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I am not a financial advisor. This post is to provide information and not provide financial product advice. I discuss why I personally chose to invest in a stock, ETF, ETNs, CEF, REIT, investment fund or cryptocurrency (which I have held for over a week) and also share information that is public about the following stock, ETF, ETN, CEF, REIT, investment fund or cryptocurrency and they are based on my own personal opinion.
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I do not work in the financial industry, so just because I write about it, doesn’t mean you should own it. So, consult with a financial advisor and do your due diligence, RESEARCH!
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I invest in all financial sectors and while I choose to seek safety by investing in Dividend Kings and Aristocrats, I also am willing to take a few risks on high yield value stocks that pay good dividends as a long-term investment.
One of those companies in the Real Estate Sector is a mortgage REIT, Orchid Island Capital (NYSE: ORC).
First, let’s get to know who Orchid Island Capital is.
The Florida company was founded in 2010 and publicly traded since 2103 and according to their website:
Orchid Island Capital, Inc. is a specialty finance company that invests in residential mortgage-backed securities on a leveraged basis. Income generated for distribution to our shareholders is based primarily on the difference between the yield on our mortgage assets and the cost of our borrowings. We operate to qualify to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes and generally will not be subject to U.S. federal corporate income tax to the extent that we currently distribute all of our REIT taxable income (as defined in the Code) to our stockholders. We intend to operate our business in a manner that permits us to maintain our exemption from registration under the Investment Company Act.
We are externally managed and advised by Bimini Advisors, LLC, a wholly-owned subsidiary of Bimini Capital Management, Inc. Our manager is an investment advisor registered with the Securities and Exchange Commission.
REITs are no doubt popular, as they are seen as a hedge against a volatile market. But not all REITs are equal. In fact, one of the popular REITs are mortgage REITs (mREITS) but there is also a risk because of the market.
And within mortgage REITs, there are those who invest in Residential Mortgage-Back Securities (RMBS), a debt-based security similar to a bond, but is backed by the interest paid on loans for residences.
According to Investopedia:
- A Residential Mortgage Backed Security (RMBS) is similar to a bond that pays out based on payments from many individual mortgages.
- An RMBS can increase profits and decrease risk to investors.
- An RMBS can also create great systemic risk if not structured properly.
- The issuance of many poorly-constructed RMBS contributed to the 2008 financial crisis.
I’ve discussed why I invest in REITs. I have no interest in investing in individual apartment complexes or multiple homes. I want my footing in real estate investments and for me, REITs are something I am interested in.
But with the economy slowing down, increased interest rates possibly in the horizon, I remember what happened in 2007-2008 with CMOs (collaterized mortgage) and CDOs (Collateralized Debt Obligations) and that was no doubt one of the darkest times that literally affected the world
Having invested in mREITS, I have trimmed considerably and decided to stick with only one and that is Orchid Island Capital, a mid-sized mREIT which invests in RMBS.
The current closing price is $5.27 (as of closing on July 9th) and the 52-week range is $4.25 to $6.21. The market cap is $477.7 million and the enterprise value is $4.4 billion and shares outstanding is 94.41 million and 37% shares are held by institutions.
As you can see from the chart, since 2014, the price of the stock has decreased with a significant dip in mid-2015 and then again during the Pandemic.
Fortunately, ORC has done well compared to some of its competitors.
Currently CRFA’s Quantitative Stock Report (as of July 2nd) has a recommendation of “HOLD” and Valuation, Quality, Growth, Street Sentiment and Price Momentum, CFRA’s Quantitative Model Drivers are all at “HOLD”.
But the Risk Evaluation is High. The Financial Leverage Risk is High. While Asset/Market Size Risk, Price Volatility Risk and Liquidity Risk is Moderate.
So, why so risky? It’s because the US mortgage market is an unknown with rates at a high. Long-term it’s definitely a hold. Short term, may concern those who do not like risk.
So, in other words, interest rates puts an RMBS at risk as a rise in short-term rates increases its borrowing cost, while a rise in long-term rates increases the yield on new assets and decreases prepayment losses.
For Orchid Island Capital, revenues decreased by 68% at the end of the fiscal year December 31, 2020. Net income decreased by 91% to 2.1 million.
Currently, the monthly dividend is $0.06 with an annual dividend rate of $0.78 and an annual dividend yield of 15.42%.
ORC’s earnings per share is $1.06 and price/earnings is $4.76 and forward P/E is $10.54.
This is attractive for dividend investors because of the share price and dividend payment. Orchid Island Capital has been able to make its payments granted, dividends have decreased. But allowing the company to divert more to the company if need to tackle on expenses.
On June 23rd, Orchid Island Capital (NYSE:ORC) and Bimini Advisors, announced equity distribution agreement with J.P. Morgan Securities LLC, JMP Securities LLC, JonesTrading Institutional Services LLC and MUFG Securities Americas Inc. Under the agreement ORC may offer and sell, from time to time, up to an aggregate amount of $250M of shares of the common stock, $0.01 par value per share. Sales Agents entitled to compensation of up to 2.0% of the gross proceeds.
For me, I have invested in Orchid Island Capital (NYSE: ORC).
I’m invested in all eleven sectors and because it continues to trade at a lower price, continues to pay a dividend and keeps to a high annual yield. For me, ORC was a solid, inexpensive dividend play but I also understood the risks.
But right now, it seems the Federal Reserve is sending mix messages, with financial analysts talking about the risks of inflation while the Feds are ignoring the risks of inflation and keeping its target rate near zero. Investors arms are up in the air.
Agency mREITs are not directly impacted by inflation but they are impacted by changes in interest rates and that is my concern.
As always, perform your due diligence and do a lot of research before investing. Talk to a financial advisor and find out if Orchid Island Capital (NYSE: ORC) would be a perfect investment for you.
