Bimini Capital Management, Inc.

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. I hope everyone is safe.

After suffering through the most dramatic contraction of economic activity in financial market turmoil ever witnessed during the first quarter of [ 2020 ], albeit at a much more modest pace. The financial markets are generally functioning as they did prior to the chaos that are up this March, in large part because of the substantial intervention by the Fed and the government.

Critically for us, the quantitative easing undertaken by the Fed in which they buy both U.S. treasuries and agency mortgage-backed securities on a regular basis each week has continued, and the Fed is likely to continue doing so until the economy substantially recovered.

While the recovery in the third quarter was not as robust as what we witnessed during the second quarter, the company continued to recover nonetheless. The same is true for Orchid Island Capital as Orchid's capital base continued to recover during the third quarter.

Orchid Island shareholders' equity as of September 30, 2020, was 4.75% below the level as of December 31, 2019. But 22.3% above the level as of March 31, 2020, and 8.9% above the level as of June 30, 2020.

Given this segue, I will start with our advisory services segment. Given Orchid Island's book value continued recovery during the third quarter of 2020, revenues we received as the external manager of Orchid have continued to recover as well.

Advisory service revenues increased modestly over the second quarter and we are only 2% below the year-to-date figure for a comparable 9-month period of 2019. The current run rate if continued, will lead to advisory service revenues approximately 10% higher in the fourth quarter versus the third quarter.

In addition to being an external manager of Orchid, we now own approximately 2.6 million shares of Orchid Island Capital. Orchid Island Capital has generated a 7.9% return for the third quarter based on dividends paid and an increase in book value.

Orchid's total share return for the third quarter calculated using dividends paid and the change in stock price was 10.4%. For Bimini, this translated into a $0.8 million mark-to-market gain on our Orchid Holdings and $0.5 million in dividends.

Our MBS portfolio increased from $52.8 million as of June 30, 2020, to $73.1 million as of September 30, 2020. This led to a 15% increase in interest income.

Interest expense on repurchase agreement funding decreased 28%. The combination of the larger portfolio and lower funding costs resulted in a 21% increase in net interest income on the MBS portfolio.

Finally, interest expense on our trust preferred debt decreased by 11%, and net revenues for our 2 operating segments increased by 11% over the second quarter. Anecdotally, general and administrative expenses were down 4% for the quarter.

With respect to security selection in the RMBS portfolio, protection from fast prepayments will be critical. Rates are essentially at the lowest levels ever observed in the U.S., although rates available to borrowers have yet to keep pace with the decline in treasury yields.

This is likely to change as mortgage originators add capacity. We anticipate prepayment speeds to remain fast for the foreseeable future, so we need to focus on controlling premium amortization as best we can.

We also intend to continue to hold agency RMBS exclusively and will not be adding credit-sensitive RMBS assets.

As I mentioned a few minutes ago, our funding costs have decreased materially as the Fed issued new short-term rates in response to the COVID-19 pandemic. At this point, our funding hedges are essentially 0 as we anticipate funding costs will remain low for several more months.

We will look to opportunistically add funding hedges as the portfolio and borrowings increase going forward.

With respect to the outlook going forward, the economy has yet to fully recover from the steep contraction during the first quarter of 2020 despite massive intervention by both the Fed and the Trump administration. There remains significant uncertainty surrounding the timing of a full recovery and economic activity and a return to life as it existed before the virus emerge.

That being said, market conditions despite elevated levels of prepayments stemming from very low absolute levels of rates available to borrowers to continue to offer low- to mid-teen returns on levered agency RMBS investments with reduced book value volatility. As the same generally applies to Orchid Island, the prospects for our advisory services revenue and dividend income are likewise favorable.

Operator, that concludes my prepared remarks. We can now open up the call to questions.

Job on everything and navigating this and coming back out the other side. I was just curious, I kind of thought I would see that you guys sort of picked the Royal Palm portfolio up a bit more.

How are you guys thinking about that? Am I looking at this correctly that maybe there's, I don't know, call it, $10 million or so of equity in Royal Palm outside of the Orchid stake and...

Yes. It's poised to do so.

Our cash positions are quite full at the end of the quarter, so.

Got it. Okay.

And if I'm looking like walking through how I look at the various sources of value at Bimini. Obviously, there's the equity in Royal Palm.

There's the Orchid stake, there's the tax asset and then there's the management contract. Like when I put those together, we would use -- those are the main sources if as long as I'm not forgetting anything, correct?

No, I think that's it.

I guess my question is, I saw that you guys -- it -- you got have a GAAP book value per share and then there's an economic book value per share. And I think about the economic book value per share is higher than the gap that you're showing.

