Filing summary: Five Oaks Investment Corp. (OAKS)
Registrant and period: The supplied filing is Five Oaks Investment Corp.’s Form 10-K for the fiscal year ended December 31, 2014, filed March 16, 2015. It is not a filing for Lument Finance Trust, Inc.; the company name in the request metadata does not match the filing.
Business context
Five Oaks was an externally managed mortgage REIT investing with leverage in Agency and Non-Agency residential mortgage-backed securities (RMBS), multifamily MBS, and residential mortgage loans. In 2014 it shifted toward credit investments, built a prime-jumbo loan aggregation and securitization platform through its taxable REIT subsidiary, FOAC, and completed its first two residential loan securitizations. It also acquired subordinated interests in two Freddie Mac K-Series multifamily trusts. Results are for the full fiscal year; fourth-quarter figures are noted separately. The 2013 comparison is affected by the company’s March 2013 IPO and different portfolio scale.
Key financial and operating metrics
| Metric | FY 2014 / year-end | Comparable FY 2013 / year-end |
|---|---|---|
| Interest income | $45.8 million | $16.4 million |
| Interest expense | $27.8 million on the statement of operations | $2.2 million on the statement of operations |
| Net interest income | $18.0 million | $14.2 million |
| Other income (loss) | $(3.1) million | $(6.1) million |
| Total expenses | $11.5 million | $4.9 million |
| Net income | $3.3 million | $3.2 million |
| Net income attributable to common stockholders; diluted EPS | $0.43 million; $0.03 | $3.18 million; $0.52 |
| Comprehensive income (loss) attributable to common stockholders | $18.7 million | $(10.3) million |
| Cash from operating / investing / financing activities | $20.7 million / $(250.9) million / $229.4 million | $13.3 million / $(402.9) million / $419.1 million |
| Cash and cash equivalents at year-end | $32.3 million | $33.1 million |
| Total assets / stockholders’ equity at year-end | $2.922 billion / $212.8 million | $528.2 million / $113.9 million |
At December 31, 2014, balance-sheet repurchase agreements were $544.6 million for securities and $50.3 million for held-for-sale loans. Including linked transactions, reported repo financing was $693.9 million for securities; management reported overall debt-to-equity of 2.8:1 on a GAAP basis and 3.5:1 on its non-GAAP basis. Four consolidated securitization trusts added $2.181 billion of non-recourse liabilities and $2.390 billion of assets; the filing says the company’s maximum exposure to loss from consolidating these trusts was its $208.8 million net investment.
Unrestricted cash was $32.3 million, with $2.2 million of unpledged securities available for liquidity. Repo weighted-average borrowing rates were 0.81% on the GAAP securities basis, 1.03% including linked transactions, and 2.86% for held-for-sale mortgage loans; reported haircuts ranged from 3% to 55%, with a 15.6% weighted average. The company reported meeting its financial covenants and promptly meeting margin calls during the year.
Material changes versus the prior period
- FY 2014 net interest income increased by $3.8 million, but expenses rose by $6.6 million and preferred dividends increased to $2.9 million from $0.04 million. Common-stockholder net income fell to $0.43 million from $3.18 million.
- Other loss improved to $3.1 million from $6.1 million. The 2014 result included $21.1 million of realized and unrealized derivative losses, partly offset by linked-transaction and investment gains. AFS securities’ unrealized gains are recorded in other comprehensive income, not earnings.
- Capital raised through common and preferred equity offerings totaled $98.4 million, according to management, and total capital increased 86.8%. Common shares outstanding rose from 7.39 million to 14.72 million; Series A preferred shares increased from 800,000 to 1.61 million.
- Total assets increased sharply, largely because of first-time consolidation of two multifamily and two residential securitization trusts. This gross-up does not mean the trust assets are freely available to the parent company; assets are restricted to trust obligations.
- Fixed-rate Agency RMBS declined from 39.2% of assets on management’s non-GAAP comparison basis at year-end 2013 to 10.1% at year-end 2014. Management reported a 3.5% positive 2014 economic return on common equity, while book value per common share declined $1.03; year-end book value was $11.93 per share.
- Fourth-quarter common-stockholder net loss was $4.49 million, or $(0.31) per share, versus net income of $10.70 million, or $1.45 per share, in Q4 2013. Management attributed the decline principally to other losses, expenses, and preferred dividends; Non-Agency RMBS price declines also weighed on quarterly performance.
Outlook, risks, and unusual items
- FOAC had $375 million of warehouse financing lines at year-end and had sold $379 million of loans into two securitizations. Management expected to launch a proprietary securitization shelf in Q2 2015 and anticipated improved efficiency, but stated that execution and cost savings were not assured.
- FOI became a Federal Home Loan Bank member on February 24, 2015. The company disclosed regulatory uncertainty: a proposed FHFA rule could require termination of membership and prompt repayment of advances, potentially affecting liquidity. FOI was negotiating for advances; the filing gave no committed borrowing amount.
- Management highlighted interest-rate, spread, prepayment, credit, valuation, liquidity, and refinancing risks. Short-term repo funding against longer-lived mortgage assets creates exposure to rollover risk and margin calls. A modeled 100-basis-point rate increase was associated with a 15.5% decline in projected net interest income and a 1.52% decline in projected portfolio value; these are estimates, not forecasts.
- Credit risks include subordinated and unrated/non-investment-grade holdings, geographic concentration, and exposure to borrower defaults and property values. California represented 47.16% of Non-Agency RMBS exposure on the disclosed combined basis; 34.8% of that portfolio was not rated. The company also described risks in its new loan acquisition, servicing, and securitization businesses, including repurchase claims, regulatory compliance, and execution.
- Derivative accounting and fair-value elections can make earnings volatile. The company did not apply hedge accounting; in 2014 it recorded net realized derivative losses of $18.2 million and unrealized losses of $2.9 million. Consolidation and fair-value elections for trusts also affect reported assets, liabilities, and earnings.
- Common dividends declared were $1.47 per share for 2014; the board declared $0.125 monthly per common share for January–March 2015. Dividends are discretionary, preferred dividends have priority, and the company has no minimum common-dividend commitment. The Series A preferred stock carries an 8.75% annual dividend rate on its $25 liquidation preference.
- The filing reported effective disclosure controls and management-assessed internal control over financial reporting as effective. The external auditor did not audit or opine on internal-control effectiveness. No litigation was reported as of the filing date. The filing also disclosed that independent director William Houlihan settled an SEC administrative proceeding in March 2015, paid a $15,000 civil penalty, and neither admitted nor denied the allegations.
Investor verification priorities
- Confirm the issuer identity: this filing is for Five Oaks Investment Corp., not Lument Finance Trust, Inc.
- Review audited statements and notes for the effects of consolidating the four trusts, linked-transaction accounting, and non-GAAP portfolio and leverage measures.
- Assess cash available outside restricted collateral and securitization trusts, repo maturities and haircuts, counterparty concentration, and sensitivity to margin calls.
- Evaluate whether FOAC can source loans and execute securitizations profitably, including related-party fees, servicing exposure, repurchase obligations, and planned shelf-program costs.
- Test dividend coverage against earnings, REIT distribution requirements, preferred-stock priority, and future funding needs; do not treat the declared dividend as guaranteed.
- Monitor FHFA rulemaking and whether FOI retains FHLB access, and verify any advances, repayment terms, and potential liquidity impact.
- Compare management’s economic-return and book-value claims with GAAP comprehensive income, per-share data, and the filing’s underlying assumptions.