Filing summary
Entity and period: The supplied filing is Five Oaks Investment Corp.’s unaudited Form 10-Q for the three months ended March 31, 2013—not a filing under the name Lument Finance Trust, Inc. Five Oaks, now identified in the request as Lument, focused on leveraged investments in residential mortgage-backed securities (RMBS) and was externally managed by Oak Circle Capital Partners LLC. It commenced operations in May 2012 and completed its IPO in March 2013.
Financial performance and position
| Metric | Reported amount |
|---|---|
| Interest income / expense | $3.23 million / $2.33 million |
| Net interest income | $0.90 million |
| Other income, net | $1.06 million, including $1.75 million of gains and net interest income from Linked Transactions |
| Expenses / net income | $0.43 million / $1.53 million |
| Net income attributable to common stockholders | $1.53 million; reported EPS is $0.67 in the financial statements |
| Comprehensive income attributable to common stockholders | $0.83 million, after a $0.70 million unrealized loss on available-for-sale securities |
| Cash flows | Operating: $(2.51) million; investing: $(898.88) million; financing: $941.95 million |
| Cash and restricted cash at quarter-end | $44.17 million unrestricted cash; $12.28 million restricted cash |
| Total assets / stockholders’ equity | $1.038 billion / $116.56 million |
| RMBS portfolio | $968.96 million GAAP fair value; $992.30 million including RMBS underlying Linked Transactions on a non-GAAP basis |
| Repurchase-agreement borrowings | $920.41 million GAAP; $934.56 million including Linked Transactions financing |
No operating margin is presented. The filing reports an annualized return on average equity of 20.12%; this is based on the quarter’s results and should not be treated as a full-year result.
Changes and capital structure
- Compared with December 31, 2012, GAAP RMBS fair value increased from $81.03 million to $968.96 million, and repurchase borrowings increased from $63.42 million to $920.41 million, chiefly as the company invested IPO and private-placement proceeds.
- On March 27, the company sold 4.03 million IPO shares and 1.67 million shares in a concurrent private placement, generating $84.0 million in net proceeds in total. Quarter-end common shares outstanding were 7.39 million.
- Quarter-end leverage was 7.9 times GAAP stockholders’ equity, or 8.0 times including Linked Transactions. Management said it expected leverage generally to range from three to six times equity, while noting the higher quarter-end level reflected deployment of offering proceeds.
- For Q1, common dividends declared totaled $0.19 per share. A $0.13-per-share April dividend was paid after quarter-end; $0.16-per-share dividends for May and June were announced.
The filing does not provide a comparable first-quarter 2012 income statement: operations began in May 2012. Accordingly, year-over-year operating changes cannot be assessed from this filing.
Outlook, risks, and unusual items
- Outlook: No earnings or return guidance is provided. Management intended to make regular monthly distributions, generally targeting substantially all taxable income, subject to operating and debt-service needs and REIT requirements.
- Liquidity and funding: Most borrowings were short-term repurchase agreements; quarter-end maturities were within 90 days. The company reported $44.1 million of unrestricted cash and $3.0 million of unpledged securities available for margin calls. It experienced margin calls during the quarter and said they were met promptly. Continued access to repo financing and collateral values remain important.
- Interest-rate exposure: The company held $485 million notional of interest-rate swaps and a $5 million-notional swaption. Its sensitivity analysis estimated that an immediate 100-basis-point rise in rates would reduce projected net interest income by 21.8% and Agency RMBS portfolio value by 3.95%; these are model-based estimates, not forecasts.
- Credit and valuation: Non-Agency RMBS were $35.0 million on a combined non-GAAP basis. The filing reports 30.8% of underlying loans at least 60 days delinquent and 2.5% average remaining credit enhancement. Fair values were based on Level 2 inputs; the company reported no Level 3 securities.
- Controls: Management disclosed an unresolved material weakness involving accounting judgments on whether certain Non-Agency RMBS purchases and repo financings qualified as Linked Transactions, plus a remaining significant deficiency. Remediation efforts were underway.
- Other items: The company redeemed 100 shares of 12.5% preferred stock for $110,000 and paid $2,326 in accrued dividends. Management said there were no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the entity and filing identity: the source is Five Oaks Investment Corp.’s 2013 Q1 filing, despite the request naming Lument Finance Trust, Inc.
- Reconcile EPS: the financial statements report $0.67 basic and diluted, while MD&A also cites $0.66 diluted.
- Review the unresolved material weakness, remediation progress, and the accounting treatment of Linked Transactions.
- Assess the sustainability of short-term repo funding, high leverage, margin-call capacity, and the sensitivity of earnings and asset values to interest rates.
- Distinguish GAAP portfolio and debt figures from the company’s supplemental non-GAAP figures that include Linked Transactions.