Walter Investment Management Corp. Announces Strong Third Quarter 2013 Financial Results, Servicing Portfolio Additions Of Approximately $30 Billion And Initial Capital Commitment For Walter Capital Opportunity Corp.

06 Nov, 2013, 16:00 ET from Walter Investment Management Corp.

TAMPA, Fla., Nov. 6, 2013 /PRNewswire/ -- Walter Investment Management Corp. (NYSE: WAC) ("Walter Investment" or the "Company") today announced financial results for the quarter ended September 30, 2013, as well as updates on operational highlights and recent developments for the Company.

The Company reported GAAP net income for the third quarter of 2013 of $72.7 million, or $1.90 per diluted share, compared to net income of $6.4 million, or $0.21 per diluted share, in the third quarter of 2012.  Core earnings for the third quarter was $87.6 million after taxes, or $2.33 per diluted share, increasing 211% as compared to the same quarter of last year.  Adjusted EBITDA ("AEBITDA") for the quarter was $160.8 million, also significantly higher when compared to AEBITDA of $60.3 million in the third quarter of 2012.

Third quarter results reflected strong earnings growth in the Servicing segment, predominantly driven by the higher volume of units serviced as compared to the prior year quarter.  Servicing results also reflected increases in the value of the Company's mortgage servicing rights ("MSRs"), which added approximately $0.98 to both GAAP and core earnings per share in the quarter.   After an extremely strong second quarter, the earnings contribution from the Company's Originations segment moderated toward a more normalized level in the quarter, delivering solid results from the consumer direct channel, while continuing to develop and expand its retail and correspondent channels.

Other notable developments included:

  • Portfolio additions of over $30 billion, including agreements to acquire over $23 billion in UPB of MSRs and sub-servicing contracts on $7 billion in UPB.  These include transactions with EverBank which accounted for approximately $20 billion of MSR acquisitions and subservicing, and also served to significantly expand product capabilities into Freddie Mac and Ginnie Mae product;
  • Agreement to acquire the EverBank default servicing platform, enhancing existing platform capabilities and augmenting servicing capacity in anticipation of accelerated transfer volumes projected to occur over the next 12 months;
  • Executed a Letter of Intent with York Capital Management ("York") for an initial capital commitment of $200 million to  fund Walter Capital Opportunity Corp., an externally managed real estate investment trust ("REIT"). Closing of the transactions and initial investments by the REIT are expected to occur by year end.

"We are extremely pleased with the results produced by our business development efforts over the last quarter, which have generated a number of  important opportunities for our business and have strengthened our pipeline, again demonstrating our ability to execute against the significant growth opportunities in the specialty mortgage sector," said Mark J. O'Brien, Walter Investment's Chairman and CEO.  "These transactions are notable not only for their expected future contributions to earnings and the diversity they bring to our servicing book, but also as confirmation of the on-going importance of an outsourcing trend at depositories with respect to non-core customers, another key driver behind our expectations for continued strong growth as a specialty servicer."

"Our primary business segments, led by our core Servicing operations, continue to execute against their plans, delivering solid results for the quarter," continued O'Brien.  "Our Originations business produced solid volumes in the quarter and achieved a record recapture rate of 44% for the quarter.  The transactions establishing Walter Capital Opportunity Corp. will diversify our capital sources and allow us to grow in line with our capital-light strategy, while also providing a potentially significant source of fee revenue in our asset management business.  We look forward to making our strategic partnership with York a mutually beneficial one."

Third Quarter 2013 Financial and Operating Highlights

Total revenue for the third quarter was $489.2 million, as compared to $149.1 million in the same quarter last year.  The year-over-year increase in revenue reflects a $129.4 million increase in net servicing revenue and fees, an increase of $153.7 million in net gain on sales of loans in the Originations segment and a $30.5 million increase related to fair value gains on reverse loans and related HMBS obligations.  Other revenues increased $26.5 million, driven by higher fee income in the Originations segment and higher Insurance revenues. 

Total expense increased from $141.6 million in the third quarter of 2012 to $374.9 million in the third quarter of 2013.  The year-over-year increase reflects additional operating and overhead costs, including salaries and benefits and general and administrative expenses, associated with growth in the serviced portfolio and the acquisition and expansion of other businesses.  The additions of the Reverse Mortgage and Originations segments added approximately $39.5 million and $113.5 million to expenses, respectively.  Interest expense increased by $31.0 million over the prior year primarily reflecting increased corporate debt outstanding, and increased servicing advance liabilities and warehouse activity in the Company's Originations and Reverse Mortgage segments. 

