Ready Capital Corp (RC) 2015 Q4 法說會逐字稿

Welcome to the ZAIS Financial Corporation fourth-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, ma'am.

Thank you. Good day, everyone, and welcome to ZAIS Financial Corp's conference call to review the Company's results for the fourth quarter ended December 31. 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 being webcast through the Company's website, at www.zaisfinancial.com. Additionally, a copy of the Company's fourth 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 provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous assumptions, uncertainties, and known or unknown risk 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.zaisfinancial.com.

Each listener is encouraged to review 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 thank you for joining us for our fourth-quarter results call today. As announced on November 4, 2015, the Company has engaged a financial advisor to evaluate potential strategic alternatives to enhance shareholder value. A strategic review has included the exploration of merger or sales transactions involving the Company or a liquidation of the Company's assets.

The Company and its financial advisor have engaged in preliminary discussions with several potential counterparties. While the Company is currently engaged in discussions with a potential counterparty about a potential merger or sale transaction, there is no assurance that the disclosures will lead to a definitive merger or sale transaction which would be subject to approval by the Company's Board of Directors and its shareholders.

In the event the Company does not reach a definitive agreement for a merger or sale transaction, the Company's Management intends to present the planned liquidation to the Board of Directors for its consideration. There is no assurance that the Company's Board of Directors will approve any plan of liquidation and recommend its acceptance by the Company's shareholders.

In light of the strategic review and the current negotiations, and in order to reduce the current market risk in the investment portfolio, the Company intends to begin selling whole loan assets from its mortgage investment segment. These sales are likely to result in a reduction of the Company's investment income and may, therefore, result in a decision to curtail dividends in the future.

Additionally, as part of the strategic review, the Company has made the decision to cease the purchase of newly originated residential mortgage loans in the mortgage conduit purchase program and will begin unwinding the Company's mortgage conduit business.

Consistent with these changes to the Company's strategy, effective at noon today, Brian Hargrave will be resigning as the Company's Chief Investment Officer to pursue other opportunities, and will be succeeded by Christian Zugel, the Chairman of our Board of Directors. We thank Brian for his leadership as ZFC's CIO and his many accomplishments within the residential whole loan business. And we wish him the best in his future pursuits.

The Company does not intend to disclose further developments until the review is complete and the Company's Board of Directors has taken action with respect to the strategic review. The Company does not intend to make any public announcement of a transaction unless and until it enters into a definitive agreement approved by the Board of Directors.

Now, our financial and operating performance this period was highlighted by core earnings generation of $0.7 million, or $0.08 per diluted weighted average share outstanding. During the fourth quarter, our Mortgage Banking segment continued its strong operating performance.

While down from the sequential prior quarter, fundings and locks were up compared to the fourth quarter of 2014. The Mortgage Banking segment added $4.6 million to the MSR portfolio in the fourth quarter and the operating performance of the Mortgage Banking segment remains encouraging. I will discuss the details of our mortgage banking performance as well as the 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 $1.8 million, or $0.21 per diluted weighted average share outstanding. As of December 31, 2015, book value per share of common stock in OP unit was $19.98, a 2.9% decline from $20.58 at September 30, 2015.

GAAP earnings and book value per share were both negatively impacted by unrealized losses on the mortgage investment portfolio and increased expenses from the strategic review -- associated with the strategic review. Our fourth-quarter dividend, declared on December 17, 2015, was flat as compared to the prior quarter at $0.40 per share of common stock in OP unit.

Donna will discuss these financial results in more detail. With that, I'll now turn the call over to our Chief Financial Officer, Donna Blank.

Thanks, Mike and good morning everyone. As Mike already mentioned, for the fourth quarter ended December 31, 2015, the Company reported GAAP net loss of $1.8 million, or $0.21 per share, which includes operating results for GMFS.

These results include GMFS' operations, which contributed $4.3 million of income before taxes and a general widening of credit spreads led to a decline in the value of the residential mortgage investment portfolio of $4.4 million. Core earnings for the quarter decreased to $0.7 million, or $0.08 per share, compared to $4.1 million, or $0.46 per share, for the quarter ended December 31, 2014.

The decrease in core earnings was primarily due to a decrease in interest income from residential mortgage-backed securities that were sold to finance the GMFS acquisition and increase in expenses due to the strategic review process and the decline in the fair value of MSRs, primarily due to an increase in the value of principal paydown.

