ZAIS Financial Corp. Reports Third Quarter 2013 Results

PR Newswire

RED BANK, N.J., Nov. 12, 2013 /PRNewswire/ -- ZAIS Financial Corp. (ZFC) ("ZAIS Financial" or the "Company") today reported financial results for the three months and nine months ended September 30, 2013.  The quarter ended September 30, 2013 was the second full quarter in which the Company operated as a public mortgage REIT following its initial public offering ("IPO") completed on February 13, 2013.

THIRD QUARTER 2013 AND RECENT HIGHLIGHTS

  • GAAP net income of $4.1 million, or $0.47 per weighted average share outstanding
  • Core Earnings (a non-GAAP financial measure as defined below) of $3.0 million, or $0.33 per weighted average share outstanding
    • Additional roll income on to-be-announced ("TBA") securities positions of $0.2 million, or $0.03 per weighted average share outstanding (1)
  • Third quarter cash dividend of $0.50 per share of the Company's common stock and operating partnership unit ("OP unit") was paid on October 11, 2013
  • Residential mortgage loan portfolio as of September 30, 2013, with an unpaid principal balance of $406.2 million and a fair value of $334.8 million
    • During the three months ended September 30, 2013, acquired mortgage loans with an unpaid principal balance of $260.6 million
  • $196.6 million fair value of residential mortgage-backed securities ("RMBS") as of September 30, 2013, consisting of non-Agency RMBS
  • Sold all remaining Agency RMBS during the three months ended September 30, 2013
  • Book value per share of common stock and OP unit of $19.92 as of September 30, 2013, as compared with $19.95 as of June 30, 2013
  • 2.11x leverage ratio as of September 30, 2013

(1)   Roll income is the estimated net interest income earned on TBA positions via dollar roll transactions, and is recognized in gain/(loss) on derivative instruments in the consolidated statement of operations.  

"The third quarter was an important one for ZFC as we achieved our targeted equity allocation to residential whole loans, with 53% of our equity now allocated to whole loan investments.  We also sold our remaining Agency RMBS positions during the quarter and our portfolio is now focused on residential mortgage credit strategies, consistent with our long-term business plan," said Michael Szymanski, President and Chief Executive Officer of ZAIS Financial.  "We continue to benefit from positive trends in housing and consumer credit and to take advantage of our whole loan capabilities by pursuing attractive investment opportunities in mortgage credit.  During the quarter, we also took important steps to build out our newly originated loan purchase program, including technology development and laying the groundwork for the establishment of a loan seller network."  

THIRD QUARTER 2013 RESULTS

ZAIS Financial reported GAAP net income for the three months ended September 30, 2013 of $4.1 million, or $0.47 per weighted average share outstanding compared with net income of $8.1 million, or $2.83 per weighted average share outstanding for the three months ended September 30, 2012.  The decrease was primarily related to a decrease in other gains / (losses) of $5.6 million and an increase in operating expenses of $2.5 million, partially offset by an increase in net interest income of $4.1 million.  For the three months ended September 30, 2013, the Company reported Core Earnings, (which excludes changes in unrealized and realized gains and losses on real estate securities and mortgage loans and gains and losses on derivative instruments), of $3.0 million, or $0.33 per weighted average share and OP unit outstanding compared with Core Earnings of $1.3 million, or $0.46 per weighted average share and OP unit outstanding for the quarter ended September 30, 2012.  Core Earnings is a non-GAAP financial measure.  Additionally, the Company earned roll income on its Agency TBA securities positions of $0.2 million, or $0.03 per share.

The Company had 7,970,886 and 2,071,096 shares of common stock outstanding as of September 30, 2013 and December 31, 2012, respectively.

The September 30, 2013, book value of $19.92 per share of common stock and OP unit decreased slightly from the June 30, 2013, book value per share of common stock and OP unit of $19.95. 

The Company earned interest income of $8.3 million for the three months ended September 30, 2013, compared with $2.2 million of interest income for the three months ended September 30, 2012.  The increase in interest income was primarily due to the acquisition of whole loans, which increased interest income by $4.1 million, an increase in the Company's average RMBS portfolio, which increased interest income by $1.8 million, and an increase in the average RMBS portfolio yield, which increased interest income by $0.2 million.  The Company incurred interest expense of $2.3 million for this period, compared with $0.4 million for the three months ended September 30, 2012.  The increase in interest expense was primarily due to an increase in borrowings from the loan repurchase facility used to finance the Company's residential mortgage loan portfolio (the "Loan Repurchase Facility") and securities repurchase agreements.