Segments

Results for the Company's segments are presented below.

Servicing

The Servicing segment generated revenue of $208.5 million in the third quarter, which included $142.1 million of gross servicing fees, $28.7 million of incentive and performance-based fees, and $20.4 million of ancillary and other fees.  Servicing revenues for the third quarter of 2013 are net of $9.8 million in amortization on MSRs accounted for at amortized cost and include $60.5 million of gains related to MSRs accounted for at fair value.

Servicing segment revenues were up 144% from the third quarter of 2012, principally reflecting the significant increase in UPB serviced over the past year, as well as the positive fair value adjustment recognized in the third quarter of this year.  The segment continued its trend of producing strong results with respect to generating incentive and performance-based fees, which nearly doubled as compared to the prior year.  The application of proprietary protocols to the first lien GSE pools boarded in the first and second quarters resulted in a reduction of 30+ day delinquencies by approximately 180 bps as compared to the end of the second quarter of 2013.  

Expense for the Servicing segment was $139.3 million, which included $9.4 million of depreciation and amortization costs and $8.6 million of interest expense.  The segment generated core earnings before income taxes of $84.0 million for the quarter ended September 30, 2013, a 129% increase as compared to core earnings before income taxes of $36.7 million in the third quarter of 2012, and AEBITDA of $65.4 million, an increase of 58% as compared to the prior year period. These results compare to revenue of $244.9 million, expenses of $131.5 million, core earnings before income taxes of $129.4 million and AEBITDA of $70.3 million in the second quarter of 2013.  The decline in core earnings before income taxes as compared to the second quarter resulted from a decrease of $33.2 million in the amount of the fair value adjustment to the MSR.  Results excluding the fair value adjustment were consistent with the second quarter of 2013.

The Servicing segment ended the quarter with approximately 1.8 million total accounts serviced, with a UPB of roughly $194 billion.  During the quarter, the Company experienced a net normalized disappearance rate of 16%.  All of these results were in line with or better than Company expectations and projections.   

Reverse Mortgage

The Reverse Mortgage segment generated revenue of $41.7 million for the quarter, which included a $30.5 million gain from the net impact of HECM loan and related HMBS obligation fair value adjustments, $7.0 million in servicing fees and $4.2 million of other revenue.  Total expenses for the third quarter were $39.5 million, including $1.3 million of interest expense and $2.9 million of depreciation and amortization.   The segment reported core earnings before income taxes of $3.1 million and Adjusted EBITDA of $4.5 million for the third quarter.  These results compare to revenue of $36.0 million, expenses of $45.8 million, core earnings before income taxes of $15.9 million and AEBITDA of $16.9 million in the second quarter of 2013.  The decline in core earnings before income taxes and AEBITDA as compared to the second quarter resulted from lower origination volumes associated with recently announced regulatory changes to the reverse product offerings and competitive factors in the reverse space.  The Company continues to successfully execute against its strategy to grow its share of the higher margin, retail originations market, gaining an additional 1% of market share as compared to the second quarter.

Originations

The Originations segment generated revenue of $167.4 million in the third quarter, driven primarily by the consumer direct channel, which targets refinancing and recapture of accounts from the serviced portfolio.  Expense for the Originations segment was $115.6 million, which included $10.4 million of interest expense and $2.8 million of depreciation and amortization.  The segment generated core earnings before income taxes of $54.5 million for the third quarter of 2013 and AEBITDA of $58.6 million.  These results compare to revenue of $251.2 million, expenses of $105.3 million, core earnings before income taxes of $148.7 million and AEBITDA of $151.7 million in the second quarter of 2013. The decline in core earnings before income taxes and AEBITDA as compared to the second quarter resulted from expected decreases in locked volumes and direct margins in the consumer direct channel during the third quarter.  Direct margins in the consumer direct channel were 294 bps in the third quarter of 2013, a reduction as compared to the second quarter, principally associated with the upward movement in interest rates at the end of last quarter.

Loan closings in the third quarter totaled $6.1 billion, with 60% of that volume in the consumer lending channel and 40% generated by the correspondent and wholesale lending channel.  The total locked volume for the third quarter was $8.2 billion, as compared to $9.2 billion for the second quarter, with an ending locked pipeline of $3.1 billion as of September 30, 2013, as compared to $4.2 billion as of June 30, 2013.