The Company recorded net interest income of $4.2 million for the quarter, fourth quarter of 2015 compared with $5.8 million for the prior-year period. The decrease in interest income was due to a decrease in interest income of $1.3 million related to residential mortgage-backed securities due to principal payments, sales to finance the GMFS acquisition and a reduction in yield.

Partially offset by an increase in interest income on mortgage loans held for sale of $0.2 million from GMFS, which was acquired on October 31, 2014. And a decrease in interest income of $0.4 million related to mortgage loans held for investments due to related -- due to scheduled paydowns and payoffs.

At December 31, 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 4.09% for mortgage loans held for investment and 4.05% for the non-agency RMBS and other investment securities.

The Company earned $13.1 million of non-interest income for the three months ended December 31, 2015, which included GMFS operating activities for the quarter compared to $4.7 million for the same period in 2014, which included two months of GMFS' operating activities. Non-interest income primarily consisted of $9.5 million of income from mortgage banking activities net, $2 million of loan servicing fee income net of direct costs and a $1.5 million increase in the fair value of MSRs.

The $9.5 million of income from mortgage banking activities net was primarily comprised of $9.3 million of gain on sale of mortgage loans held for sale, net of direct costs. During the fourth quarter of 2015, the Company recognized a net loss of $5.2 million in other gains and losses compared to a net loss of $2.9 million recorded in the prior-year period. The year-over-year decline of $2.3 million was driven by unrealized losses in the mortgage investment portfolio.

The Company incurred expenses of $12.1 million for the three months ended December 31, 2015, compared with $8.2 million for the same period in 2014. The increase was mainly due to the addition of a full quarter of expenses related to GMFS, including an increase of $4 million of salaries, commissions and benefits and an increase of $0.4 million, primarily relating to rent expense and marketing and advertising and additional expenses related to the strategic review, partially offset by a $1.3 million decrease in contingent consideration.

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

Thanks and good morning, everyone. First, I want to thank my colleagues for their partnership and support of my efforts as the CIO of ZFC. I've enjoyed working with the team and wish them all the best. With that, I'll now turn to the review of the investment performance for the quarter.

On the mortgage banking side, rising interest rates and seasonal slowdown headed into year end led to a fourth-quarter funded origination volume of $400 million, a decline of 17.6% from what was a strong third quarter. At the same time, new interest rate locks for the quarter declined approximately 13.4% to $490 million.

While down from the sequential prior quarter, fundings and locks were up 4.6% and 8%, respectively, compared to the fourth quarter of 2014. The origination mix for the fourth quarter of 2015 was approximately 65.1% purchase transactions, with the remainder refinancing.

The move higher in rates had a positive effect on the fair value of our mortgage servicing rights portfolio and offset to the slightly weaker operating results. Looking ahead, the rally in interest rates subsequent to year end is likely to increase refinance volumes as purchase volumes declined on a seasonal basis.

On the investment portfolio side, after some signs of stability early in the fourth quarter, market volatility increased significantly later in the quarter. As a result, we experienced modest, unrealized losses across our whole loans held for investment, RMBS and other investment securities.

At the same time, fundamentals such as positive home price appreciation, low consumer inflation, and ongoing employment growth remain supportive of long-term prospects for our credit-oriented investment portfolio. As of December 31, 2015, our residential mortgage loan portfolio had a fair value of $397.7 million and non-agency RMBS and other investment securities had a fair value of $122.1 million.

Back on the mortgage banking side, our assets include loans held for sale with an unpaid principal balance of $111.4 million, which are primarily loans eligible for securitization by Fannie Mae, Freddie Mac, or Ginnie Mae. We also held mortgage servicing rights at the fair market value of $48.2 million as of December 31, 2015.

Mortgage servicing rights portfolio consists of loans with an unpaid principal balance of $4.2 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 December 31, 2015, remained largely in line with the third quarter of 2015. At the end of the fourth quarter, approximately 57% of our capital was allocated to the residential mortgage loan investment portfolio which is primarily the seasoned loan portfolio we have acquired and managed since our IPO.

At the same time, approximately 42% 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 December 31, we had a leverage ratio of 2.97 times, up slightly from third-quarter levels.