As of September 30, 2013, the weighted average net interest spread between the yield on the Company's assets and the cost of funds, including the impact of interest rate hedging, was 3.50% for the Company's mortgage loans and 4.66% for the Company's non-Agency RMBS.  As of September 30, 2012, the weighted average net interest spread between the yield on the Company's assets and the cost of funds, including the impact of interest rate hedging, was 2.41% for the Company's Agency RMBS and 4.80% for the Company's non-Agency RMBS.

The Company incurred operating expenses of $3.0 million for the three months ended September 30, 2013, compared with $0.5 million for the three months ended September 30, 2012.  The increase in expenses was primarily due to increases in professional fees, advisory fees and general and administrative expenses.  Professional fees increased by $0.9 million primarily due to work performed by the independent auditors for quarterly reviews and procedures performed for the 2013 annual audit.  Advisory fees increased by $0.5 million due to an increase in stockholders' equity as a result of the Company's February 2013 IPO.  General and administrative expenses increased by $0.8 million primarily due to mortgage loan transaction costs, insurance expense, research fees, additional public company expenses and independent directors' fees.  Loan servicing fees increased by $0.3 million due to the acquisition of whole loans. 

PORTFOLIO SUMMARY

As of September 30, 2013, the company held residential mortgage loans with an aggregate unpaid principal balance of $406.2 million and a fair value of $334.8 million and a diversified portfolio of non-Agency RMBS with a fair value of $196.6 million which consisted primarily of senior tranches that were originally highly rated but subsequently downgraded.

During the three months ended September 30, 2013, the Company acquired fixed rate mortgage loans and ARMs with a principal balance of $260.6 million.  The Company did not sell any mortgage loans during the third quarter.  Also during the three months ended September 30, 2013, the Company sold Agency RMBS with a principal balance of $170.3 million for $168.8 million and non-Agency RMBS with a principal balance of $80.2 million for $60.8 million.  The Company did not acquire Agency RMBS or non-Agency RMBS during the third quarter.

The three-month average and the six-month average Constant Prepayment Rates ("CPR") for the periods ended September 30, 2013 were 23.89% and 12.78%, respectively, for the Company's non-Agency RMBS. 

As of September 30, 2013, the Company was fully invested in its target assets contemplated by its long-term business plan.  However, for a portion of the quarter ended September 30, 2013, the Company was not fully invested in its long-term target assets.  

LEVERAGE AND HEDGING ACTIVITIES

As of September 30, 2013, the Company had a leverage ratio of 2.11x.  The Company had an aggregate of $374.5 million in borrowings outstanding as of September 30, 2013, under the Loan Repurchase Facility and under four RMBS master repurchase agreements.  These agreements are secured by a portion of the Company's mortgage loans and non-Agency RMBS and bear interest at rates that have historically moved in close relationship to LIBOR.

As of September 30, 2013, the Company had outstanding interest rate swap agreements designed to mitigate the effects of increases in interest rates on a portion of its repurchase agreements. These interest rate swap agreements provide for the Company to pay fixed interest rates and receive floating interest rates indexed to LIBOR, effectively fixing the floating interest rates on $17.2 million of borrowings under its repurchase agreements as of September 30, 2013.

COMMON STOCK DIVIDEND

On September 18, 2013, the Company announced that its Board of Directors declared a cash dividend of $0.50 per share of the Company's common stock and OP unit for the three months ended September 30, 2013.  The dividend was payable on October 11, 2013 to stockholders and OP unit holders of record as of the close of business on September 30, 2013. 

The Company's current policy is to pay quarterly distributions which, on an annual basis, will equal all or substantially all of its net taxable income.  Taxable and GAAP earnings will typically differ due to differences in premium amortization and discount accretion, certain non-taxable unrealized and realized gains and losses, and non-deductible general and administrative expenses.