Other Segments

The ARM segment generated revenue of $9.9 million and incurred expense of $6.8 million in the quarter ended September 30, 2013. Core earnings before income taxes was $4.5 million and AEBITDA was $4.7 million for the third quarter.  These results compare with revenue of $11.2 million, expenses of $7.3 million, core earnings before income taxes of $5.5 million and AEBITDA of $5.6 million in the second quarter of 2013.  These results were consistent with revenues of $9.8 million, expenses of $7.8 million, core earnings before income taxes of $4.2 million and AEBITDA of $4.2 million in the third quarter of 2012. 

Walter Investment's Insurance segment generated revenue of $28.9 million, offset by expenses of $9.7 million for the third quarter.  Insurance segment core earnings before income taxes was $20.7 million and AEBITDA was $20.7 million for the quarter ended September 30, 2013.  These results compare favorably with revenue of $18.1 million, expenses of $9.1 million, core earnings before income taxes of $10.3 million and AEBITDA of $10.4 million in the second quarter of 2013.  In the third quarter of 2012, the Insurance segment generated revenue of $17.4 million, expenses of $9.4 million, core earnings before income taxes of $9.9 million and AEBITDA of $9.8 million.  Favorable results as compared to the second quarter and the prior year quarter reflect growth in the number of policy set-ups from the much larger serviced book of business as well as reductions in the cancellation experience on newly instituted policies.

The Loans and Residuals segment, which includes the legacy Walter Investment owned portfolio, generated interest income of $35.7 million for the third quarter of 2013.  Total expense for the segment was $28.4 million, including $21.4 million of interest expense on securitized debt.  The Loans and Residuals segment generated pre-tax core earnings of $7.8 million and AEBITDA of $6.4 million for the third quarter of 2013, compared to pre-tax core earnings of $4.4 million and AEBITDA of $4.6 million for the third quarter of 2012. These results compare to interest income of $36.8 million, expenses of $26.6 million, core earnings before income taxes of $10.7 million and AEBITDA of $7.1 million in the second quarter of 2013.

Market Commentary and Outlook

Volatility in the interest rate environment, which negatively impacted the Originations segment in the second quarter, was offset by strength in the Servicing segment and an increase in the value of MSR assets. The overall economic environment continues to provide a solid base for the business, and positive catalysts within the mortgage sector continue to drive the movement of non-core, credit-sensitive assets from depositories to specialty servicers, as evidenced by the Company's announced transactions with EverBank.  The Company anticipates these trends will continue driving growth opportunities for the sector and for the Company.  The business development pipeline currently exceeds $325 billion and transaction flow continues to accelerate into the fourth quarter.  The Company remains highly confident with respect to the significant levels of sub-servicing and MSR purchase opportunities in both its current pipeline and in the overall market opportunity over the next 24 to 36 months. 

Based on the overall strong market conditions, robust current pipeline activity and our recently announced acquisitions, the Company reaffirms its previously provided Adjusted EBITDA range for 2013 of $700 to $740 million.  The Company is increasing 2013 after tax core earnings estimates to $9.60 to $9.80 per diluted share to reflect third quarter performance, principally with regard to fair value gains on the MSR asset.  Walter Investment's previously provided $6.00 to $6.50 after tax core earnings per share estimates for 2014 remain unchanged.  These ranges include estimates for certain business development and growth opportunities, depreciation and amortization and the Company's expected capital structure.  Neither fourth quarter 2013 nor 2014 estimates include an estimate for future fair value adjustments.

About Walter Investment Management Corp.

Walter Investment Management Corp. is an asset manager, mortgage servicer and originator focused on finding solutions for consumers and credit owners.  Based in Tampa, Fla., the Company has over 6,200 employees and services a diverse loan portfolio.  For more information about Walter Investment Management Corp., please visit the Company's website at www.walterinvestment.com.  The information on our website is not a part of this release.

Conference Call Webcast

Members of the Company's leadership team will discuss Walter Investment's third quarter results and other general business matters during a conference call and live webcast to be held on Wednesday, November 6, 2013, at 5 p.m. Eastern Time.  To listen to the event live or in an archive, which will be available for at least 30 days, visit the Company's website at www.walterinvestment.com.

This press release and the accompanying reconciliations include non-GAAP financial measures.  For a description of these non-GAAP financial measures, including the reasons management uses each measure, and reconciliations of these non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with GAAP, please see the reconciliations as well as "Use of Non-GAAP Measures" at the end of this press release.  

