Ready Capital Corp (RC) 2015 Q3 法說會逐字稿

Good day, and welcome to the ZAIS Financial Corporation Third Quarter 2015 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Marilynn Meek. Please go ahead.

Thank you. Good day, everyone, and welcome to ZAIS Financial Corp's conference call to review the Company's results for the third quarter ended September 30. On the call today will be Michael Szymanski, President and Chief Executive Officer; Donna Blank, Chief Financial Officer; and Brian Hargrave, Chief Investment Officer.

As a reminder, this call is being recorded and also is being webcast through the Company's website, www.zaisfinancial.com. Additionally, a copy of the Company's third quarter investor presentation is available for your 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 provision of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements are subject to numerous assumptions, uncertainties, 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 this morning and may also be accessed through the Company's website at www.ziasfinancial.com. Each listener is encouraged to review those reconciliations provided in the earnings release together with all information provided in the release.

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

Good morning, everyone, and thank you for joining us for our third quarter results call. We're pleased with our financial and operating performance this period, which was highlighted by core income generation of $4.8 million, or $0.54 per diluted weighted average share outstanding. During the third quarter, our Mortgage Banking segment continued its strong operating performance, with the mortgage origination volumes down only slightly from the levels of the second quarter 2015.

The fair value of our MSR portfolio declined $5.9 million. However, the operating performance of our Mortgage Banking segment remains encouraging. Brian will discuss the details of our Mortgage Banking performance as well as the positive credit performance of our investment portfolio later in the call.

Now, turning to our financial performance; on a GAAP basis, we reported a net loss for the quarter of negative $6.7 million or $0.76 per diluted weighted share outstanding. As of September 30, 2015, book value per share of common stock and OP unit was $20.58, representing a 5.3% decline from $21.74 at June 30, 2015. GAAP earnings and book value per share were both negatively impacted by a decline in the fair value of mortgage servicing rights and unrealized losses on the mortgage investment portfolio.

Our third quarter dividend, declared on September 17, 2015, was flat as compared to the prior quarter at $0.40 per share of common stock and OP units. Donna will discuss these financial results in more detail. Current market conditions find the Company's common stock trading over an extended period of time at a significant discount to book value, similar to many in the mortgage REIT space. In light of these conditions and management's view of the near term prospects for improvement, the Company has decided to commence a process to evaluate potential strategic alternatives to enhance shareholder value.

These alternatives include, among others, a sale or a combination or liquidation of the Company or other possible transactions. Houlihan Lokey Capital is serving as financial advisor to the Company. While the Company has commenced exploring these potential alternatives, no assurance can be given as to the outcome or the timing of the process. The Company does not intend currently to disclose further developments with respect to the process until the strategic review has been completed. Therefore, we are unable to answer any questions on the subject at this time.

With that, I'll turn the call over to our Chief Financial Officer, Donna Blank.

Thanks, Mike. Good morning, everyone. As Mike already mentioned, for the third quarter ended September 30, 2015, the Company reported GAAP net loss of $6.7 million or $0.76 per share, which includes operating results for GMFS. GAAP earnings were impacted by a decline in interest rates, which led to a decline in the fair value of the MSRs of $5.9 million. In addition, a general widening of credit spreads led to a decline in the value of the mortgage investment portfolio by $5.7 million.

Core earnings for the quarter increased to $4.8 million or $0.54 per share compared to $3.1 million or $0.35 per share for the quarter ended September 30, 2014. The increase in core earnings was primarily due to the addition of net income from GMFS operations, partially offset by a decline in net interest income due to the sale of RMBS assets in the fourth quarter of 2014 to fund the GMFS purchase, and a decrease in the net interest spread on those assets. The Company recorded net interest income of $4.9 million for the third quarter of 2015 compared with $6.5 million in the prior year period.

There was a decline in net interest income related to the mortgage investment portfolio of $0.3 million, primarily due to the principal amortization resulting from pay downs; and net interest income for RMBS decline by $1.7 million, primarily due to the reallocation of capital to whole loans and the sale of securities in the fourth quarter of 2014 to fund the acquisition of GMFS.

At September 30, 2015 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 4.8% for the mortgage loans held for investment and 4.38% for the non-Agency RMBS and other securities. The Company earned $8.9 million of non-interest income for the three months ended September 30, 2015, due to the inclusion of the operating results for GMFS. There were no comparable results for the quarter ending September 30, 2014.