As of September 30, 2013, the Company had undistributed taxable income of approximately $1.07 per share primarily attributable to the termination of interest rate swap contracts during the quarter ended September 30, 2013.  While the Company intends to distribute all or substantially all of its taxable income through dividends declared on or prior to December 31, 2013, no assurances can be given as to the amount of such distribution as certain events and expenses will impact the amount of such distributions.

INVESTOR CONFERENCE CALL

Management will host a conference call today, November 12, 2013, at 10:00 a.m. eastern time to review the Company's financial results.  The number to call for this interactive teleconference is (480) 629-9819. 

A replay of the conference call will be available through Tuesday November 19, 2013, by dialing (303) 590-3030 and entering the confirmation number, 4648126. 

The live broadcast of the ZAIS Financial Corp. quarterly conference call will also be available online at the Company's website, www.zaisfinancial.com on Tuesday November 12, 2013, beginning at 10:00 a.m. eastern time.  The online replay will follow shortly after the call and will be available for approximately one year.

THIRD QUARTER INVESTOR PRESENTATION

The Company's Third Quarter Investor Presentation – September 30, 2013, is available on the Company's website at www.zaisfinancial.com.  To access the presentation, select the Q3 2013 Earnings Presentation link on the "Investor Relations" page on the Company's website.

USE OF NON-GAAP FINANCIAL INFORMATION

In addition to the results presented in accordance with generally accepted accounting principles ("GAAP"), this press release includes certain non-GAAP financial information, including Core Earnings.  Core Earnings is a non-GAAP measure that the Company defines as GAAP net income, excluding changes in unrealized gains or losses on mortgage loans and real estate securities, realized gains or losses on mortgage loans and real estate securities, gains or losses on derivative instruments, and certain non-recurring adjustments. 

The Company believes that providing investors with this non-GAAP financial information, in addition to the related GAAP measures, gives investors greater transparency to the information used by management in its financial and operational decision-making. However, because Core Earnings is an incomplete measure of the Company's financial performance and involves differences from net income computed in accordance with GAAP, it should be considered along with, but not as an alternative to, the Company's net income computed in accordance with GAAP as a measure of the Company's financial performance. In addition, because not all companies use identical calculations, the Company's presentation of Core Earnings may not be comparable to other similarly-titled measures of other companies.

The following table reconciles net income computed in accordance with GAAP with Core Earnings:

ZAIS FINANCIAL CORP. AND SUBSIDIARIES
RECONCILIATION OF GAAP NET INCOME TO CORE EARNINGS











Three Months Ended September 30,


Nine Months Ended September 30,


2013


2012


2013


2012


(unaudited)


(unaudited)


(unaudited)


(unaudited)

















Net income / (loss) - GAAP

$  4,148,193


$  8,058,518


$  (1,446,990)


$  17,619,685









Recurring adjustments for non-core earnings:








   Change in unrealized gain or loss on mortgage loans

(3,644,036)


-


(5,211,327)


-

   Change in unrealized gain or loss on real estate securities 

(4,785,568)


(6,269,964)


9,953,797


(15,662,891)

   Realized (gain) on mortgage loans

(346,482)


-


(412,726)


-

   Realized loss / (gain) on real estate securities

9,113,260


(849,794)


9,359,315


1,102,068

   (Gain) / loss on derivative instruments

(1,510,143)


362,681


(5,489,668)


1,118,633









Core Earnings -  non-GAAP

$  2,975,224


$  1,301,441


$   6,752,401


$    4,177,495









Core Earnings - per weighted average share outstanding -  non-GAAP

$          0.33


$          0.46


$           0.85


$            1.41









 

 

ZAIS FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS






(Expressed in United States Dollars)





September 30, 2013


December 31, 2012

Assets

(unaudited)



Cash 

$             21,467,891


$            19,061,110

Restricted cash

3,031,804


3,768,151

Mortgage loans, at fair value - $334,539,232 and $0 pledged as collateral, respectively

334,793,412


-

Real estate securities, at fair value - $180,081,818 and $133,538,998 pledged as collateral, respectively

