Tiptree Inc (TIPT) 2015 Q4 法說會逐字稿

Greetings and welcome to the Tiptree Financial Inc. full-year 2015 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sandra Bell. Thank you. You may begin.

Good morning, everyone. Welcome to Tiptree Financial's 2015 earnings call. My name is Sandra Bell; I am the Company's Chief Financial Officer. And I am joined today by our Executive Chairman, Michael Barnes, and Chief Executive Officer, Jonathan Ilany.

Prior to this call we posted the earnings release and presentation on our website at TiptreeFinancial.com. The presentation provides supplemental information to our prepared remarks which we will refer to buy page during the call.

Please turn to page 1 of the presentation where we list our required disclosures in detail. Our remarks on this call are qualified in their entirety by the disclaimers on this page. This presentation is being provided as a supplement to our SEC filings solely for information purposes.

Throughout the presentation there are forward-looking statements which provide management's current expectations of what we believe could occur, including comments about our plans and objectives. Our businesses are subject to risks and uncertainties which are outlined in our SEC filings and which could impact our expectations of future results.

Except as required by the securities laws, we undertake no obligation to update any forward-looking statements. We have also included in this presentation information from publicly available sources, which we have not independently verified.

Lastly, we use non-GAAP measures, including EBITDA and adjusted EBITDA, throughout the presentation. We believe these non-GAAP measures provide supplemental information useful to investors. As these measures are not GAAP, they should not be used as a substitute for GAAP disclosure. The appendix, beginning on page 17, provides a reconciliation of each of these non-GAAP measures to their GAAP equivalent.

With that disclaimer, let me turn it over to Michael who will begin his comments on page 3.

Thank you, Sandra. Good morning and thank you for joining our call. 2015 was a year of significant changes at Tiptree that will provide the foundation of our strategic direction and future growth going forward.

On a consolidated basis total revenues grew 5.5 times to $440 million while contributing $58 million of adjusted EBITDA. Book value per Class A common share increased to $8.96 per share.

Our growth this year was driven by Fortegra's first full year of operations under the Company's ownership, which produced $41 million of adjusted EBITDA. Growing demand for non-bank consumer finance and audit warranty and insurance products contributed to these results.

In the second quarter we closed on our sale of Philadelphia Financial Group and received $142.8 million cash proceeds plus future payments of $7.3 million. The sale resulted in an after-tax gain for 2015 of approximately $15.6 million.

In July we added to our mortgage origination business by acquiring Reliance First Capital, which primarily focuses on agency and government mortgage loans. Higher year-over-year results in our specialty finance segment were driven by improvements in the housing market and small business lending.

Care Investment Trust continued its strategy of building out our senior care real estate portfolio by acquiring $85 million in new senior housing related investments. Positive macro economic and demographic trends continue to support our expectation regarding the senior housing business.

In 2016 we expect to see the benefits from the 2014 and 2015 property acquisition as actions taken to improve rental income and adjusted EBITDA take hold. We initiated our strategy of investing in nonperforming residential mortgage loans ending the year with a portfolio investment of $39.7 million. Since yearend we have added $8 million for a total investment of $47.7 million.

During the year we made $70 million of additional equity investments in Telos 7 warehouse and leveraged loan strategy. Market concern over weakening credit trends, primarily driven by the energy sector, has lowered loan prices and widened spreads slowing new CLO issuance. While we remain comfortable with the underlying credit performance of our loan assets, we expect the volatility to continue through at least the early part of 2016.

Lastly, the Company returned $7.3 million to shareholders for 2015 in the form of dividends and stock buybacks. Tiptree's businesses are leveraged to improvements in the US economy and more specifically to the health of the US consumer.

On page 4 we note improvements in GDP, housing starts and industrial production. With lower unemployment, a strong dollar and lower oil prices the US consumer appears to be more optimistic about the future and is spending more. As you know, public markets have seen a challenging start to the year with investor concerns over energy prices, global growth and high-yield corporate credit.

Despite market volatility we expect to leverage the fundamental macroeconomic trends and continue to grow Tiptree by investing in our existing businesses to achieve revenue, volume and margin expansion, by looking for opportunistic acquisitions and investments in high returning cash flow businesses, and by redeploying capital from non-core capital intensive or underperforming assets.

We believe that our approach to capital management will produce growth and long-term shareholder value. With that said I will turn it back to Sandra who will discuss our 2015 financial results.

