Ready Capital Corp (RC) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. And welcome to the ZAIS Financial Corporation first-quarter 2014 conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, there will be a question-and-answer session. And instructions will be given at that time.

(Operator Instructions)

As a reminder, this call is being recorded today, May 13th, 2014. I would now like to turn the call over to Scott Eckstein. Please go ahead, sir.

Thank you, operator. Good day, everyone, and welcome to ZAIS Financial Corp's conference call to review the Company's results for the first quarter ended March 31.

On the call today will be Mike Szymanski, President and Chief Executive Officer; Paul McDade, Chief Financial Officer and Treasurer; and Brian Hargrave, Chief Investment Officer. As a reminder, this call is being recorded and also being Webcast through the Company's website, www.ZAISFinancial.com. Additionally, a copy of the Company's first quarter investor presentation is available for you review on the Company's website on the Investor Relations page.

Before we begin, I'd like to remind everyone that during the course of this conference call, both in our prepared remarks and in answers to your questions, we may make certain statements and assumptions that contain or are based upon forward-looking information pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous assumptions, uncertainties, and known or unknown risks, which could cause actual results to differ materially from those anticipated.

These risk factors are more fully discussed in the Company's filings with the Securities and Exchange Commission. The forward-looking statements included in this conference call are only made as of the date of this call, and the Company is not obligated to publicly update or revise them.

In addition, certain terms used in this call are non-GAAP financial measures. Reconciliations of which are provided in the Company's Earnings Release and accompanying tables, which have been furnished to the SEC through the Company's Form 8-K filed this morning and may also be accessed through the Company's website at www.ZAISFinancial.com. Each listener is encouraged to he radio view those reconciliations provided in the Earnings Release together with all other information provided in the release.

I will now turn the call over to Michael Szymanski. Please go ahead, sir.

Good morning, everyone, and thanks for joining us today. We're pleased to present our financial results for the first quarter of 2014, which demonstrate the continuing execution of our mortgage credit focused investment strategy.

During this morning's call, I'll briefly discuss our financial results and our other achievements during the quarter, which included significant realized and unrealized gains in both our whole loan and our non-agency RMBS portfolios. After that, our CFO, Paul McDade, will review our financial results in more detail, while our CIO, Brian Hargrave, will discuss the mortgage credit market environment and recap our portfolio performance.

As noted in today's press release, for the first quarter of 2014, we reported core earnings of $1.5 million, or $0.17 per weighted average share outstanding. On a GAAP basis, we reported net income of $2.5 million for the quarter, or $0.28 per weighted average share outstanding.

As stated in our press release, our core and GAAP earnings for the quarter were impacted by increased general and administrative expenses as well as professional fees. These included an increase of approximately $0.9 million, or $0.10 per share, in general and administrative expenses, largely attributable to due diligence costs and professional fees, related to the Company's evaluation of a potential acquisition. Increased professional fees of approximately $0.5 million, or $0.06 per share, included $2.2 million (sic -- see press release "$0.2 million") of accounting and legal work related to our recent registration statement filings.

During the first quarter, we continued to execute on our whole loan strategy, expanding our residential mortgage loan portfolio to over $415 million of fair market value, as of March 31, 2014. In line with our investment strategy, our capital allocation to whole loans increased to 67%. Our securities portfolio at March 31, 2014 had a fair market value of $231.8 million, up from December 31, 2013 value of $226.2 million.

Importantly, we saw significant realized and unrealized gains in both our whole loan and non-agency RMBS portfolios in the quarter. As of March 31, 2014, book value per share of common stock in OP unit was $19.86, compared with $19.98 at December 31, 2013.

The March 31, 2014 book value includes $3.6 million, or $0.40 per share, of common stock and OP unit in dividends payable, related to the previously announced March 20th, 2014 dividend declaration. This dividend was paid on April 14th, 2014 to stockholders and OP unit holders of record as of March 31, 2014.

During the quarter, we also continued to develop our whole loan platform. We believe these efforts provide us with the ability to further grow our legacy whole loan portfolio, while also moving us closer to launching our newly originated loan purchase program.

In summary, we continue to execute on our legacy whole loan investment strategy, which has benefited from supportive market conditions. We've been successful in deploying capital, reaching our target often ahead of schedule. Our portfolio performance is in line or above our initial expectations. And we continue to view this a asset class as a compelling investment opportunity.