Our borrowings were composed of $296.8 million outstanding under our loan repurchase facilities used to refinance -- used to finance residential mortgage loans held for investment; $73.3 million outstanding under repurchase agreement secured by our RMBS portfolio; $100.8 million outstanding under warehouse lines of credit, used to fund mortgage loans held for sale; and $56.5 million book value of convertible notes outstanding.

Loan repurchase facilities, 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 quarter. At December 31, 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 will now open it up for your questions.

(Operator Instructions)

Sam Choe.

I was just wondering if you could provide any color on the potential timing of the strategic alternatives that are being considered?

Yes, effectively, we're in a number of different discussions and analyses. But we really can't comment on the timing at this point. We can't really give you much more specifics because we are right in the middle of the process.

Got it.

Then, could you give us a sense of how book value has been trending subsequent to the quarter?

Well, not really. We don't give earnings guidance in that regard. And I think that you sort of know the sorts of assets that we are invested in. It's pretty well disclosed. So I think that's probably the best source of information that you can use for those kinds of projections.

Got it. Thank you.

(Operator Instructions)

Trevor Cranston.

Thanks.

In light of the decision to sell the loan portfolio as part of the strategic review process, can you maybe talk about how you're thinking about the RMBS portfolio and what would drive the decision to either hold onto that portfolio or potentially sell that as well in the future? Thanks.

Trevor, thanks for the question. Again, I have to say that we are right in the midst of these discussions -- not only the discussions with a potential counterparty, but just generally, our thoughts around if those discussions don't move forward what we'll recommend to the Board next. So we really can't get into the details of how we think about whether or not we're going to do X or Y with any parts of the portfolio at this point. Those are just details we can't get into.

Okay. Fair enough.

And then on the dividend, obviously, you made the comment that the sale of the loans may impact the dividend level in the future. Could you clarify at all how you're thinking about the timing of that, since the sale of the loans wouldn't occur until the second quarter? And just share any thoughts on maybe how you're thinking about the first-quarter dividend level?

Again, with the respect to the process of selling the season's re-performing mortgage loans, we're in process. We think that the sale should be completed by early second quarter 2016. Right now, the loan sale is subject to negotiation and due diligence. And there's really no assurance that they sale will close.

But that's our timing that we are targeting. Again, there's no assurance that we can get the sale done; but that's the timing.

Okay. Thanks.

(Operator Instructions)

Jim Young.

Hello. As the strategic review has been ongoing for now a little over four months and I recognize that you can't share any definitive information with us. But I guess the question is, how committed is management to realizing either a merger or sale transaction at this point in time?

Well, Jim, I can say to you and all that are on the call right now that this management team is fully committed to maximizing shareholder value. That is exactly what we're focused on. That will either happen through sale, merger, or liquidation.

But what we're most focused on and what's taking the time and why we're taking such a deliberative process and so is this Board is to get that maximum number done.

Okay. Thank you.

(Operator Instructions)

Ron Maffe.

Yes, can you talk a little bit with Brian Hargrave resigning effective today, how the mortgage portfolio and management responsibilities will be divided up or who is there that is able to handle that side? And also, if the Company was sold or wound down, would you expect there to be any termination fee paid? I know some of the REITs and yours have a termination provision if the management contract is terminated that it could be up to three times the annual management fee.

Okay, so let me answer the first question. And for those of the shareholders who don't really know about ZAIS Group. ZAIS Group, who's the advisor to ZFC, has a very deep and very extensive capability in residential mortgages, both in terms of securities and whole loans. The person who was going to be taking over the role of CIO is our current Chairman of the Board, Christian Zugel.

But he is also the Chief Investment Officer of ZAIS Group LLC and has extensive experience in this space. We have an existing, very active, robust, residential mortgage business on the investing side. So there is a deep bench here with respect to mortgages.

With respect to your question regarding the termination fee. Again, we really can't speak specifically to any details of this potential merger or sale transaction that we're in the midst of looking at. We certainly will be considering the termination fee in light of a specific transaction we're negotiating.

But beyond that, in terms of getting into details, it's very hard -- given that this is all confidential, we can't really go down and speak about specific elements of the review or any specific transaction at this point.

Thank you.

(Operator Instructions)

Speakers, it does appear we have no further questions at this time. I will now hand it back over to you 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.

And that does conclude today's program. We'd like to thank you for your participation. Have a wonderful day, and you may disconnect at any time.