Non-interest income consisted primarily of $13.1 million in income from mortgage banking activities, net, which includes $12.8 million of gain on sale of mortgage loans held for sale, net of direct costs. In addition, there was a $1.7 million of loan servicing fee income, net of direct costs, and $5.9 million decrease in the fair value of the mortgage servicing rights. During the third quarter of 2015, the Company recognized a net loss of $8 million in other gains and losses compared to a net loss of $1.8 million recorded in the prior year period. The year-over-year decline of $6.2 million was driven by unrealized losses on the mortgage investment portfolio.

The Company incurred expenses of $12.9 million for the three months ended September 30, 2015 compared with $3.4 million for the same period in 2014. The increase was mainly due to the addition of $7.7 million of salaries, commissions and benefits; $1.5 million primarily relating to rent expense and marketing and advertising; and $0.3 million related to the increase in contingent consideration, each relating to GMFS. The Company's effective tax rate was negative 3.6% for the three months ended September 30, 2015. The Company's effective tax rate differs from its statutory tax rate of 35% due to the impact of the [REIT election] and an increase in the deferred tax asset valuation allowance.

I'd now like to turn the call over to our Chief Investment Officer, Brian Hargrave.

Thank you, and good morning, everyone. As Mike mentioned, our Mortgage Banking segment results for the quarter were solid, while the credit performance of our investment portfolio continues to exceed our expectations. On the Mortgage Banking side, lower interest rates, increased home sale activity and strong execution resulted in third quarter origination volumes of $485.4 million, a decline of 2.5% from what was a strong second quarter.

At the same time, new interest rate locks for the third quarter declined approximately 0.2% to $566 million. The origination mix for the third quarter of 2015 was approximately 73% purchase transactions with the remainder refinancings. The move lower in rates did have a negative effect on the fair value of our mortgage servicing rights portfolio, an offset to the strong operating results. While the mortgage origination market will naturally slow as we move into the winter months, the trajectory of our Mortgage Banking platform remains encouraging.

On the investment portfolio side, markets became increasingly volatile during the third quarter. As a result, we experienced modest unrealized losses across our whole loans held for investment, RMBS, and other investment securities. From a fundamental standpoint, continued home price appreciation, low consumer inflation and ongoing employment growth remain supportive of long-term prospects for our credit oriented investment portfolio. As of September 30, 2015, our residential mortgage loan portfolio had a fair value of $401.2 million, and non-Agency RMBS and other investment securities had a fair value of $128.4 million.

Back on the Mortgage Banking side, our assets include $114.7 million of loans held for sale, which are primarily loans eligible for securitization by Fannie Mae, Freddie Mac or Ginnie Mae. We also held mortgage servicing rights with a fair market value of $42 million as of September 30, 2015. The mortgage servicing rights portfolio consists of loans with an unpaid principal balance of $3.9 billion, approximately 64% of which are conventional Fannie Mae and Freddie Mac loans, and the remaining 36% are Ginnie Mae loans.

Our capital allocation as of September 30, 2015 remained largely in line with the second quarter of 2015. At the end of the third quarter, approximately 58% of our capital was allocated to the residential mortgage loan portfolio, which is primarily the seasoned loan portfolio we have acquired and managed since our IPO. At the same time, approximately 38% of our capital at the end of the quarter was allocated to mortgage banking activities, primarily in the form of mortgage servicing rights and loans held for sale.

At September 30, we had a leverage ratio of 2.9 times, up slightly from second quarter levels. Our borrowings were composed of $295.3 million outstanding under loan repurchase facilities used to finance residential mortgage loans held for investment; $74.5 million outstanding under repurchase agreements secured by our RMBS portfolio; $104.2 million outstanding under warehouse lines of credit used to fund mortgage loans held for sale; and $56.2 million book value of convertible notes outstanding.

The loan repurchase facility, warehouse lines of credit and repurchase agreements bear interest at rates that have historically moved in close relationship to LIBOR. Our interest rate hedging strategy also did not change materially during the third quarter. At September 30, 2015, our mortgage loans held for sale and interest rate lock commitments were primarily hedged with forward sales of agency securities. We also held a relatively small interest rate swap position in the investment portfolio.

That concludes our prepared remarks, and we'll now open it up for your questions.

(Operator Instructions) Douglas Harter.

Hi, this is actually Sam Choe filling in for Doug Harter. I was wondering if you could give us a sense of what the pay history has been like for your re-performing loans?

Pay history, I mean, probably the best way to look at that is to look at our investor presentation on slide nine. Given that over 90% of the portfolio is contractually current -- in our investor presentation on that slide, slide nine, we plot the current to delinquent roll rates, so in a given month, for all the loans that are current, what percentage of those loans roll into a delinquency state in that given month. So you can see historically how that's moved over time and kind of settled in somewhere in the 1.5% to 2% range on average. But that's probably the best indication of pay history at kind of a higher level.

