Bimini Capital Management's (BMNM) CEO Robert Cauley on Q4 2015 Results - Earnings Call Transcript
Bimini Capital Management, Inc. (OTCQB:BMNM) Q4 2015 Earnings Conference Call March 22, 2016 10:00 AM ET
Executives
Robert Cauley - Chairman & CEO
Hunter Haas - President, Chief Investment Officer, CFO & Treasurer
Analysts
Derek Pilecki - Gator Capital
Operator
Welcome to the Fourth Quarter 2015 Earnings Conference Call for Bimini Capital Management. This call is being recorded today, March 22, 2016.
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 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.
Robert Cauley
Thank you, Operator. Before discussing developments to the market with the portfolio, I would like to discuss developments with respect to our REIT stat, this is an update from our third quarter earnings call. The year and quarter ended December 31, 2015 represent an end of an era for Bimini Capital, Bimini was formed as an agency REIT in late 2003 and operated as such since. For 2005 we acquired an [indiscernible] loan originator in an effort to withstand our revenue stream. As most of you know, our timing was unfortunate and we've dealt with significant challenges in the mortgage and housing market, substantial loss followed.
Bimini has slowly and steadily recovered from that episode, we have launched Orchid Island Capital in early 2013 and now derives substantially revenues from Orchid in the form of management fees, overhead sharing cost and dividends. These revenue streams which for the most part flow to one of our taxable REIT subsidiaries Bimini Advisors have grown in relation to the traditional net interest income of Bimini's MBS portfolio. In fact these revenue streams have grown the point that based on an independent valuation late last year we no longer compile with one of the requirements for the qualification as they reach. For this reason Bimini will no longer be a REIT for Federal Income tax purposes or at least for next four years. The flip side of this development is that Bimini can now operate outside of the income and asset test necessary to maintain REIT status.
We expect to do that in a way that will allow us to take advantage of existing taxable net operating losses or NOLs. These NOLs existed both in Bimini and our former mortgage company currently called MortCo TRS because Bimini is no longer a REIT, Bimini recorded a deferred tax asset or DTA associated with it's NOL. MortCo TRS has always had a deferred tax asset but it has also recorded evaluation allowance against the asset resulting in a net value of zero, the valuation allowance was recorded because MortCo TRS no longer had any operations and there is no ability to generate taxable income to utilize NOLs.
We have analyzed in model potential outcomes with respect to our existing operations in an attempt to determine the best way to maximize our ability to harvest the taxable NOLs. Based on this work we have initiated the following steps. We are moving the existing agency NBS portfolio from Bimini to our former mortgage company MortCo TRS. This will allow the net interest income in resolving taxable income to be applied to MortCo's federal NOLs of approximately 261.3 million. The external manager of Orchid Bimini Advisors has converted into an LLC for tax purposes. As a result revenues and expenses of Bimini Advisors will be combined with the revenues and expenses of Bimini and to the extent they result in net taxable income be applied against Bimini's approximately 21.3 million of federal NOLs. In all cases by using the NOLs to offset any tax liability we generate can be deployed in net income retained into MortCo's portfolio, this in turn will allow us to grow it over time, slowly increasing its income generating potential and accelerating the consumption of the NOLs. Bimini's NOLs began to expire in 2028 and MortCo's NOLs will begin to expire in 2025.
Based on our analysis we believe that more likely than not Bimini will be able to generate sufficient taxable income to consume all of it's NOLs across it's respirations [ph] and therefore did not report a valuation allowance against a deferred tax asset. We performed similar analysis from MortCo and believe that more likely than not it will generate sufficient taxable income prior to the expiration of it's NOLs to warrant [ph] removal of approximately 55% of the existing valuation allowance against it's NOLs. In some Bimini reported an income tax benefit for the year of approximately 62.4 million which was a result of Bimini DTA and the removal of 55% MortCo's valuation allowance. These figures are of course based on several assumptions and therefore subject to revisions in the future if and when actual results differ from modeling or caps. In particular there are no assurances that Bimini will generate taxable income given the magnitude, the income tax benefits this dominate our results of operations for the year and drove a significant increase in our book value.
Going forward we anticipate we will continue to operate an agency NBS portfolio now at MortCo although with slightly more latitude to hedge and manage our risks now that we no longer subject to the [indiscernible].. We anticipate the portfolio will continue to be all agency NBS although we will be able to better utilize the securities within this [indiscernible]. The process of migrating the NBS portfolio from Bimini to MortCo has already begun. The
second segment of our operations will be the management of Orchid's and it's NBS portfolio. Bimini will generally become a holding company since it's NBS portfolio has migrated to MortCo with two 100% on subsidiaries that are conducting their respective operations that we expect will benefit from the NOL's.
Now turning to developments in the markets and with our portfolio, a lot has happened since the end of third quarter. The fourth quarter of 2015 brought the first rate hike by the U.S. Federal Reserve, the Fed since 2006 and at the time the market expected to see the second late last Wednesday. The path leading up to this initial height was very volatile beginning in 2013 with the taper tantrum when the Fed first single and ended quantitative easing, the third episode of QEFS [indiscernible] and continuing to the summer of last year when the market was poised for the first right hike only to back away as developments in China and elsewhere [indiscernible] financial markets. Market conditions changed again very rapidly and the economic data strengthened as we moved into the fourth quarter. This paved the way for the Fed to high rates at December. The Fed also hinted at three or more hikes this year via their stock bonds, the rate forecast of individual members.
