ZAIS Financial Corp. Reports First Quarter 2016 Results

RED BANK, N.J., May 10, 2016 /PRNewswire/ -- ZAIS Financial Corp. (NYSE: ZFC) ("ZAIS Financial" or the "Company") today reported financial results for the three months ended March 31, 2016.

FIRST QUARTER 2016 HIGHLIGHTS AND RECENT DEVELOPMENTS

A summary of the Company's operating results for the three months ended March 31, 2016 and March 31, 2015 is presented below.  In addition, the Company's book value per share and leverage ratio at March 31, 2016 and December 31, 2015 are included below:    

• Core earnings (a non-GAAP financial measure as defined below) decreased to $1.2 million, or $0.14 per diluted weighted average share outstanding, from $4.5 million, or $0.51 per diluted weighted average share outstanding for the three months ended March 31, 2015. The decrease was driven by an increase in transaction costs related to the strategic alternatives evaluated by the Company and the pending plan of merger with Sutherland Asset Management Corporation ("Sutherland"), a decrease in net interest margin on the Company's residential mortgage investment portfolio and an increase in payoffs of mortgage servicing rights ("MSRs"). 
         
• The Company maintained a dividend of $0.40 per share of the Company's common stock and operating partnership unit ("OP unit") for the first quarter, declared on March 17, 2016 and paid on April 15, 2016.

The Company's results of operations included GMFS's residential mortgage banking operations (which is included in the Company's residential mortgage banking segment).  Highlights of GMFS operating activity for the first quarter of 2016 are as follows:

PLANNED BUSINESS COMBINATION WITH SUTHERLAND ASSET MANAGEMENT

As described in greater detail in our current reports on Form 8-K filed on April 7, 2016 and May 9, 2016, the Company entered into a definitive merger agreement on April 6, 2016, as amended as of May 9, 2016 (the "Merger Agreement"), pursuant to which the Company will combine with Sutherland, a privately held commercial mortgage real estate investment trust ("REIT"). In the transactions described in the Merger Agreement (the "Mergers"), the Company's stockholders will continue to be stockholders of the surviving corporation and will be eligible to receive cash of up to $64.3 million in a tender offer to be made by the Company following stockholder approval of the transaction. Pursuant to the terms of the Merger Agreement, Sutherland stockholders will receive newly issued shares of the Company's common stock, and holders of Sutherland operating partnership units will receive operating partnership units in ZAIS Financial Partners, L.P., which will be the surviving operating partnership. Following the Mergers, the combined entity will be renamed Sutherland Asset Management Corporation, and its shares will continue to be listed on the New York Stock Exchange under the symbol "SLD". The management agreement with ZAIS Group will be terminated, a termination fee of $8 million will be paid to ZAIS Group and Sutherland will become externally managed by Waterfall Asset Management, LLC, Sutherland's current external manager. 

The Merger Agreement has been approved by both companies' boards of directors and is subject to the approval of both companies' stockholders. The completion of the Mergers is subject to the satisfaction of certain other conditions, including the commencement and completion or withdrawal of the tender offer described above, the consummation of the sale of the Company's seasoned, re-performing mortgage loan portfolio, receipt of regulatory approvals relating to the issuance of the Company's common stock, the delivery of certain documents and consents, the representations and warranties of the parties being true and correct, subject to the materiality standards contained in the Merger Agreement, and the absence of a material adverse effect with respect to either Sutherland or the Company.  The companies expect the transaction to close in the third quarter of 2016.

FIRST QUARTER 2016 RESULTS

ZAIS Financial reported U.S. GAAP net loss for the three months ended March 31, 2016 of $(3.4) million or $(0.38) per diluted weighted average share outstanding, compared with net income of $0.4 million or $0.05 per diluted weighted average share outstanding for the same period in 2015.  The decrease was primarily due to a decrease of $3.7 million in non-interest income from the Company's residential mortgage banking segment which was primarily driven by a decrease in the value of the MSRs from changes in the prepayment assumptions and payoffs, a decrease in net interest income relating to the Company's residential mortgage loan investment segment of $1.2 million due to sales of RMBS during the twelve months ended March 31, 2016 and scheduled principal payments related to RMBS and an increase in other expenses of $1.5 million due to transaction costs incurred relating to the strategic alternatives evaluated by the Company and pending Mergers; offset by a reduction in other losses of $1.7 million. 

