINESS -- Orchid Island Capital, Inc. is a specialty finance company that invests in Agency RMBS (residential mortgage backed securities). ORC’s investment strategy focuses on, and the portfolio consists of, two categories of Agency RMBS: (i) traditional pass-through Agency RMBS and (ii) structured Agency RMBS, such as CMOs, IOs, IIOs and POs, among other types of structured Agency RMBS.

Companies in ORC’s asset class earn money on the spread between low-interest short-term borrowing and purchasing higher-interest long-term securities. If short-term interest rates were to increase relative to longer-term interest rates, earnings would decline for ORC’s asset class.


ORC has several red flags. The company has an overly generous compensation plan. ORC has reserved four million new shares for issuance under its 2011 Equity Incentive Plan: this looks too generous compared with other companies we have analyzed in the same sector class.

“The number of shares of common stock to be outstanding immediately after the closing of this offering and the concurrent private placement includes (i) 1,063,830 shares of our common stock that will be held by Bimini upon completion of this offering, and (ii) 7,500,000 shares of common stock to be sold in this offering. Does not include 4,000,000 shares of common stock reserved for issuance under our 2011 Equity Incentive Plan.” S-1, page 56

Legal proceedings involving the sponsor, Bimini (OTCQB:BMNM) and certain of its subsidiaries, have adversely affected Bimini, may materially adversely affect Bimini’s ability to effectively manage ORC’s business and could materially adversely affect ORC’s reputation, business, financial condition and results of operations and ORC’s ability to pay distributions to stockholders. Bimini and its subsidiaries are currently subject to a number of ongoing legal proceedings and could be subject to further legal proceedings in the future.

ORC has several conflicts of interest. OCR, Bimini and other accounts managed by ORC’s Manager may compete for opportunities to acquire assets, which are allocated in accordance with the Investment Allocation Agreement by and among Bimini, ORC’s Manager and ORC.

CONCLUSION -- Investors who want to invest in the asset class should consider, instead of ORC, already public companies with existing track records, such as Annaly Capital (NYSE:NLY), Chimera Inv (NYSE:CIM), American Cap Agency (NASDAQ:AGNC), Hatteras Financial (NYSE:HTS), and Invesco Mortgage (NYSE:IVR), which pay in the range of 12-13%.

-- In the February-March 2011, time frame five REITS filed for IPOs, to raise $1.55 bb. One, AG Mortgage (NYSE:MITT), was with in that group and filed for a $300 million IPO. AG Mortgage finally IPO’d June 30 at a reduced amount, half of which was a concurrent private placement presumably with clients of the manager. See our AG Mortgage analysis here.

The other four haven’t yet gone public, although another one, Apollo Residential Mortgage, is also scheduled to IPO Friday, July 22, 2011.

A number of public companies in the sector so far this year have done secondaries to raise significant amounts of money. The sector companies all pay relatively high rates and have established success patterns.

Said ORD's manager:

“We are currently managed by Bimini. Upon completion of this offering, we will be externally managed and advised by Bimini Advisors, Inc., or our Manager, pursuant to the terms of a management agreement. Our Manager is a newly-formed Maryland corporation and wholly owned subsidiary of Bimini. Our Manager will be responsible for administering our business activities and day-to-day operations, subject to the supervision and oversight of our Board of Directors. Members of Bimini’s and our Manager’s senior management team will also serve as our executive officers. We will not have any employees.” S-1 page 2

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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