Disclaimer and Cautionary Note Regarding Forward-Looking Statements

This document contains forward-looking statements, including forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, but are not limited to, statements concerning Walter Investment's plans, beliefs, objectives, expectations, level of confidence, guidance and intentions and other statements that are not historical or current facts. Forward-looking statements are based on Walter Investment's current expectations and involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in such forward-looking statements. In addition, these statements are based on a number of assumptions that are subject to change.  Accordingly, actual results may be materially higher or lower than those projected. The inclusion of such projections herein should not be regarded as a representation by Walter Investment that the projections will prove to be correct. This document speaks only as of this date. Walter Investment disclaims any duty to update the information herein except as otherwise required by law.

Factors that could cause Walter Investment's results to differ materially from current expectations or affect the Company's ability to achieve anticipated core earnings and AEBITDA include, but are not limited to:

  • Regulatory changes and changes in delinquency and default rates that could adversely affect the costs of our businesses such that they are higher than expected;
  • Prepayment speeds, delinquency and default rates of the portfolios we service;
  • Our  ability or inability to achieve anticipated incentive fees, which are subject to certain factors beyond the Company's control and which are difficult to estimate with any degree of certainty in advance;
  • The achievement of anticipated volumes and margins from the origination of both forward and reverse mortgages, which can be affected by multiple factors, many of which are beyond our control;
  • Assumptions with regard to the HARP eligible population of the portfolios we service, customer take up rates, our recapture rates, the origination margins for HARP refinancing and anticipated changes to the HARP program which may increase competition;
  • Assumptions regarding the continuation in all material respects, of government programs related to our business
  • The impact of regulatory scrutiny on our lender placed insurance, including limitations that may be imposed on fees and commissions by regulators and customers that we may earn on such business
  • The timely and efficient transfer of assets acquired to the Company's platforms and the efficient integration of the acquired businesses, including achievement of synergies related thereto;
  • The accuracy of our expectations regarding the value of, and contributions from, acquired MSRs, intangibles and other assets, including the accuracy of our assumptions as to the performance of the assets we acquire, which are subject to and affected by many factors, some of which are beyond our control, and could differ materially from our estimates;
  • Timely establishment of the external capital vehicle and the availability of funding and investment opportunities;
  • Errors in our financial models or changes in assumptions could result in our estimates and expectations being materially inaccurate which may adversely affect our earnings;
  • Changes in accounting;
  • The effects of competition on our existing and potential future business;
  • Our ability to service our existing or future indebtedness;
  • Other factors that may affect the Company's earnings or costs; and
  • Other factors relating to our business in general as detailed in Walter Investment's 2012 Annual Report on Form 10-K and other periodic reports filed with the U.S. Securities and Exchange Commission.

 

Walter Investment Management Corp.

Segment Revenues and Operating Income

For the Three Months Ended September 30, 2013

($ in thousands)

Servicing

Reverse Mortgage

Originations

Asset Receivables Management

Insurance

Loans and Residuals

Other

Eliminations

Total Consolidated

REVENUES:

Servicing revenue and fees

$  206,602

$      7,023

$                   -

$                9,836

$              -

$               -

$                   -

$          (4,730)

$            218,731

Gain on loan sales, net

-

-

153,710

-

-

-

-

-

153,710

Interest income on loans

-

-

-

-

-

35,702

-

-

35,702

Net fair value gains on reverse loans and related HMBS obligations

-

30,476

-

-

-

-

-

-

30,476

Insurance revenue

-

-

-

-

28,896

-

-

-

28,896

Other income

1,848

4,214

13,669

41

4

3

1,873

-

21,652

Total revenues

208,450

41,713

167,379

9,877

28,900

35,705

1,873

(4,730)

489,167

EXPENSES:

Interest expense

8,629

1,306

10,359

-

-

21,376

33,347

-

75,017

Depreciation and amortization

9,402

2,856

2,783

1,497

1,210

-

9

-

17,757

Provision for loan losses

-

-

-

-

-

545

-

-

545

Other expenses, net

121,269

35,326

102,474

5,289

8,483

6,520

6,906

(4,730)

281,537

Total expenses

139,300

39,488

115,616

6,786

9,693

28,441

40,262

(4,730)

374,856

OTHER GAINS (LOSSES)

Net fair value gains (losses)

(197)

-

-

-

-

102

6,602

-

6,507

Other

-

-

-

-

-

-

-

-

-

Total other gains (losses)