196,552,996


170,671,683

Other assets

3,699,269


1,345,665

Receivable for real estate securities sold

-


6,801,398



Total assets

$           559,545,372


$          201,648,007

Liabilities




Loan repurchase facility

$           240,477,801


$                             -

Securities repurchase agreements

134,062,326


116,080,467

Payable for real estate securities purchased

-


6,195,767

Derivative liabilities, at fair value

596,988


1,144,744

Dividends and distributions payable

4,448,900


-

Accounts payable and other liabilities

2,139,378


1,820,581

Accrued interest payable

598,962


74,966

Common stock repurchase liability 

-


11,190,687



Total liabilities

382,324,355


136,507,212













Stockholders' equity




12.5% Series A cumulative non-voting preferred stock, $0.0001 par value; 50,000,000 shares authorized; zero shares and 133 shares issued and outstanding, respectively 




-


-

Common stock $0.0001 par value; 500,000,000 shares authorized; 7,970,886 shares issued and 7,970,886 shares outstanding, and 2,586,131 shares issued and 2,071,096 shares outstanding, respectively 







798


207

Additional paid-in capital

164,207,617


39,759,770

(Accumulated deficit) / retained earnings 

(5,449,113)


5,281,941


Total ZAIS Financial Corp. stockholders' equity

158,759,302


45,041,918

Non-controlling interests in operating partnership

18,461,715


20,098,877


Total stockholders' equity

177,221,017


65,140,795


       Total liabilities and stockholders' equity 

$           559,545,372


$          201,648,007







 

 

ZAIS FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)














(Expressed in United States Dollars)














Three Months Ended September 30,


Nine Months Ended September 30,







2013


2012


2013


2012














Interest income








Mortgage loans

$           4,051,406


$                        -


$           4,984,265


$                        -

Real estate securities

4,222,038


2,176,647


12,660,723


7,216,518


Total interest income

8,273,444


2,176,647


17,644,988


7,216,518

Interest expense








Loan repurchase facility

1,455,617


-


1,744,913


-

Securities repurchase agreements

877,522


376,742


2,259,041


1,043,889


Total interest expense

2,333,139


376,742


4,003,954


1,043,889


Net interest income

5,940,305


1,799,905


13,641,034


6,172,629

Other gains / (losses)








Change in unrealized gain or loss on mortgage loans

3,644,036


-


5,211,327


-

Change in unrealized gain or loss on real estate securities

4,785,568


6,269,964


(9,953,797)


15,662,891

Realized gain on mortgage loans

346,482


-


412,726


-

Realized (loss) / gain on real estate securities

(9,113,260)


849,794


(9,359,315)


(1,102,068)

Gain / (loss) on derivative instruments

1,510,143


(362,681)


5,489,668


(1,118,633)


Total other gains / (losses)

1,172,969


6,757,077


(8,199,391)


13,442,190

Expenses








Professional fees

1,090,672


193,892


2,583,246


1,137,329

Advisory fee - related party

710,563


255,943


1,903,635


728,521

Loan servicing fees

319,489


-


434,023


-

General and administrative expenses

844,357


48,629


1,967,729


129,284


Total expenses

2,965,081


498,464


6,888,633


1,995,134


Net income / (loss)

4,148,193


8,058,518


(1,446,990)


17,619,685

Net income / (loss) allocated to non-controlling interests

432,132


-


(57,250)


-

Preferred dividends

-


4,156


15,379


11,730


Net income / (loss) attributable to ZAIS Financial Corp.



-






common stockholders 

$         3,716,061


$         8,054,362


$         (1,405,119)


$        17,607,955

Net income / (loss) per share applicable to common








 stockholders - basic and diluted

$                    .47


$                  2.83


$                     .20


$                   5.94

Weighted average number of shares of common stock:








Basic



7,970,886


2,843,203


7,038,304


2,962,376

Diluted



8,897,800


2,843,203


7,965,218


2,962,376

 

The following table sets forth certain information regarding the Company's mortgage loans as of September 30, 2013: 



Unpaid


Premium


Amortized


Gross Unrealized (1)


Fair


Weighted Average



Principal Balance


(Discount)


Cost


Gains


Losses


Value


Coupon


Yield (2)


















Mortgage Loans
















Performing

















Fixed

$       219,759,258


$   (45,799,160)


$    173,960,098


$     6,468,904


$      (2,775,149)


$ 177,653,853


4.55%



6.63%



ARM

173,301,235


(26,834,656)


146,466,579


3,161,622


(1,411,114)