I guess I was a little surprised to see you guys buy more Orchid in the quarter at 95% or so or more of its stated NAV when you guys, in my opinion, are trading at maybe 40% -- I say trading, I don't -- there are -- maybe [indiscernible] trade. So -- but sort of quoted at roughly somewhere between 35% to 40% of what I think the economic NAV is.

We'd only bought 100,000 shares this quarter, and that was early on. I actually bought that at the Bimini level.

That's basically the only holdings that Bimini has. We do segregate Bimini from Royal Palm.

Bimini's more the -- what's the word I'm thinking of the holding company, and we had some excess cash, and we just bought some shares early on. They were not at the steeper discount as they were in Q2, but they were still a pretty decent and attractive discount at the time.

But going forward, the focus will be on portfolio for Royal Palm. As I said, our cash position is quite full.

So I would expect by the end of this quarter, you will see that deployed and down to manageable levels that we need to maintain to run a levered bond fund.

And Orchid has -- I mean I can't speak too much about Orchid because it's not Orchid's call, but Orchid's continues to do well relative to its peers, both in terms of book value performance and dividend yield. And so there's the potential for growth in the equity base, which obviously is beneficial to us and our advisory services revenue.

And then with respect to the portal, the returns are very attractive. Not sure how this election is going to ultimately play out still much -- very much in a state of flux.

But I think for us, probably the best outcome would be a divided Congress because I think you end up with a kind of an inability of either party to pursue the extremes of their respective agendas, and so you kind of get a middle-of-the-road outcome. And you probably get modest continued recovery from the pandemic.

You get low funding costs for an extended period of time. Prepayment speeds would stay elevated eventually would slow down just to burn out.

But all in all, it would be a very good environment for both Royal Palms portfolio, Orchid and then through Orchid being in a very favorable environment, that also bodes well for us as the external manager and Orchid's potential to grow its capital base.

Got it.

I would just chime in that for us, it I hear what you're saying about Orchid trading at 95% of that. But it's still a very compelling yield, just from allocating capital amongst the asset classes that we invest in.

So we levered MBS on the 1 hand, and Orchid shares on the other hand, at the Royal Palm level. I think when we can achieve this mid-teens type of yield that it's a very compelling trade because when we purchased those shares, we're not required to hold a bunch of excess capital on the sidelines to deal with things like margin calls as we would in the levered bond front.

So when it comes down to capital allocation, yes, there are -- might be a little bit better opportunities on the leverage side, but the amount of capital that you have to put towards that is also larger. So we see it as is kind of a wash, and it's a lot easier to hold shares of Orchid stock versus the alternative being a levered mortgage position right now.

And so that yield comes down, then we'll do -- we'll rethink our allocation strategy. But over the course of the third quarter and really the second quarter as well, when we added the biggest bulk of that position.

At first, it was a attractive because it was a deep discount and then it turned into more of a just a yield play.

Right. No, I hear what you guys are saying about all this, but I think the sort of the point that I'm making is if you look at Orchid versus maybe spending $0.5 million on Bimini shares, if Bimini's economic NAV is higher than the GAAP NAV that you're showing and you're trading at roughly 1/3 of it somewhere between my best estimate is somewhere between 1/3 and 45% of it.

Essentially, you're buying the Orchid stock when you buy Bimini stock at the same price, but you're getting all of this other stuff alongside of it. And so when you make the decision to buy -- if you want to buy Orchid stock, you can buy it synthetically with Bimini stock and get a whole bunch of freebies on top of it, utilization of the tax asset, growth in the AMA et cetera and this sub note with...

That's a good point.

The economic value of the sub note is probably far less than the carrying value. I don't think the people that own that would enter into that agreement today.

So it's...

I appreciate that. We did renew...

I'm sorry, Bob, go ahead.

No, no, I think you guys have done a tender in the past. Maybe look at that in the future alongside some sort of 10b5-1 plan where you guys can be out there and with some sort of stated price that you could buy up to, and I think you'd have people calling you to offer you shares.

We did renew that plan.

So on the portfolio and everything. I just -- I want to make that observation and note the difference between GAAP NAV and economic NAV.

Understood. Point taken.

Thank you, operator, and thank you, everybody, for joining us. I appreciate your interest in Bimini Capital.

To the extent you have additional questions that you didn't get a chance to ask or if you didn't get a chance to listen to the call live on, listen to the replay and then follow up with questions after, please feel free to do so. Our number in the office is (772) 231-1400.

Otherwise, I look forward to talking to you end of the fourth quarter. Enjoy your holidays, and please stay safe.

Thank you.