(197)

-

-

-

-

102

6,602

-

6,507

Income (loss) before income taxes

68,953

2,225

51,763

3,091

19,207

7,366

(31,787)

-

120,818

CORE EARNINGS

Step-up depreciation and amortization

5,539

2,373

1,978

1,289

1,210

-

5

-

12,394

Step-up amortization of sub-servicing contracts

7,705

-

-

-

-

-

-

-

7,705

Share-based compensation expense

1,586

360

771

126

254

-

173

-

3,270

Transaction and integration costs

-

-

-

-

-

-

2,576

-

2,576

Non-cash interest expense

198

-

-

-

-

469

2,246

-

2,913

Net impact of Non-Residual Trusts

-

-

-

-

-

-

(4,316)

-

(4,316)

Fair value to cash adjustments for reverse loans

-

(2,815)

-

-

-

-

-

-

(2,815)

Other

-

964

-

-

-

-

74

-

1,038

Total adjustments

15,028

882

2,749

1,415

1,464

469

758

-

22,765

Core earnings (loss) before income taxes

83,981

3,107

54,512

4,506

20,671

7,835

(31,029)

-

143,583

ADJUSTED EBITDA

Interest expense on debt

-

1

-

-

-

-

31,101

-

31,102

Non-cash interest income

(356)

(79)

-

-

-

(3,902)

-

-

(4,337)

Depreciation and amortization

3,863

483

805

208

-

-

4

-

5,363

Amortization and fair value adjustments of servicing rights 

(23,172)

949

-

-

-

-

-

-

(22,223)

Pro forma synergies

-

-

-

-

-

-

-

-

-

Provision for loan losses

-

-

-

-

-

545

-

-

545

Residual Trusts cash flows

-

-

-

-

-

1,896

-

-

1,896

Other

1,046

10

3,243

8

21

21

497

-

4,846

Total adjustments

(18,619)

1,364

4,048

216

21

(1,440)

31,602

-

17,192

Adjusted EBITDA

$    65,362

$      4,471

$         58,560

$                4,722

$    20,692

$        6,395

$               573

$                   -

$            160,775

 

Walter Investment Management Corp.

Segment Revenues and Operating Income

For the Three Months Ended September 30, 2012

($ in thousands)

Servicing

Reverse Mortgage

Originations

Asset Receivables Management

Insurance

Loans and Residuals

Other

Eliminations

Total Consolidated

REVENUES:

Servicing revenue and fees

$    84,795

$              -

$                   -

$              9,755

$              -

$               -

$                -

$          (5,206)

$            89,344

Gain on loan sales, net

-

-

-

-

-

-

-

-

-

Interest income on loans

-

-

-

-

-

37,964

-

-

37,964

Net fair value gains on reverse loans and related HMBS     obligations

-

-

-

-

-

-

-

-

-

Insurance revenue

-

-

-

-

17,335

-

-

-

17,335

Other income

462

-

1,419

-

88

-

2,461

-

4,430

Total revenues

85,257

-

1,419

9,755

17,423

37,964

2,461

(5,206)

149,073

EXPENSES:

Interest expense

1,085

-

-

-

-

23,081

19,820

-

43,986

Depreciation and amortization

8,677

-

30

2,004

1,369

-

7

-

12,087

Provision for loan losses

-

-

-

-

-

4,596

-

-

4,596

Other expenses, net

57,095

-

2,055

5,765

8,000

6,294

6,949

(5,206)

80,952

Total expenses

66,857

-

2,085

7,769

9,369

33,971

26,776

(5,206)

141,621

OTHER GAINS (LOSSES)

Net fair value gains (losses)

(251)

-

-

-

-

482

2,892

-

3,123

Other

-

-

-

-

-

-

-

-

-

Total other gains (losses)

(251)

-

-

-

-

482

2,892

-

3,123

Income (loss) before income taxes

18,149

-

(666)

1,986

8,054

4,475

(21,423)

-

10,575

CORE EARNINGS

Step-up depreciation and amortization

6,579

-

30

2,004

1,369

-

7

-

9,989

Step-up amortization of sub-servicing contracts

9,121

-

-

-

-

-

-

-

9,121

Share-based compensation expense

2,164

-

49

196

436

-

22

-

2,867

Transaction and integration costs

404

-

-

-

-

-

2,596

-

3,000

Non-cash interest expense

247

-

-

-

38

(41)

