SEC Filing Summary
Registrant and period: The filing is for ZAIS Financial Corp., not Ready Capital Corp., for the quarter ended March 31, 2016. The company was a Maryland REIT focused on residential mortgage investments, non-Agency RMBS, mortgage servicing rights and mortgage banking through GMFS, LLC.
Business Context and Reporting Period
- The company operated through two segments: residential mortgage investments and residential mortgage banking.
- GMFS originated, sold and serviced residential mortgage loans and had 243 employees at March 31, 2016.
- The company was externally managed by ZAIS REIT Management, LLC and held approximately 89.6% of the operating partnership.
- The filing was signed May 10, 2016, and reported unaudited results for the three months ended March 31, 2016, compared with the prior-year quarter.
Financial Performance and Key Metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total interest income | $8.7 million | $9.7 million |
| Interest expense | $4.8 million | $4.7 million |
| Net interest income | $3.9 million | $4.9 million |
| Non-interest income | $5.7 million | $9.4 million |
| Total expenses | $14.4 million | $12.2 million |
| Net income/(loss) | $(3.4) million | $0.4 million |
| Net loss attributable to common stockholders | $(3.0) million | $0.4 million |
| Diluted EPS | $(0.38) | $0.05 |
| Core Earnings, non-GAAP | $1.2 million | $4.5 million |
| Core Earnings per diluted share | $0.14 | $0.51 |
Net interest margin, calculated as net interest income divided by interest income, was approximately 44.9% in Q1 2016 versus 51.0% in Q1 2015. The company reported a mortgage investment net interest spread of 4.05%, unchanged from the prior-year comparable disclosure, while the spread on non-Agency RMBS and other investment securities declined to 2.99% from 4.97%.
- Mortgage banking activities, net, increased to $11.7 million from $11.2 million.
- Loan servicing fee income, net of direct costs, increased to $2.1 million from $1.6 million.
- Mortgage servicing rights fair value declined by $8.1 million, compared with a $3.4 million decline in Q1 2015.
- Other gains and losses improved to a net loss of $0.2 million from a net loss of $1.9 million.
- Transaction costs increased substantially to approximately $2.0 million, primarily from strategic alternatives and the pending Sutherland merger.
Balance Sheet, Liquidity and Debt
| Metric | March 31, 2016 | December 31, 2015 |
|---|---|---|
| Total assets | $802.7 million | $775.1 million |
| Cash and cash equivalents | $66.6 million | $20.8 million |
| Restricted cash | $4.2 million | $4.4 million |
| Total liabilities | $631.8 million | $597.4 million |
| Total equity | $170.8 million | $177.8 million |
| Book value per common share and OP unit | $19.19 | $19.98 |
| Leverage ratio | 3.26x | 2.97x |
- Mortgage assets included $369.0 million of seasoned and re-performing loans reclassified to held for sale, $32.1 million of newly originated investment loans, $87.1 million of non-Agency RMBS, $110.9 million of mortgage loans held for sale and $44.9 million of MSRs.
- Debt included $101.5 million of warehouse borrowings, $39.6 million under a Treasury repurchase agreement, $297.4 million under loan repurchase facilities, $60.8 million under securities repurchase agreements and $56.8 million carrying value of Exchangeable Senior Notes.
- The company reported $185.0 million of aggregate warehouse capacity and $25.8 million of liquidity cushion, excluding GMFS warehouse facilities and repurchase agreements.
- All significant debt covenants and margin call requirements were satisfied as of March 31, 2016.
- Cash flow provided by operating activities was $0.6 million, compared with cash used of $30.1 million in Q1 2015. Investing activities provided $20.4 million and financing activities provided $24.8 million, producing a $45.8 million increase in cash.
Material Changes Versus the Prior Comparable Period
- The company shifted from a small profit to a GAAP net loss, primarily due to lower net interest income, a larger MSR fair value decline and approximately $1.5 million of additional expenses.
- Core Earnings fell approximately 73% to $1.2 million, reflecting transaction costs, a $1.2 million decrease in net interest margin contribution and higher MSR payoffs.
- Residential mortgage investment assets declined as the company sold non-Agency RMBS and reclassified approximately $369.0 million of seasoned, re-performing loans from held for investment to held for sale.
- Non-Agency RMBS fair value declined to $87.1 million from $109.3 million, while MSR fair value declined to $44.9 million from $48.2 million.
- Mortgage loans held for sale declined to $110.9 million from $115.9 million, although GMFS mortgage originations increased to $432.1 million and interest rate locks increased to $616.7 million.
- Leverage increased from 2.97x to 3.26x, while book value per share declined from $19.98 to $19.19.
Guidance, Outlook, Risks and Unusual Items
- The company expected to sell its seasoned, re-performing loan portfolio in the second quarter of 2016. Management warned that the sale would reduce investment income and could result in dividend curtailment if the proposed merger did not close.
- The company ceased purchasing newly originated residential mortgage loans through its mortgage conduit program and began terminating related contracts and surrendering governmental licenses.
- The proposed Sutherland Asset Management Corporation merger, announced after quarter-end, was expected to close in the third quarter of 2016, subject to stockholder, regulatory and other customary conditions. The transaction contemplated up to $64.3 million of cash tender consideration, issuance of company shares and OP units, an $8.0 million termination fee to the existing advisor if the merger closed, and replacement of the advisor by Waterfall Asset Management.
- The $57.5 million principal amount of 8.0% Exchangeable Senior Notes matured November 15, 2016. If the merger did not close, management intended to sell assets to fund repayment.
- GMFS maintained a $3.4 million loan indemnification reserve. A counterparty claim related to historical loan sales could expose GMFS to substantial damages; the company could not estimate the likelihood or amount of loss. An escrow balance of approximately $4.0 million and contingent consideration were potential sources of recovery, but losses beyond those amounts could materially affect results.
- Interest-rate, prepayment, credit, fair-value, counterparty and refinancing risks were significant. A hypothetical 50-basis-point increase in LIBOR was estimated to increase quarterly interest expense on variable-rate debt by approximately $0.6 million.
- The company remained dependent on short-term warehouse and repurchase financing, including facilities with maturities in 2016, and refinancing or renewal was not guaranteed.
- The company declared a quarterly dividend of $0.40 per share and OP unit for payment on April 15, 2016.
Investor Verification Checklist
- Confirm the issuer identity: the supplied filing is for ZAIS Financial Corp., although the request identifies Ready Capital Corp.
- Verify completion of the Sutherland merger, the sale of the seasoned loan portfolio and the resulting change in business strategy and asset mix.
- Verify repayment or refinancing of the Exchangeable Senior Notes and the status of 2016 repurchase and warehouse facilities.
- Assess the sustainability of the $0.40 dividend after the planned loan portfolio sale and reduction in investment income.
- Review subsequent developments concerning the GMFS litigation claim, indemnification reserve, escrow and contingent consideration.
- Reconcile GAAP losses with Core Earnings and evaluate the sensitivity of MSR values to prepayments and interest rates.