I see; so you don't do like a breakdown of maybe like 12 months, 18 months, something like that?

We haven't done that.

Got it. I guess, shifting gears, looking at mortgage banking segment, I mean, how are you thinking about origination volumes going forward? Do you see a meaningful drop-off due to seasonality in the fourth quarter, or do you expect more of the same?

I think the answer, unfortunately, is it depends largely on interest rates. I would say that rates have certainly moved back up from the end of the third quarter, and you would expect purchase volume to -- the share of volume that is purchase transaction related to increase as a result; and that purchase volume is going to be more seasonal. So that's an another way of saying, as rates move higher and the business shifts to a purchase market, the seasonality is going to be stronger, but I don't think we can give you any real firm guidance other than that.

Sure, okay. Thank you so much.

Trevor Cranston.

On the Mortgage Banking segment, I just wanted to make sure I understand the improvement in the results sequentially. Am I understanding correctly that kind of the improvement in execution this quarter is primarily driven by the drop in rates, or is there some other components going on there?

I think that certainly the rates are going to be the predominant effect there. I think that probably if you went back and looked over the time we have owned the platform, I think we have been picking up some market share over the course of that time period. But it's kind of hard to tease out exactly the relative effects of those moves. But certainly in the short term the rate movements are going to be the primary driver.

Okay, so when we're thinking about going ahead into the fourth quarter, absent a meaningful drop in rates, it would be reasonable to expect the profitability to revert downwards somewhat?

I think as volume drops, yes, you would expect to see that. And again, like I said earlier, I think the volume heading into the end of the year will largely be a function of movements in rates.

Got it, okay. And I understand you guys can't really comment on the strategic alternatives, but can you give us any kind of just general thinking on how long you're expecting the review period to take before you can comment again on kind of where it comes out?

Sure, Trevor. As we've announced, we're conducting a comprehensive strategic review, and it's at a relatively early stage. And there is really nothing to report at this time. We don't have a specific end date, but we do anticipate that it will be completed by the end of the year.

Okay, great. That's helpful. Thanks, guys.

(Operator Instructions) Rob Brock.

Thank you. First, Michael, thanks very much for doing the strategic review; as significant shareholders and long-time shareholders we really appreciate your focus on trying to maximize shareholder value. So, thank you. My question today is, you may not be able to answer, but clearly an important part of your business is trying to become a leader in the mortgage origination servicing business. Do you have any idea what a business like this might fetch relative to where you're carrying at book value on your books? Is there any way you can speculate on that?

Yes, first of all, thank you very much for your comments. We're just not at a position to comment on details like that. We are going through the review; it's a confidential review. It is something that is a Board level process. Those kinds of specific analysis of the various different components of our businesses are absolutely being undertaken with Houlihan Lokey, our Financial Advisor. I can't really comment on the specific stuff.

I understand. Thank you.

Guillermo Roditi Dominguez.

Hi, good morning. In the last quarter, I guess there was some -- you mentioned of securitization in order to kind of term fund the whole loans not being something you guys were exploring at that time. Has that changed since then?

I don't think anything is changed in terms of the way we think about financing that portfolio. Obviously, we haven't reported any developments in that. So we haven't -- undertaking a securitization, or we don't have anything in the market at this point, but I don't know that our thinking at a high level around the financing of that portfolio has changed.

And just following from that, there is obviously the converts coming due in 2016; that's a significant chunk of capital, and it was pricey capital. So how are you guys thinking ahead as to how you are going to replace that funding, whether you guys can bring that with average cost of capital down or not?

I mean, I think at this stage it does come to a year from now; we have an eye on it. We don't have -- obviously it somewhat depends on what happens between now and then. But at the worst case, we could de-lever and sell assets to pay that off. So from a liquidity standpoint, I don't think we have any concerns.

Okay. And finally, sorry about that; we've seen a few of your peers join different federal home loan banks in order to gain term financing for some of these whole loans. Is that something you guys have explored or are currently exploring? Or how are you guys thinking about that, if you are?

Yes, let me take that one. We certainly have looked at that in the past, and we're engaged in discussions, but given the strategic review, what we've said is we've taken a step back, and we're evaluating all aspects of our financing. So we have noted that the trend in our industry -- we definitely -- we're focused on it, but we've stepped back as part of the strategic review.

Thank you so much.

(Operator Instructions) And it appears that we have no further questions at this time. I'll turn it back to management for any additional or closing remarks.

Well, thank you all for your participation today, and we look forward to speaking with you again on our next earnings call. Have a great day. Thank you.

This does conclude today's teleconference. You may now disconnect. Thank you and have a great day.