SEC Filing Summary
Business context and reporting period
The filing is a Form 10-K for ZAIS Financial Corp., not Ready Capital Corp., covering the fiscal year ended December 31, 2014. The filing includes unaudited fourth-quarter results and was filed March 16, 2015.
ZAIS Financial was an externally managed mortgage REIT that originated, acquired, financed, sold, serviced and managed residential mortgage loans. It also invested in non-Agency residential mortgage-backed securities, mortgage servicing rights and other real-estate-related assets. The company acquired GMFS, a mortgage banking platform, on October 31, 2014.
Key financial metrics
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Total interest income | $41.6 million | $26.4 million |
| Total interest expense | $17.3 million | $7.1 million |
| Net interest income | $24.3 million | $19.3 million |
| Mortgage banking activities, net | $5.4 million | None reported |
| Loan servicing fee income, net | $0.9 million | None reported |
| Change in fair value of MSRs | $(1.7) million | None reported |
| Other gains/(losses) | $18.9 million | $(2.2) million |
| Net income attributable to common stockholders | $26.7 million | $6.7 million |
| Basic diluted EPS | $3.35 / $3.08 | $0.92 / $0.92 |
| Core Earnings, non-GAAP | $11.9 million; $1.33 per diluted share | $9.7 million; $1.19 per diluted share |
| Book value per share and OP unit | $21.73 | $19.98 |
Year-end total assets were $792.4 million, compared with $620.1 million at December 31, 2013. Total stockholders’ equity was $193.4 million, including $173.2 million attributable to ZAIS Financial common stockholders and $20.1 million of non-controlling interests.
At December 31, 2014, the portfolio had an aggregate fair value of approximately $695.6 million, consisting principally of mortgage loans held for investment of $415.9 million, mortgage loans held for sale of $97.7 million, non-Agency RMBS of $148.6 million and MSRs of $33.4 million.
The company declared quarterly dividends of $0.40 per share and OP unit during 2014, or $1.60 for the year. A portion of the October 2014 dividend and all of the January 2015 dividend were characterized as return of capital for federal income tax purposes.
Liquidity, debt and cash flow
- Borrowings totaled approximately $549.0 million at year-end, including warehouse lines, loan repurchase facilities, securities repurchase agreements and exchangeable senior notes.
- Warehouse lines and related repurchase agreements totaled $89.4 million outstanding against aggregate capacity of $130.0 million.
- Loan repurchase facilities totaled $300.1 million outstanding against aggregate capacity of $425.0 million.
- Securities repurchase agreements totaled $103.0 million.
- The 8.0% Exchangeable Senior Notes had $57.5 million principal outstanding and mature November 15, 2016. Their effective interest rate was 10.2%.
- The year-end leverage ratio was 2.84 times, compared with 2.42 times in 2013.
- Cash was $33.8 million and restricted cash was $7.1 million at year-end. Management reported a $36.4 million liquidity cushion, excluding GMFS warehouse lines and repurchase agreements.
- Operating activities used $4.7 million of cash in 2014, compared with $8.1 million provided in 2013. Investing activities used $31.5 million, while financing activities provided $12.9 million.
- A 50-basis-point increase in LIBOR was estimated to increase quarterly interest expense on variable-rate debt by approximately $0.6 million, assuming no balance-sheet changes.
Material changes versus the prior comparable period
- GMFS was acquired on October 31, 2014 for preliminary total consideration of $74.3 million, including $62.8 million of cash consideration and $11.4 million of estimated contingent consideration. The transaction added mortgage banking, servicing and mortgage-loan-held-for-sale activities.
- GMFS generated approximately $5.4 million of mortgage banking income and $0.9 million of net servicing fee income after acquisition, but its segment reported a $1.3 million after-tax loss for the post-acquisition period after expenses.
- Interest income increased 57.4% and net interest income increased approximately 26% year over year, primarily due to growth in the whole-loan portfolio and increased leverage.
- Other gains improved by approximately $21.1 million, driven mainly by a $22.8 million unrealized gain on mortgage loans, partially offset by a $5.9 million derivative loss.
- RMBS fair value declined to $148.6 million from $226.2 million as the company sold securities to fund the GMFS acquisition and reallocated capital toward whole loans.
- Mortgage loans held for investment increased to $415.9 million from $331.8 million. The portfolio’s weighted-average unleveraged yield increased to 7.20% from 6.91%.
- Book value per share increased to $21.73 from $19.98, while leverage rose from 2.42 times to 2.84 times.
- Operating expenses increased substantially due to GMFS-related salaries, professional fees, general and administrative costs, servicing fees and transaction costs.
Outlook, management commentary, risks and unusual items
The filing does not provide formal earnings or dividend guidance. Management expected to continue pursuing mortgage loans, non-Agency RMBS, MSRs and mortgage banking opportunities, with leverage and asset allocation adjusted based on interest rates, credit spreads, liquidity, financing availability and expected risk-adjusted returns.
- Results are highly sensitive to interest rates, yield-curve changes, prepayment speeds, credit performance, fair-value movements and the availability and cost of short-term financing.
- Repurchase agreements and warehouse facilities expose the company to margin calls, collateral requirements, refinancing risk, cross-default provisions and potential forced asset sales.
- At year-end, 55.7% of the fair value of mortgage loans had unpaid principal balances exceeding current property values. California and Florida represented 26.2% and 16.6% of mortgage-loan fair value, respectively.
- Most mortgage loans held for investment, non-Agency RMBS and MSRs were Level 3 fair-value assets, relying on models, broker quotes and assumptions regarding defaults, loss severity, delinquencies, prepayments and discount rates.
- The company recorded no other-than-temporary impairment on RMBS in 2014, compared with $1.1 million of realized OTTI losses in 2013.
- GMFS consideration was preliminary and contingent payments could reach an additional $22 million, subject to profitability, employee-retention and loan-production conditions. The final purchase price and goodwill could change.
- The company relies on its external advisor and has no employees outside the GMFS platform. The advisory fee was $2.9 million in 2014 and is generally based on stockholders’ equity rather than performance.
- The company must maintain REIT qualification and its exemption from registration under the Investment Company Act. Failure could result in corporate-level taxes, forced asset sales, increased regulation or restrictions on the investment strategy.
- GMFS was not included in management’s year-end internal-control assessment. GMFS represented approximately 19% of total assets, 27% of net assets and 11% of total revenues; integration of its financial reporting controls was expected during 2015.
- Subsequent to year-end, the company amended a $45 million repurchase agreement to extend its maturity to March 31, 2015 and increased a $35 million warehouse line to $50 million.
Most important facts for investors to verify
- Confirm that the intended issuer is ZAIS Financial Corp. rather than Ready Capital Corp.; the supplied filing does not identify Ready Capital.
- Reconcile reported net income of $26.7 million attributable to common stockholders with Core Earnings of $11.9 million and identify the recurring versus fair-value and derivative components.
- Review the sustainability of the $22.8 million unrealized mortgage-loan gain and the sensitivity of Level 3 valuations to defaults, prepayments, delinquencies and loss severity.
- Assess refinancing and margin-call exposure, particularly the $300.1 million loan repurchase facilities, $103.0 million securities repos and the $57.5 million notes due in 2016.
- Evaluate the GMFS acquisition, including final purchase-accounting adjustments, contingent consideration, goodwill, MSR valuation and post-acquisition profitability.
- Verify dividend coverage using taxable income and recurring cash earnings, noting that portions of recent dividends were classified as return of capital.
- Monitor GMFS regulatory capital, GSE seller-servicer status, loan repurchase and indemnification exposure, and the planned integration of internal controls.