Eoneren
Orchid Island Capital, Inc. (NYSE:ORC) is a United States-based real estate investment trust (“REIT”) that invests in residential mortgage-backed securities (“RMBS”) on a leveraged basis. The company has been paying monthly dividends since the very beginning. Since 2014, this mREIT has generated a tempting yield between 15 and 20 percent. The company claims that the income generated for distribution to its shareholders is based primarily on the difference between the yield on its mortgage assets and the cost of its borrowings. It can surely be an attractive investment option for the income-seeking investors, if this yield is sustainable.
Orchid Island Capital’s Business Model
Orchid Island Capital’s business objective is to provide attractive risk-adjusted total returns over the long term through a combination of capital appreciation and payment of regular monthly distributions. This mREIT primarily operates through Agency RMBS. Agency RMBS are issued and guaranteed by a federally chartered corporation or agency. The principal and interest payments of its RMBS are guaranteed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association, and are backed by single-family residential mortgage loans.
ORC’s investment portfolio is broadly divided into pass-through Agency RMBS and structured Agency RMBS. Pass-through Agency RMBS includes mortgage pass-through certificates and collateralized mortgage obligations issued by Fannie Mae, Freddie Mac or Ginnie Mae. Structured Agency RMBS includes collateralized mortgage obligations, interest-only securities, inverse interest-only securities, and principal-only securities. These investments are funded through short-term borrowings structured as repurchase agreements.
Reverse Stock Split Announced on 17th August
Orchid Island Capital announced a 1:5 reverse stock split of its outstanding shares, which will take effect on August 30, 2022. Every five issued and outstanding shares of Common Stock held by an investor on that date will be converted into one share. The shares are expected to begin trading on a split-adjusted basis at market open on August 31, 2022. No fractional shares will be issued in this regard and stockholders who otherwise would have received fractional shares will receive cash in lieu of such fractional shares. The value will be determined on the basis of the closing price of ORC’s equity shares on the NYSE on August 30, 2022.
The outstanding number of shares thus will come down from 176 million to almost 37 million. Orchid Island Capital also declared a monthly cash dividend of $0.16 for the month of August 2022 which will be paid on a split-adjusted basis. The August Dividend equates to a dividend of $0.032 per share of Common Stock on a pre-split basis. In that sense, the payout decreases from $0.045 per share. The Company estimates book value per share as of August 16, 2022 to be approximately $3.10 to $3.12 per share without giving effect to the Reverse Stock Split, an increase of approximately 8 percent from that of June 30, 2022 of $2.87. However, the reverse stock split may not allow the book value to move up to that extent.
Inherent Risk Factors
Orchid Island Capital was incorporated in 2010 and is based in Vero Beach, Florida. It is externally managed and advised by Bimini Advisors, LLC, a wholly-owned subsidiary of Bimini Capital Management, Inc. This mREIT has only 22.3 percent institutional holdings, out of which almost 6 percent are held by Vanguard Group Inc. The company has also failed to achieve any price growth despite delivering such a strong yield. Negative price growth and low institutional investments do raise concerns about this stock.
Orchid Island Capital may change their investment strategy, investment guidelines and asset allocation without notice or stockholder consent, which may result in riskier investments. A change in investment strategy may increase the interest rate risk and could be adversely impacted by the real estate market fluctuations. Furthermore, the charter provides that the Board of Directors may revoke or otherwise terminate the REIT qualification, without the approval of our stockholders. These changes could materially adversely affect financial condition, results of operations, the price movement in the share market, and ORC’s ability to generate high yield for its shareholders.
Orchid Island Capital’s board members are subject to conflicts of interest arising out of their relationships with Bimini. All its executive officers are employees of Bimini. As a result, the officers may have conflicts between their duties to ORC and their duties to Bimini. ORC may acquire or sell assets in which Bimini or its affiliates have or may have an interest. Similarly, Bimini or its affiliates may acquire or sell assets in which ORC has or may have an interest. Additionally, Orchid Island Capital may engage in transactions directly with Bimini or its affiliates, including the purchase and sale of all or a portion of a portfolio asset. This relationship surely creates a concern for the investors of ORC.
Investment Thesis
Orchid Island Capital has so far successfully invested in residential mortgage-backed securities (“RMBS”) on a leveraged basis. The company generated an extremely high yield for the past eight years. However, this mREIT has low institutional investments and has failed to achieve any price growth despite delivering such a strong yield. A probable reason behind such low institutional interest may be the uncertainties surrounding the management and the power vested with the board of directors.
ORC has an option of changing its investment strategy, investment guidelines and asset allocation without notice or obtaining consent of its shareholders. The company also faces a conflict of interest in its relationship with Bimini. The reverse stock split also indicates a lack of confidence on the part of board members of Orchid Island Capital. Reverse stock split may be detrimental for the book value of this mREIT. The company has already announced a reduction in the dollar value of its payout. Thus, although the stock is highly lucrative due to its extremely high yield, the kind of risk it possesses might make investors a bit skeptical about accumulating this stock.
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