I'll now turn the call over to our Chief Financial Officer, Paul McDade, to review our financial performance.

Thanks, Mike. Good morning, everyone.

As Mike already mentioned, for the quarter ended March 31, 2014, the Company reported GAAP net income of $2.5 million, or $0.28 per weighted average share outstanding. Core earnings for the quarter were $1.5 million, or $0.17 per weighted average share outstanding.

The difference between GAAP and core earnings was due to net realized and unrealized gains of $1 million on our portfolio recorded under GAAP. You can reference the section of our press release entitled Use of Non-GAAP Financial Information for a further explanation of core earnings, which is a non-GAAP financial measure.

As previously noted in our release and past calls, we believe providing investors core earnings information is important when assessing the performance of the quarter, as it offers greater transparency to the information that our management team uses in its financial and operational decision making process.

The Company recorded net interest income of $5.6 million for the first quarter of 2014, compared with $2.9 million in the prior year period. Interest income of $9.5 million increased by $6.1 million, from the $3.4 million recognized in the first quarter of 2013.

The change was mainly due to the deployment of capital raised in the February 2013 IPO and the November 2013 issuance of the convertible notes, which is now significantly allocated to whole loans. The purchase of whole loans into the portfolio increased interest income by $5.6 million.

Other factors contributing to the increase in interest income included increases in the average RMBS portfolio yield and the purchase of other investment securities, which raised interest income by $1 million and $0.1 million, respectively. These increases were partially offset by a decrease in the Company's average RMBS portfolio balance, which lowered interest income by $0.6 million.

We incurred interest expense of $3.9 million for the first quarter of 2014, compared with $0.5 million for the first quarter of 2013. The $3.4 million increase was from additional borrowings under the loan repurchase facility, used to finance residential mortgage loans, security repurchase agreements, and the convertible notes. As of March 31, 2014, the weighted average net interest spread between the yield on the Company's assets and the cost of funds, including the impact of interest rate hedging, was 3.97% for mortgage loans and 4.82% for non-agency RMBS and other investment securities.

During the first quarter, the Company recognized a favorable change in unrealized gain or loss on mortgage loans, real estate securities, and other investment securities of $3.8 million, as well as realized gains on mortgage loans and RMBS of $0.3 million, partially offset by losses on derivative instruments of $3.1 million. We incurred operating expenses of $4.1 million for the first quarter of 2014, compared with $2.1 million in last year's first quarter.

As Mike mentioned earlier, general and administrative expenses increased by $0.9 million. This increase was mainly due to due diligence costs and professional fees, related to the evaluation of a potential acquisition. Professional fees increased by $0.5 million, due to procedures performed by the independent auditors for the 2013 annual financial statement audit and additional legal expenses related to the Company's registration statement filings on Form S-3.

Loan servicing fees increased by $0.4 million from the prior year period, due to the acquisition of whole loans, as the Company executed on its investment strategy. Advisory fees increased by $0.2 million, due to an increase in stockholders equity resulting from the Company's February 2013 IPO.

That concludes our financial review. I'd now like to turn the call over to our Chief Investment Officer, Brian Hargrave, to discuss our portfolio and investment activities.

Thanks, Paul, and good morning, everyone.

In the first quarter of 2014, we experienced a rally in interest rates from the 2013 highs, due primarily to perceived weakness in the economic environment. This weakness was confirmed with the recent first quarter GDP release, estimating annualized growth of 0.1%.

At the same time, volatility in the fixed income markets continued to decline, largely looking past the first quarter weakness. As a result, market conditions remain quite supportive of risk assets. Our portfolio benefited from this environment, with our whole loan and securities holdings generating realized and unrealized gains of $4.1 million for the quarter.

Despite the first quarter slowdown, economic conditions seemed to have improved meaningfully late in the first quarter and subsequent to quarter end. Importantly, the housing market remains strong and continues to benefit from tight supply conditions.

Our investment activity in the first quarter included the deployment of a portion of the proceeds from our November 2013 note issuance into both our whole loan and RMBS portfolios. During the three months ended March 31, 2014, we purchased mortgage loans with an unpaid principal balance of approximately $100.4 million, resulting in a whole loan portfolio fair market value of $415.6 million, as of March 31, 2014. This put our capital allocation at approximately 67% to whole loans at the end of the quarter.