In keeping with the recent pattern on sudden reversals in market conditions investor attitudes the market fell into turmoil again in January and quickly priced out all -- most if not all fed hikes of 2016. Once again developments [indiscernible] are mainly to blame, although at this time domestic economic data contributed as well after fourth quarter growth in GDP was initially reported only 0.6%. Since late January 2016 the data has reversed for the most part in conditions in financial markets appear stable for now, to with the market did not expect the Federal Reserve to raise rates last week as signs of economic strength in financial markets stability were too closely removed from the events of January. However the market did expect a fed to say how they are likely to resume raising rates in June, they didn't need it. More importantly their message in a way in the post meeting statement and the chair on this press conference imply that financial market developments and events from overseas have become even more influential in their outlook on the economy and that domestic data apparently less so. This [indiscernible] appear to confuse market participants and certainly us. Going forward incoming economic data will have to be looked at in the context of the strength of the global economy and the stability of financial markets generally.
Turning to the results of the fourth quarter, I will discuss our two areas of operations separately. With respect to the management operations of Orchid in our shareholdings of Orchid stock we generated income of 2.24 million, management fees accounted for 1.05 million, dividends on our Orchid shares were 0.42 million and we had a positive mark to market on the shares of 0.77 million. We also had a positive mark to market on a retain interest in securitizations of 0.22 million. Retain interest in securitizations fall outside of our two primary areas of operations but we anticipate the cash flows these residuals generate will be used to build the portfolio of MortCo going forward.
Turning to the NBS portfolio operations, the polling results were dominated by this sell off rates triggered by strong economic data in the initial rate increase by the Fed. While mortgages had wide for most of the quarter, they did recoup some of this late in the quarter mitigating some of the initial impact of the market move. However, premium on corporate securities were impacted by higher rates and decline. We reported a 1.03 million negative mark to market on our NBS portfolio only partially offset by a positive 0.63 million positive mark to market of our funding hedges. The negative market to market adjustments have concentrated in [indiscernible] and inverse interest only securities as the interest only securities benefited from higher rates and we recorded a positive mark to market on them of 0.19 million.
Net interest income was 0.66 million for the quarter net of interest on our trust preferred debt, this corresponding figure for the third quarter was 0.64 million. Total return on invested capital for the quarter not annualized was 3.8% for the past year strategy and negative 1.7% for the structured security strategy. Of course volume [ph] figures for the third quarter were 2.9% and negative 12% respectively.
There were no material changes to the composition of the portfolio during the fourth quarter, we reduced the size of the [indiscernible] portfolio by selling securities, repaying the associated repurchase agreement funding and using the net cash to deploy into the portfolio of MortCo. As MortCo did not have any repurchase agreement funding in place yet we purchased approximately 430,000 shares of work around capital in the open market. In spite of these changes the net effect of portfolio is a slight increase in the allocation to pass through securities from 61.7% at September 30, 2015 to 64.8% at December 31, 2015 primarily due to the increase in the cash position. The structured securities portfolio decreased slightly due to run-off in those securities we had purchased or sold. The change in the capital allocation going to fourth quarter was not material nor strategic. Since year-end we have reduced the Bimini NBS portfolio further by approximately 18.7 million and added 53.8 million to the MortCo NBS portfolio, MortCo now has access to repurchase agreement funding.
We will continue to migrate the NBS portfolio from Bimini to MortCo over the balance of the quarter into the second quarter. We do not have a precise timing at which the process will be complete as we're attempting to execute this process carefully and opportunistically. As we move forward in 2016 we anticipate a slight increase of repayment speeds over the next couple of months but less so than we experienced in 2015 as it applies to commodity prices in import prices become less negative on a year over year basis as we move through 2016 we expect headline inflation to slowly move towards 1.0% to 1.5%. We expect core inflation measures even the Fed's preferred measure core personal consumption expenditure or PCE will trend towards 2% as wage pressures continue to rise service sector costs. We do not anticipate the U.S. moving into a negative interest rate environment and believe that the Fed will continue to remove combination at a very slow rate even more slowly than we anticipated even a short week ago.
Our portfolio position is therefore unlikely to change materially over the course of the year. We will continue to favor high coupon, fixed rate call protected securities. As markets fluctuate in and various forms of call protection become more or less appealing we will attempt to minimize the impact of speeds essential price erosion [indiscernible] sell-off. This of course will be done in conjunction with the migration the portfolio from Bimini to MortCo. In the end we anticipate the allocation of pass through securities to remain in the vicinity of 60% to 65%.
Operator that includes my prepared remarks. We can open up the call to questions.
Question-and-Answer Session
Operator
[Operator Instructions]. Our first question is from Derek Pilecki with Gator Capital. You may begin.
Derek Pilecki
I’ve a question, why didn’t you move Bimini Advisors into the MortCo TRS?