For the three months ended March 31, 2016, the Company reported Core Earnings of $1.2 million, or $0.14 per diluted weighted average share outstanding, compared with $4.5 million or $0.51 per diluted weighted average share outstanding during the same period in 2015.  The decrease in Core Earnings was primarily due to $2.0 million of transaction costs related to the strategic alternatives evaluated by the Company and the pending Mergers, a decrease of $1.2 million in the net interest margin related to the Company's residential mortgage investment portfolio and an increase in MSR payoffs of $0.7 million.  Core Earnings for the Company's residential mortgage banking segment declined by $0.1 million.  Core Earnings is a non-U.S. GAAP financial measure that the Company defines as net interest income, plus non-interest income from its mortgage banking platform (excluding the after tax change in fair value of MSRs resulting from changes in values of market related inputs or assumptions used in a valuation model) less total operating expenses (excluding the after tax effect of depreciation and amortization, changes in contingent consideration, amortization of deferred premiums, production and profitability earn-outs and certain non-recurring adjustments), plus/(less) the income tax benefit/(expense) related to the Company's taxable REIT subsidiaries using the applicable effective tax rate for the period.  The Company's mortgage banking platform is primarily comprised of income related to originating, selling, and servicing mortgage loans.

At March 31, 2016, 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 4.05% for mortgage loan investments and 2.99% for non-Agency RMBS and other investment securities, compared with 4.05% and 4.97%, respectively, at March 31, 2015.

The Company incurred expenses of $14.4 million for the three months ended March 31, 2016, compared with $12.2 million for the three months ended March 31, 2015.  The increase was largely attributable to the transaction costs relating to the strategic alternatives that were being considered by the Company and the pending plan of merger with Sutherland.

The Company had 7,970,886 shares of common stock outstanding as of March 31, 2016 and March 31, 2015, respectively.

INVESTMENT PORTFOLIO SUMMARY

As of March 31, 2016, ZAIS Financial held residential mortgage loans held for investment with an aggregate unpaid principal balance of $31.3 million and a fair value of $32.1 million, mortgage loans held for sale previously held for investment with an aggregate unpaid principal balance of $411.0 million and a fair value of $369.0 million, a diversified portfolio of non-Agency RMBS with a fair value of $87.1 million consisting primarily of senior tranches that were originally highly rated but subsequently downgraded and other investment securities with a fair value of $12.9 million.

During the three months ended March 31, 2016, the Company purchased newly originated residential mortgage loans with an unpaid principal balance of $11.4 million which are held for investment at fair value.  During the same three month period, the Company sold non-Agency RMBS with an unpaid principal balance of $19.4 million. The Company did not purchase any non-Agency RMBS or other investment securities during the period. Additionally, the Company did not sell any other investment securities during the period.

LEVERAGE, DEBT AND HEDGING ACTIVITIES

As of March 31, 2016, ZAIS Financial had a leverage ratio of 3.26x. The aggregate borrowings outstanding as of March 31, 2016 were $556.6 million under the loan repurchase facilities with Citibank, N.A. and Credit Suisse First Boston Mortgage Capital LLC, four master securities repurchase agreements, warehouse lines of credit, treasury repurchase agreements and the unsecured exchangeable senior notes due 2016 (the "Notes") issued by the Company's operating partnership subsidiary. The loan repurchase facilities, which are secured by portions of the Company's seasoned, re-performing and newly originated mortgage loans, the warehouse lines of credit, which are secured by portions of the Company's mortgage loans held for sale, and the master securities repurchase agreements, which are secured by non-Agency RMBS, bear interest at rates that have historically moved in close relationship to LIBOR.  The Notes, which mature on November 15, 2016, are the Company's senior unsecured obligations and bear interest at a rate of 8.0% per year, payable semiannually in arrears on May 15th and November 15th of each year. If the Mergers do not close prior to November 15, 2016, the Company intends to sell assets and apply the proceeds of such sales to repay the Notes.

As of March 31, 2016, the Company had outstanding MBS forward sales contracts used to mitigate the interest rate price risk associated with its outstanding interest rate lock commitments ("IRLC") and mortgage loans held for sale. The Company expects these derivatives will experience changes in fair value opposite to changes in fair value of the IRLCs and mortgage loans held for sale, thereby reducing earnings volatility. The notional amount of the Company's MBS forward sales contracts as of March 31, 2016 was $242.7 million.  As of March 31, 2016, the Company also 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 March 31, 2016. 

COMMON STOCK DIVIDEND

On March 17, 2016, ZAIS Financial announced that its Board of Directors declared a cash dividend of $0.40 per share of the Company's common stock and OP unit for the three months ended March 31, 2016, maintaining the dividend level from prior quarters. The dividend was paid on April 15, 2016 to stockholders and OP unit holders of record as of the close of business on March 31, 2016. 

The Company's current policy is to pay quarterly distributions which will allow it to continue to qualify as a REIT.  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.