We also acquired $14.5 million in non-agency RMBS and $10 million in other investment securities during the quarter, which increased the fair value of our non-agency RMBS portfolio and other investment securities to $242.9 million at March 31, 2014. At March 31, we had a leverage ratio of 2.9 times, with borrowings composed of $297.4 million outstanding under our loan purchase facility, used to finance residential mortgage loans; $159.2 million outstanding under repurchase agreements secured by our RMBS portfolio; and $54.8 million in book value of convertible notes outstanding.

During the quarter, we amended our loan repurchase facility to increase uncommitted funding by $75 million. The loan repurchase facility and repurchase agreements bear interest at rates that have historically moved in close relationship to LIBOR. We are now in negotiations with counterparties and anticipate having additional available borrowing capacity, from which, we expect to be able to acquire additional assets, going forward.

Additionally, we added an interest rate swaption during the first quarter 2014, giving us the right -- but not the obligation -- to enter into a previously agreed upon swap contract on a future date. The notional amount of this option was $225 million, as of March 31, 2014. Economically, this position gives us increased protection if rates start to move higher this year.

We have maintained some interest rate swap agreements to mitigate the effects of increases in interest rates for a portion of our outstanding purchase agreements. These swap agreements provide for us to pay fixed interest rates and receive floating interest rates indexed off of LIBOR, effectively fixing the floating interest rates on $17.2 million of repurchase agreement borrowings, as of March 31, 2014.

Our whole loan portfolio strategy continues to be focused on higher risk performing and re-performing whole loans originated prior to the financial crisis. As we show in our investor presentation available on our website, the portfolio has outperformed our expectations, as measured by the movement of loans from current to delinquent status.

We continue to see this asset class as an attractive source of income and capital appreciation for our portfolio. In addition, we have continued to develop our newly originated loan purchase program and are moving closer to launching this initiative.

That concludes our prepared remarks. And we will now open it up for your questions.

Thank you very much. Ladies and gentlemen, at this time we will begin the question-and-answer session.

(Operator Instructions)

And our first question does come from the line of Douglas Harter with Credit Suisse.

This is actually Tapfuma, on for Doug harder.

Just want to go back to the expenses in the quarter. Obviously, elevated there with the one-timers. We saw that in the fourth quarter.

Just wanted to get a good sense of a run rate, going forward there. Is it just as simple as stripping out that [$1.4 million] in total from the G&A and professional fees?

Yes, to respond to that -- first, we can't really give any type of a run rate or prospective guidance on expenses. But as you mentioned, if the we look at the expenses for the quarter and we normalize out the impact of the professional fees related to our S-3 filings and the professional fees in our G&A line item related to evaluation of the potential acquisition -- we factor those million dollars of expenses out, we have a normalized expense run rate for the quarter of about $3 million. And those expenses are all in line with what we were expecting.

We do have a little bit of a chunky expense in the first quarter, due to the fact that we have our annual financial statement audit that occurs. And the bulk of all that work that's done on the audit, because it's a substantive audit in nature, all falls in the first quarter.

So if you take those three factors, I think the team is very comfortable with the expense run rate, factoring those normalization adjustments out of the expenses.

Got it.

So just backing out all those expenses and looking at where you had deployed -- I think you said you're fully deployed at this point -- get me closer to that $0.40 level, in terms of the core earnings power of the portfolio. Am I thinking about that right, at this point?

Yes. I think that there's two components to that. One is the expense piece that Paul covered. And the other is the investment portfolio, which we did continue to ramp up during the quarter. It was not -- I'm sorry, it was fully ramped at the end of the quarter, but it did ramp up during the quarter. So I think you'd have to factor both of those into the analysis.

Great.

And just one last one, if I may. In the other securities buckets, what type of investments do you have in that bucket there?

That $10 million of other investment securities is composed of risk transfer notes from one of the GSV risk transfer programs.

Great. Thanks, guys.

And our next question does come from the line of Trevor Cranston with JMP Securities.

With respect to the potential acquisition you evaluated in the quarter, can you give any color on that -- if it was, maybe, an originator that you guys were looking to buy? And if so, if that's something you guys would continue to look at, going forward, in order to start out on the newly originated loan business?

Trevor, thanks so much. Let me give you some context on potential acquisitions.

As part of our business development activities, we've looked at a couple potential acquisitions. And we do this really opportunistically. I expect that we'll continue to do that.