148,217,087


3.83



6.34


Total performing

393,060,493


(72,633,816)


320,426,677


9,630,526


(4,186,263)


325,870,940


4.23



6.50




















Non-performing (3)

13,107,328


(3,951,920)


9,155,408


278,257


(511,193)


8,922,472


4.89



7.29




















Total Mortgage Loans

$       406,167,821


$   (76,585,736)


$    329,582,085


$     9,908,783


$      (4,697,456)


$ 334,793,412


4.25%



6.52%



































(1)

The Company has elected the fair value option pursuant to ASC 825 for its mortgage loans. The Company recorded a gain of $3.6 million for the three months ended September 30, 2013 and a gain of $5.2 million for the nine months ended September 30, 2013, as change in unrealized gain or loss on mortgage loans in the consolidated statements of operations.

(2)

Unleveraged yield.                                                                                            

(3)

Loans that are delinquent for 60 days or more are considered non-performing.

 

The following table sets forth certain information regarding the Company's RMBS as of September 30, 2013:




Principal or


Premium


Amortized


Gross Unrealized (1)


Fair


Weighted Average




Notional Balance


(Discount)


Cost


Gains


Losses


Value


Coupon


Yield (2)





















Real estate securities


















Non-Agency RMBS 




















  Alternative - A (3)

$       156,032,245


$   (82,841,762)


$      73,190,483


$     1,969,402


$      (1,562,573)


$   73,597,312


4.67%



6.71%



  Pay option adjustable rate

35,284,102


(7,390,488)


27,893,614


146,164


(482,443)


27,557,335


0.83



6.71



  Prime

85,732,026


(10,040,163)


75,691,863


3,038,135


(954,285)


77,775,713


5.40



6.83



  Subprime

20,320,181


(2,422,356)


17,897,825


458,387


(733,576)


17,622,636


0.83



6.24






















 Total RMBS

$       297,368,554


$ (102,694,769)


$   194,673,785


$     5,612,088


$      (3,732,877)


$ 196,552,996


4.08%



6.71%






















(1)

The Company has elected the fair value option pursuant to ASC 825 for its real estate securities. The Company recorded a gain of $4.8 million and $6.3 million for the three months ended September 30, 2013 and 2012, respectively, and a loss of $10.0 million and a gain of $15.7 million for the nine months ended September 30, 2013 and 2012, respectively, as change in unrealized gain or loss on real estate securities in the consolidated statements of operations.

(2)

Unleveraged yield.

(3)

Alternative – A RMBS includes an interest-only strip with a notional balance of $69.6 million. 

 

The following table presents information about the Company's interest rate swap agreements as of September 30, 2013:









Weighted





Weighted


Weighted


 Average



Notional


 Average


 Average


Years to

Maturity

Amount


Pay Rate


Receive Rate


 Maturity










2023

17,200,000


2.72%


0.26%


9.8

Total/Weighted average

$  17,200,000


2.72%


0.26%


9.8

 

ABOUT ZAIS FINANCIAL CORP.

ZAIS Financial Corp. is a real estate investment trust ("REIT") which invests in, finances and manages a diversified portfolio of residential mortgage assets, other real estate-related securities and financial assets. The Company is externally managed and advised by ZAIS REIT Management, LLC, a subsidiary of ZAIS Group, LLC. Additional information can be found on the Company's website at www.zaisfinancial.com.

This press release contains statements that constitute "forward-looking statements," as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and such statements are intended to be covered by the safe harbor provided by the same. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements; the Company can give no assurance that its expectations will be attained. Factors that could cause actual results to differ materially from the Company's expectations include, but are not limited to, availability of suitable investment opportunities; changes in interest rates; changes in the yield curve; changes in prepayment rates; the availability and terms of financing; general economic conditions; market conditions; conditions in the market for mortgage-related investments; legislative and regulatory changes that could adversely affect the business of the Company; and other factors, including those set forth in the Risk Factors section of the Company's Annual Report on Form 10-K for the year ended December 31, 2012 and other reports filed by the Company with the Securities and Exchange Commission (the "SEC"), copies of which are available on the SEC's website, www.sec.gov. The Company undertakes no obligation to update these statements for revisions or changes after the date of this release, except as required by law.

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