Thank you, Michael. Beginning on page 6 you can see our GAAP results along with adjusted EBITDA. For the year we reported GAAP net income of $8.8 million for the operating company and $5.8 million for Tiptree Financial. This includes income of $22.6 million from discontinued operations for the first half of 2015 related to PFG. Adjusted EBITDA at the operating company for the same period was $58.4 million.

Results from continuing operations were primarily impacted by improved profitability from the addition of Fortegra, growth in specialty finance, volumes and (technical difficulty) along with the acquisition of Reliance, increased rental income at Care from both the growth at our portfolio and improving results at our existing properties. And were primarily offset by realized and unrealized fair value losses on our CLO supported note, higher depreciation and amortization and our real estate investments, higher corporate expenses to enhance our controls and infrastructure and separation payments to a former executive.

On pages 7 and 8 we have laid out the components of our segment revenue and adjusted EBITDA. Our 2015 segment revenue grew from $80 million in 2014 to $440 million in 2015. To allow for easier year-over-year comparisons, we have highlighted both PFG revenues included in discontinued operations and income attributable to the consolidated CLOs, neither of which are reported in our revenue. Adjusted EBITDA from continuing operations was up 7.5% year-over-year. With that we will now transition to our segment results and outlook.

Page 10 includes the unaudited pro forma revenues and net revenues in the insurance segment to allow for comparison of Fortegra's year-over-year performance. The pro formas are presented without the purchase price adjustments reflected in our consolidated financial statement. Net revenue, a non-GAAP financial measure, is reconciled to GAAP in the appendix.

Insurance revenues were down slightly year-over-year. Growth in credit protection products and improvement in both specialty and warranty products reflect the growing consumer confidence Michael mentioned earlier. Those improvements were more than offset by the cell phone warranty product which continue to experience competitive pressure.

Adjusted EBITDA was up 5.6% over the prior year primarily driven by an aggressive program to cut costs which resulted in margin expansion of 2.2%. Going forward revenue growth is expected to be supported by additional expansion in credit protection and our specialty insurance product and a disciplined expense management in 2016.

We are pleased with the positive trends in the specialty finance segment this year. On page 11, adjusted EBITDA was $5.9 million, a 7.4 main dollar improvement over 2014. This was driven by improved mortgage volumes, up 131%, as well as increases in our middle-market lending platform (inaudible) which benefited from a 91% increase in average earning assets. With the addition of Reliance and its higher mix of FHA VA and agency volume, net revenue margins increased by 144 basis points year-over-year.

Home affordability continues to be attractive as near-term mortgage rates are expected to remain low by historic standards. Home affordability combined with improving job prospects and home price appreciation are expected to drive positive growth in the mortgage purchase market.

The GSEs and FHA have added product and improved pricing to encourage first-time homebuyers, which seems to be having the desired effect. Lower-priced home sales have picked up in the first two months of 2016 according to the National Association of Realtors.

Turning to page 12, the combination of an aging US population and stable economy continue to support positive dynamics for our senior housing segment. 53% of Care's portfolio was acquired at the end of 2014 through 2015. The acquisitions were primarily managed properties, partnering with existing operators and focused on facilities that are undergoing comprehensive capital expenditure and enhancements to allow them to operate more efficiently.

As the facilities ramp-up and stabilize we expect our results to reflect improvement. While we incur operating expenses on the (inaudible) property, the potential for revenue and NOI growth provide greater upside as occupancy, rental revenues and cost efficiencies are realized.

The increase in the number of properties combined with improving occupancy at existing properties generated higher rental and other income in 2015 compared with 2014. However, the Company also incurred additional depreciation, amortization and interest expense as a consequence of the growth in the portfolio.

Excluding the one-time gain of $7.9 million at Care in 2014, we saw year-over-year growth of 115% in revenue and 106% in adjusted EBITDA. Subsequent to the fourth quarter Care has acquired two new managed properties for approximately $55 million.

We report our CLO businesses in two segments, asset management and corporate and other. In the asset management segment we report management fees earned on both our consolidated and deconsolidated CLOs. In the principal investment portion of corporate and other segment we report our distribution and realized and unrealized fair value adjustments on our retained interest.

On page 13 our asset management fees were down year-over-year from $12 million in 2014 to $10.5 million in 2015. The principal reason for the decline was a combination of amortizing assets under management and our older CLOs and lower fees on more recent CLOs.

