Five Oaks Investment Corp. — Form 10-Q Summary
Entity note: The request identifies Lument Finance Trust, Inc., but the supplied filing is for Five Oaks Investment Corp. (NYSE: OAKS). This summary reflects the filing provided.
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2016; financial statements are unaudited. Five Oaks was an externally managed mortgage REIT investing in residential and multifamily mortgage-backed securities, residential mortgage loans, and mortgage servicing rights. It relies substantially on short-term repurchase financing.
Financial results and position
| Metric | Q3 2016 / September 30, 2016 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $2.306 billion | $2.498 billion at December 31, 2015 |
| Total stockholders’ equity | $149.6 million, including $37.2 million preferred equity | $177.5 million at December 31, 2015 |
| Common book value per share | $7.70 | $7.88 at June 30, 2016 |
| Net interest income | $6.15 million for Q3; $17.69 million for nine months | $7.10 million and $24.77 million, respectively, in 2015 |
| Net income (loss) attributable to common stockholders | $0.62 million, or $0.04 per share, for Q3; $(22.16) million, or $(1.52) per share, for nine months | $(2.58) million, or $(0.18) per share, for Q3 2015; $(5.66) million, or $(0.38) per share, for nine months 2015 |
| Cash flows, nine months | Operations: $0.42 million provided; investing: $165.35 million used; financing: $167.38 million provided | Cash and equivalents ended at $28.59 million |
Q3 interest income was $22.73 million and interest expense was $16.58 million. The filing does not provide a conventional operating margin measure. Nine-month other income/loss was a $25.02 million loss, reflecting investment and hedge losses, fair-value changes, and a one-time tax-related interest charge.
At quarter-end, repurchase agreements totaled $746.6 million, with a weighted-average rate of 0.89%; the weighted-average rate on securities repos was 0.88% in management’s discussion. Consolidated trust debt of approximately $1.397 billion is non-recourse and secured by the trusts’ assets. Overall debt-to-equity leverage was 5.0:1. Unrestricted cash was $28.6 million and restricted cash was $14.1 million. The company reported compliance with borrowing covenants.
Material changes versus comparable periods
- Q3 returned to modest common-stockholder profitability from a year-earlier loss, while the nine-month common loss widened substantially.
- Nine-month net interest income fell about 29% year over year, primarily as balances in consolidated securitization trusts declined. Total interest income and expense also decreased.
- The portfolio shifted toward Agency RMBS: quarter-end Agency holdings rose to $702.0 million from $619.8 million at June 30; Non-Agency RMBS fell to $22.7 million GAAP fair value from $43.9 million; multifamily MBS rose to $92.7 million.
- Management reported non-GAAP combined Non-Agency exposure of $27.7 million at quarter-end, down from $57.4 million at June 30; it sold a further $13.4 million after quarter-end.
- Common dividends declared were $0.18 per share for Q3, compared with $0.30 in Q3 2015; nine-month dividends were $0.54 versus $1.05.
- Assets and liabilities declined partly because of second-quarter Re-REMIC transactions and deconsolidation of the JPMMT 2014-OAK4 residential trust.
Outlook, risks, contingencies, and unusual items
- Effective August 1, 2016, Five Oaks stopped aggregating prime jumbo mortgage loans and said future securitizations would be opportunistic. Management estimated annual cost savings of $2 million over the following three to nine months. The remaining $25 million warehouse facility terminated November 1, 2016.
- Management said it would redeploy capital toward Agency RMBS and consider complementary businesses that do not depend on short-term repo financing. The filing gives no earnings or return guidance.
- On November 9, the board declared a $19.38 million deficiency dividend, or $1.33 per common share, to address 2013 undistributed REIT taxable income after determining that certain hedge gains could not be offset against capital losses for federal tax purposes. Payment was scheduled for December 26, 2016, in cash and stock, with cash capped at $3.88 million. The company recorded $1.86 million of expected IRS interest expense in Q3; actual interest could differ.
- Disclosure controls and procedures were ineffective at September 30 because of a material weakness involving insufficient timely technical review of the 2013 REIT tax position. A separate prior weakness involved accounting for fair-value-option securities and had led to restated 2015 interim statements. Remediation was underway, but completion timing was not estimated.
- Key risks include short-term financing and rollover exposure, margin calls, counterparty concentration, market liquidity, interest-rate and prepayment changes, credit losses, and potentially ineffective hedges. The company’s modeled +100-basis-point rate shock projected a 63.63% decrease in net interest income and a 0.26% decrease in portfolio value; these are model estimates, not forecasts.
- Management cited reduced dealer and bank capacity for financing credit-sensitive assets and uncertainty about interest rates. It said it had met margin calls experienced during the period.
Important facts for investors to verify
- Confirm the issuer mismatch: the filing is Five Oaks, not Lument Finance Trust.
- Review the deficiency dividend’s final cash-versus-stock allocation, payment, and IRS interest amount.
- Track remediation and testing of both material weaknesses, and any subsequent changes in disclosure-control effectiveness.
- Verify realized performance, asset mix, repo availability and cost, collateral haircuts, margin calls, and leverage following the strategic shift.
- Assess whether the projected $2 million annual savings materialize and whether the reduced prime jumbo activity affects servicing income or other revenues.
- Examine the basis and sensitivity of fair values, credit-loss estimates, and interest-rate stress assumptions, especially for less-liquid and non-Agency holdings.