In order to reduce market risk in its investment portfolio, the Company has begun the process of selling its seasoned, re-performing mortgage loans from its residential mortgage investments segment. A sale of these assets is expected to be completed in the second quarter of 2016. If completed, these mortgage loan sales are likely to result in a reduction of the Company's investment income and, if the Mergers are not completed, may therefore result in a decision to curtail dividends in the future.

FIRST QUARTER INVESTOR PRESENTATION

The Company's First Quarter Investor Presentation – March 31, 2016, is available on the Company's website at www.zaisfinancial.com.  To access the presentation, select the Q1 2016 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 accounting principles generally accepted in the United States ("U.S. GAAP"), this press release includes Core Earnings which is a non-U.S GAAP financial measure. The Company defines Core Earnings as net interest income, plus non-interest income from its mortgage banking platform (excluding the after tax change in fair value of MSRs resulting from changes in values of market related inputs or assumptions used in a valuation model) less total operating expenses (excluding the after tax effect of depreciation and amortization, changes in contingent consideration, amortization of deferred premiums, production and profitability earn-outs and certain non-recurring adjustments), plus/(less) the income tax benefit/(expense) related to the Company's taxable REIT subsidiaries using the applicable effective tax rate for the period. The Company's mortgage banking platform is primarily comprised of income related to originating, selling, and servicing mortgage loans.

The Company believes that providing investors with this non-U.S GAAP financial information, in addition to the related U.S. GAAP measures, gives investors greater transparency into 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 U.S. GAAP, it should be considered along with, but not as an alternative to, the Company's net income computed in accordance with U.S 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 U.S. GAAP to Core Earnings:

ADDITIONAL INFORMATION ABOUT THE MERGER

In connection with the Mergers, the Company filed a registration statement on Form S-4 with the Securities and Exchange Commission (the "SEC") that included a preliminary joint proxy statement/prospectus, and will file other relevant documents concerning the Mergers. The registration statement on Form S-4 has not yet been declared effective by the SEC and is subject to revision, some of which may be significant. This does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval. BEFORE MAKING ANY VOTING OR INVESTMENT DECISION, INVESTORS ARE URGED TO READ THE DEFINITIVE JOINT PROXY STATEMENT/PROSPECTUS AND ANY OTHER DOCUMENTS TO BE FILED WITH THE SEC IN CONNECTION WITH THE MERGERS OR INCORPORATED BY REFERENCE IN THE DEFINITIVE JOINT PROXY STATEMENT/PROSPECTUS BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE COMPANY, SUTHERLAND AND THE MERGERS.

Investors and stockholders of the Company and Sutherland may obtain free copies of the registration statement, the joint proxy statement/prospectus and other relevant documents filed by the Company with the SEC (if and when they become available) through the website maintained by the SEC at www.sec.gov. Copies of the documents filed by the Company with the SEC are also available free of charge on ZFC's website at www.zaisfinancial.com.  The Company's stockholders may also contact ZAIS Investor Services for additional information by calling 212-827-3773 or emailing [email protected].

This communication shall not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the U.S. Securities Act of 1933, as amended (the "Securities Act").

PARTICIPANTS IN SOLICITATION RELATING TO THE MERGER

The Company, Sutherland and their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from the Company's and Sutherland's stockholders in respect of the proposed Mergers. Information regarding the Company's directors and executive officers can be found in the Company's Annual Report on Form 10-K filed with the SEC on March 10, 2016, as amended by its Form 10-K/A filed on April 29, 2016.  Information regarding Sutherland's directors and executive officers can be found in the Company's registration statement on Form S-4 filed with the SEC. Additional information regarding the interests of such potential participants will be included in the joint proxy statement/prospectus and other relevant documents filed with the SEC in connection with the Mergers if and when they become available. These documents are available free of charge on the SEC's website and from the Company or Sutherland, as applicable, using the sources indicated above.

ABOUT ZAIS FINANCIAL CORP.

ZAIS Financial Corp. is a REIT which invests in 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, 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, the risk that the Mergers will not be consummated within the expected time period or at all; the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement; the inability to obtain stockholder approvals relating to the Mergers or the failure to satisfy the other conditions to completion of the Mergers; fluctuations in the adjusted book value per share of the shares of both the Company and Sutherland; risks related to disruption of management's attention from the ongoing business operations due to the proposed Mergers; the effect of the announcement of the proposed Mergers on the Company's operating results and businesses generally; the outcome of any legal proceedings relating to the Mergers; changes in future loan production; the Company's ability to retain key managers of GMFS; 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 most recent Annual Report on Form 10-K filed with the SEC,  and other reports filed by the Company with 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.

SOURCE ZAIS Financial Corp.

Related Links

http://www.zaisfinancial.com