Robert Cauley
Well we have -- as we have mentioned we have NOLs at both Bimini and at MortCo and there are things called the [indiscernible] rules which I'm not going too much into but doing what we did we’re are able to use the NOLs of Bimini against taxable income generated Bimini Advisors. Normally when you have this sister-sister related subs they cannot offset the liabilities of one with tax NOLs of the other. There is an exception for a parent and that’s what Bimini represents for Bimini Advisors.
So by keeping Advisors under Bimini we can use Bimini's taxable NOLs to offset the taxable income as advisors. If at some point in the future those are all consumed Bimini can then contribute Bimini Advisors to MortCo and then MortCo will become the parent of advisors and that could -- then we would use MortCo's NOLs to offset advisors taxable income but this allows us to use all of them as rapidly as possible and before any of them expire.
Derek Pilecki
Without the REIT stats going away would you’ve had to write up your deferred tax asset valuation allowance?
Robert Cauley
Well generally REITs don’t have one just because they're non-tax paying entities so there was never one at Bimini and totally loss our REIT status, MortCo's I mentioned has already one but because there were no operations per se there you couldn't justify having anything other than a zero net value on the deferred tax asset. Now that we have operations there we did a lot of modeling in and made assumptions to underlie those models and came up with projected case flows that allowed to take back 55% of that valuation allowance and so you know Bimini's likewise, Bimini we believe will at this moment in time will be able to use all this deferred tax asset but you really can't have one for a non-tax entity prior to losing it.
Derek Pilecki
In the press release you mentioned having more flexibility without the REIT status, could you talk about that a little bit more what you're thinking and give an example of something that you could do now that you couldn't do before?
Robert Cauley
Yes, Hunter will talk more about but just couple of things for instance TBAs, is a TBA a good REIT asset most law firms that they know they have a great rate of return swap from the IO's which again are not good REIT assets.
Hunter Haas
Sure. I think that within the context of what we plan on doing. I mean we have tremendous flexibility. You know we can open a pizza shop in there if we wanted to do, we don’t want to play on doing that but I think with respect to the increased scope of both investment alternatives as well as hedging alternatives that's really where we see the value in not being a REIT. So especially on the hedging side of the equation, so for us we have a limited ability to be able to hedge with say. TBAs as well as owning them outright for carry purposes in a dollar role type of trade but from time to time the market presents us with opportunities where the month over month drop on a TBA is relatively low and so we can clip carry by and at the same time reduce basis risk be it mortgage slot basis risk or mortgage treasure based risk depending on the type of instrument that we know.
So it's particularly beneficial to Bimini because Bimini doesn’t have a lot of the facilities and [indiscernible] in place with a broad list of counter parties that allow it to go out and run a swaps and swaptions and that sort of thing. So being able to hedge with mortgage products is a very important thing for us and as Bob as alluded to the iOS market is very much open to Bimini now whereas before that was impossible because any income that would have been generated from those instruments because their total rate of return swaps would have been bad REIT income and since the income thresholds for relatively low to begin with just given the size of Bimini's portfolio we really had not a lot of room for error or flexibility with respect to what types of income and assets we can go and still maintain our REIT status.
Derek Pilecki
Okay, one last question. During the quarter you purchased shares of Orchid, was that a onetime opportunistic purchase or do you anticipate being a more regular buyer of Orchid shares at the Bimini level?
Robert Cauley
It was a little of both but at the same -- as I mentioned when we started to migrate the portfolio MortCo didn’t have any access to repo [ph] so we couldn't buy any assets in the traditional sense. So it was a way for us to put money to work right away and earn the dividends. In the future we may but you know that was really just more of a pragmatic solution at the time. Now that we do have access to repo rebuild we will start building that portfolio out in the traditional sense and as Hunter just described we have little more flexibility in terms of assets that we own and the in which we hedge our risk. If that opportunity presents itself as we may be but I wouldn’t say that it's a core component of the strategy going forward.
Hunter Haas
We hope that it's not something that’s is available to us all the time but sort of confluence of events where Orchid was trading at pretty distressed levels at the time we started acquiring it and we at the same time were seeking to expand the portfolio at the MortCo level. So we sort of think of Orchid stock as an alternative to the portfolio in that when it's cheap enough and selling at a big enough discounted book value in the same way that Orchid looks at buying back it's own stock Bimini will look to invest. So we're happy with it, we're happy with the yield, it's a relatively low allocation of capital for the return and so you it made a lot of sense at the time and just so happened that from an operational standpoint we didn't have a lot of options anyway. So it was a little bit of a good timing I guess.
Operator
[Operator Instructions]. And I'm showing no further questions at this time. I would like to turn the call back over to Mr. Cauley for closing remarks.
Robert Cauley
Thank you, Operator. As always to the extent anybody has a follow up questions or questions that don't occur at the moment please call us in our office or use a replay. We’re always open to any questions. Our number is 772-231-1400. We’re a very glad to answer any questions you might have otherwise we will speak to you at the end of the first quarter. Thank you.
Operator
Ladies and gentlemen this concludes today's conference. Thank you for your participation and have a wonderful day.
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