Obviously, we can't give any assurance that we'll identify any acceptable acquisition target or that we'll be able to reach an agreement on the terms of any deal. And as a result, we don't really -- we don't give out specific acquisition criteria. We really look at each potential situation, and we evaluate it as to whether or not it's going to fit within our business strategy.

And all of these things we look at from a complementary perspective to our organic business development activities -- the things that we've talked about, in terms of legacy portfolio as well as newly originated opportunities. But I'm sure you can understand. As a matter of policy, we cannot discuss any specific deal, unless and until we come to a definitive agreement. And then we'll make a public announcement.

So hopefully that gives you a little bit -- doesn't give you a lot, but that's our policy, is really to be general in nature when we're looking at potential acquisitions.

Understood. And I appreciate those comments.

I guess one other thing. On the performing and re-performing loan side, can you guys comment on what you're seeing in the market right now -- if there's been any kind of trend towards more competition for assets or higher prices? I mean, it looks like the yield on your portfolio is pretty stable this quarter. Just curious about general market conditions.

Yes. I think, as you point out, the yield on our portfolio's been relatively stable. We have, over the last couple of quarters, though -- if you look back -- generated gains on that segment of the portfolio. So that segment of the portfolio is mark-to-market, so that will give a sense of what we've experienced on the price side.

In terms of competition, I don't know that there's anything notable that I've noticed that's changed there. I think the supply has been relatively stable and has met with reasonable demand. I think that, in large part, the market has somewhat tracked the RMBS segment with varying degrees of lag over the last several months -- would be my general comments.

Okay. That's helpful.

And then the last thing -- on the book value roll-forward slide, you guys show a negative $0.35 on the derivative instruments, which seems on the surface, a little bit large, relative to the swap and swaption book. Can you talk about what's in that line item there, this quarter?

It is those two positions that's are driving that loss. And the majority of that is coming from the swaption on the quarter. That's a longer-dated payer swaption.

So as rates continue to rally, and accordingly, as volatility continued to drop, that position was hit accordingly. I think we still are happy to have that position on and are, in many ways, wanting to make sure that we're constantly mindful of the impact of higher rates on the portfolio.

Okay.

So it's not the correct way to look at it to see that you didn't have that swaption at the end of last quarter, and at March 31, it had a positive fair value. You can't take those two numbers and say it looks like it was a positive mark in the quarter?

I'm not sure I understand -- you're right that we didn't have it at the end of last quarter. We acquired it during the quarter, and then it generated a loss, subsequent to acquisition, during the quarter.

Oh, okay. On slide 19. I was just looking at the fair value. Looks like it's positive $2 million, so --

Yes. It still has positive value. It's just less positive than it was at acquisition.

Got it. Okay. That makes sense. Thanks, guys.

Thank you.

And our next question does come from the line of Jim Young with West Family Investments.

Hi, Jim.

Yes, hi. You'd mentioned that, with the mortgage loans you acquired with unpaid principal balance of $100 million -- what were they acquired for in the quarter?

It was approximately $85 million, which, if you think about it on a percentage of the unpaid principal balance, it's roughly in line with the price of our -- the mark-to-market value of our portfolio, in general.

And can you give us a sense of some of the credit characteristics of these mortgage loans? And what kind of an IRR are you expecting from this portfolio?

We can't really comment on prospective IRR. I think, if you look at the -- and we haven't disclosed characteristics of that individual segment of the portfolio.

What I would guide you to is on our slide presentation, slide 9, you can see the change in portfolio characteristics, quarter-over-quarter. And there's nothing really dramatic that leaps out at you.

The average LTV dropped a little bit, probably more due to home price appreciation than due to the acquisition. The average credit score dropped more as a result of the acquisition, but in large part the acquisition is very much in line with our existing portfolio, from a risk standpoint.

Okay. Thank you.

At this time, there are no further questions. I would like to turn the call back over to management for any closing comments.

Well, thank you very much for joining us for our call today. And we look forward to speaking with you on our next earnings call. Once again, thank you very much.

Thank you. Ladies and gentlemen, that will conclude the conference for today. If you would like to listen to a replay of this conference, you may do so by dialing 303-590-3030, or 1-800-406-7325. You will need to enter the access code of 4681154.

Those telephone numbers, once again, are 303-590-3030 or 1-800-406-7325. With the access code of 4681154. Again, we do thank you for your participation on today's call. You may now disconnect your lines at this time.