Lument Finance Trust, Inc. quarterly report, Q1 FY2014

Открыть документ

Business context and reporting period

This filing is Five Oaks Investment Corp.’s unaudited Form 10-Q for the quarter ended March 31, 2014. The request identifies Lument Finance Trust, Inc., but the filing itself names Five Oaks Investment Corp. (NYSE: OAKS); verify the issuer before relying on this summary.

Five Oaks is an externally managed mortgage REIT investing in Agency and non-Agency residential mortgage-backed securities (RMBS), multi-family MBS, and other mortgage-related assets. Results compare with the three months ended March 31, 2013, but the comparison is materially affected by the company’s March 2013 IPO and much smaller operating base in that prior period.

Key financial metrics

  • Revenue and earnings: Interest income was $3.91 million versus $1.03 million; interest expense was $0.56 million versus $0.13 million; net interest income was $3.35 million versus $0.90 million. Net loss was $2.54 million, or $3.02 million attributable to common stockholders ($0.34 per share), compared with common-stockholder income of $1.53 million ($0.67 per share) in Q1 2013.
  • Other income/loss: Other loss was $4.29 million, including a $4.21 million realized investment-sale loss, $5.13 million unrealized derivative losses and $0.84 million realized derivative losses, partly offset by $5.89 million of gains and net interest income from Linked Transactions.
  • Comprehensive income: $9.38 million attributable to common stockholders, including $12.41 million of other comprehensive income, principally reflecting changes in unrealized gains on available-for-sale securities. This is distinct from reported net loss.
  • Cash flow: Operating activities provided $2.85 million; investing activities used $30.66 million; financing activities provided $33.57 million. Cash and cash equivalents ended the quarter at $38.83 million, up from $33.06 million at year-end. Restricted cash was an additional $15.60 million and was not generally available for corporate purposes.
  • Balance sheet and liquidity: Total assets were $600.87 million and stockholders’ equity was $158.09 million, compared with $528.20 million and $113.93 million at December 31, 2013. Unrestricted cash available for margin calls was $38.8 million. Book value per common share was $12.84, down from $12.97.
  • Debt and leverage: GAAP repurchase-agreement borrowings were $435.30 million, versus $412.17 million at year-end; including financing underlying Linked Transactions, borrowings were $582.8 million. The reported weighted-average repo rate was 0.52%. Leverage was 2.8 times equity on a GAAP basis and 3.7 times including Linked Transactions.
  • Dividends: The company reported $0.38 per common share declared for the quarter; its dividend table totals approximately $0.36 per share for Q1 declarations. Preferred dividends were $0.48 million. The filing announced second-quarter 2014 common dividends of $0.125 per share per month.

Material changes versus the prior comparable period

  • Interest income and net interest income rose with increased investment activity and a larger portfolio, while interest expense also increased.
  • Results shifted from profit to loss, largely because of realized investment-sale and derivative losses. Unrealized gains on available-for-sale securities were recorded in other comprehensive income rather than earnings.
  • The company raised approximately $35.1 million net from common-stock offerings and $2.78 million net from preferred shares. Common shares outstanding increased to 10.69 million from 7.39 million at year-end.
  • Available-for-sale MBS increased to $482.5 million from $445.0 million. The company added its first Multi-Family MBS investments and continued shifting Agency holdings toward hybrid adjustable-rate securities.
  • Book value per share declined about 1.0%, while management reported a 1.9% economic return on common equity for the quarter, including dividends.

Outlook, management commentary, risks and unusual items

  • Management said short-term liquidity appeared sufficient based on the portfolio, leverage, cash flows and available borrowing arrangements; longer-term capital needs depend on additional debt or equity financing and market conditions. The company expected leverage to range from three to six times equity overall, with targets varying by asset class.
  • FOAC entered a 364-day warehouse repurchase facility with capacity of up to $125 million for planned prime-jumbo and other mortgage-loan acquisitions; none was drawn at March 31, 2014. The company also made initial investments in subordinated Freddie Mac K-Series Multi-Family MBS.
  • Management cited continued market volatility amid Federal Reserve tapering and expects market conditions to drive portfolio and financing adjustments. No earnings or return guidance was provided.
  • Material risks include short-term repo funding and rollover risk, margin calls and collateral haircuts, interest-rate and basis mismatch, prepayment and extension risk, derivative valuation volatility, and credit and property-market losses. All current derivatives were treated as trading instruments rather than hedge-accounted, contributing to earnings volatility.
  • During the quarter the company experienced margin calls and reported that it met them promptly. Repo collateral haircuts ranged from 3% to 50%, averaging 12.5%. Management reported compliance with repo covenants; no material legal proceedings or material changes to previously disclosed risk factors were reported.
  • The company must maintain REIT qualification, including distribution and other statutory tests. Failure to qualify could materially affect taxes and funds available for distributions.

Most important facts for investors to verify

  1. Confirm the issuer: the supplied filing is for Five Oaks Investment Corp., not Lument Finance Trust, Inc.
  2. Reconcile the reported $0.38 common dividend per share with the Q1 dividend schedule totaling approximately $0.36 per share, including declaration and payment timing.
  3. Review the quality and concentration of non-Agency credit exposure: the combined portfolio included 28.4% 60-plus-day delinquencies, 1.0% average remaining credit enhancement, and substantial California and 2006-vintage exposure.
  4. Assess dependence on short-term repo financing, collateral calls, counterparty concentration, and the company’s available unrestricted liquidity.
  5. Distinguish GAAP figures from management’s non-GAAP portfolio and borrowing figures, which include assets and financing accounted for as Linked Transactions.