Page 14 highlights the key drivers impacting our corporate and other segment. Adjusted EBITDA losses were $33 million which was primarily impacted by our CLO equity performance. We generated $25 million of cash from a combination of management fees, which are recorded in our asset management segment, and distributions on our investments. This was offset by $25.9 million of realized and unrealized losses on our subordinated notes.

We estimate the fair value of our subordinated notes by applying a discounted cash flow methodology and using a number of assumptions to estimate future distribution on those instruments including default rates, expected losses given default, reinvestment rates and discount factors. As a result as distributions are paid the value will naturally decline. Thus as in the case and all periods, a portion of the $17.9 million of unrealized losses in 2015 was actually attributable to earned distribution.

(Inaudible) strategies to invest in middle market loans which are less likely syndicated (inaudible) prior covenant structures. While our loans are less liquid than others and thus more sensitive to fair market value accounting volatility, we believe that our ongoing distributions and fees benefit from the tighter covenants providing us with greater ability to mitigate defaults when credit deteriorates and more stable cash earning.

In the fourth quarter Tiptree purchased 1.4 million common shares of RAIT Financial Trust, a publicly traded commercial real estate trust, and an additional 5.2 million shares in the first quarter of 2016 for a total cost of $16.1 million. We also expect our NPL investments will begin to result in realizations on sales of mortgage loans and/or single-family homes in the second half of 2016.

Lastly, our efforts to improve the controls and reporting infrastructure are reflected in increased payroll and external cost of $2.5 million and $7.6 million respectively, which primarily consist of additional headcount, consultants and audit fees. Also impacting our corporate expenses was $6.5 million of separation payments related to a former executive.

With that I will now pass it on to Michael for a wrap-up on page 15.

Thank you, Sandra. Looking forward we believe Tiptree is well-positioned as a result of the changes we implemented in 2015. Adjusted EBITDA is expected to benefit from continued revenue growth and disciplined expense management of Fortegra.

We expect specialty finance volumes to be supported by positive trends in the housing market and improving product mix. Growing rental income from our current senior care real estate portfolio combined with incremental capital expenditures should drive operating improvements in that segment.

In our credit businesses we expect continued volatility from unrealized gains and losses, but believe that the defaults in our portfolios will remain low for 2016 and the business will continue to provide stable asset management fees and distributions on our principal investments.

Lastly, we plan to redeploy capital from underperforming businesses to support growth in our core segments and expect that investments in our people and infrastructure will deliver improvements in controls and financial reporting. We believe our efforts to increase transparency in our financial reporting should allow investors to better understand the value of Tiptree.

Thank you. And we will now open up the call for Q&A.

(Operator Instructions). [Andrew Cohen], [Badge].

A couple of questions. On the Telos side, as more of the ore recent vintage Telos deals season does that -- do those fees start growing over the next couple years -- or do you get into the higher incentive fee rates?

Once the reinvestment period is over. In the financial statements we do articulate in the footnote on the CLOs the timing of the end of the reinvestment period. And it is at that point that the incentive fees would kick in.

Do we hit any of those this year?

We do not.

Okay. And just going through all the numbers it looks like nice growth basically in margins and revenue almost across the board. Is there any way you can give any kind of guidance for -- like a range of guidance for the year in either segments or as a whole?

No, we are not giving guidance this year at this point.

Okay. I guess that is it for me for now. Thanks.

No problem, thank you.

(Operator Instructions). John Sites, Wexford Capital.

Ladies and gentlemen, it looks like a great year in 2015. So my question is how do you unlock value in your equity going forward?

Good morning, John. As Michael mentioned in our prepared remarks, if you look on page 4 we are saying that 2015 was a year in which we repositioned the Company for long-term growth. And we continue to invest in our existing businesses and we look to add to our portfolio and to acquire and to invest in businesses which contain (technical difficulty) and high cash flow focusing on higher returns. And lastly, redeploy capital from non-core underperforming.

Jonathan, I would add one other point to support your answer and to answer John's questions. We also believe, John, that by improving our transparency and our communication with investors it will help us be able to deliver the message of our strategy in a way that will allow them to take those results and translate it into our forward momentum.

Okay, thank you.

(Operator Instructions). Ladies and gentlemen, we have no further questions in queue at this time. I would like to turn the floor back over to management for closing comments.

Thank you to everyone for dialing in today. We look forward to seeing you during the course of the year. If you have any questions please feel free to reach out to me or the rest of the team. This concludes our conference call. Thank you.

Thank you. Ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.