-

-

244

Net impact of Non-Residual Trusts

-

-

-

-

-

-

(455)

-

(455)

Fair value to cash adjustments for reverse loans

-

-

-

-

-

-

-

-

-

Other

-

-

-

-

-

-

224

-

224

Total adjustments

18,515

-

79

2,200

1,843

(41)

2,394

-

24,990

Core earnings (loss) before income taxes

36,664

-

(587)

4,186

9,897

4,434

(19,029)

-

35,565

ADJUSTED EBITDA

Interest expense on debt

19

-

-

-

-

-

19,820

-

19,839

Non-cash interest income

(460)

-

-

-

(88)

(3,579)

-

-

(4,127)

Depreciation and amortization

2,098

-

-

-

-

-

-

-

2,098

Amortization and fair value adjustments of servicing rights 

2,562

-

-

-

-

-

-

-

2,562

Pro forma synergies

-

-

-

-

-

-

-

-

-

Provision for loan losses

-

-

-

-

-

4,596

-

-

4,596

Residual Trusts cash flows

-

-

-

-

-

480

-

-

480

Other

422

-

1

13

19

(1,371)

220

-

(696)

Total adjustments

4,641

-

1

13

(69)

126

20,040

-

24,752

Adjusted EBITDA

$    41,305

$              -

$             (586)

$              4,199

$      9,828

$        4,560

$        1,011

$                   -

$            60,317

 

Walter Investment Management Corp.

Segment Revenues and Operating Income

For the Nine Months Ended September 30, 2013

($ in thousands)

Servicing

Reverse Mortgage

Originations

Asset Receivables Management

Insurance

Loans and Residuals

Other

Eliminations

Total Consolidated

REVENUES:

Servicing revenue and fees

$    576,161

$    20,395

$                   -

$              31,028

$              -

$               -

$                   -

$        (14,538)

$            613,046

Gain on loan sales, net

-

4,633

463,471

-

-

-

-

-

468,104

Interest income on loans

-

-

-

-

-

109,396

-

-

109,396

Net fair value gains on reverse loans and related HMBS obligations

-

93,995

-

-

-

-

-

-

93,995

Insurance revenue

-

-

-

-

64,480

-

-

-

64,480

Other income

2,767

9,525

31,193

174

17

7

6,995

(39)

50,639

Total revenues

578,928

128,548

494,664

31,202

64,497

109,403

6,995

(14,577)

1,399,660

EXPENSES:

Interest expense

16,205

7,001

19,665

-

-

65,472

89,106

-

197,449

Depreciation and amortization

27,704

8,270

7,149

4,867

3,692

-

22

-

51,704

Provision for loan losses

-

-

-

-

-

2,366

-

-

2,366

Other expenses, net

330,231

108,780

235,949

17,041

24,925

15,342

31,439

(14,577)

749,130

Total expenses

374,140

124,051

262,763

21,908

28,617

83,180

120,567

(14,577)

1,000,649

OTHER GAINS (LOSSES)

Net fair value gains (losses)

(621)

-

-

-

-

506

7,017

-

6,902

Other

-

-

-

-

-

-

-

-

-

Total other gains (losses)

(621)

-

-

-

-

506

7,017

-

6,902

Income (loss) before income taxes

204,167

4,497

231,901

9,294

35,880

26,729

(106,555)

-

405,913

CORE EARNINGS

Step-up depreciation and amortization

17,757

7,177

5,188

4,245

3,692

-

16

-

38,075

Step-up amortization of sub-servicing contracts

23,940

-

-

-

-

-

-

-

23,940

Share-based compensation expense

4,978

1,083

1,924

415

904

-

508

-

9,812

Transaction and integration costs

-

-

-

-

-

-

22,904

-

22,904

Non-cash interest expense

628

-

-

-

-

1,106

6,496

-

8,230

Net impact of Non-Residual Trusts

-

-

-

-

-

-

(4,762)

-

(4,762)

Fair value to cash adjustments for reverse loans

-

17,607

-

-

-

-

-

-

17,607

Other

-

6,964

-

-

-

-

22

-

6,986

Total adjustments

47,303

32,831

7,112

4,660

4,596

1,106

25,184

-

122,792

Core earnings (loss) before income taxes

251,470

37,328

239,013

13,954

40,476

27,835

(81,371)

-

528,705

ADJUSTED EBITDA

Interest expense on debt

-

27

-

-

-

-

82,610

-

82,637

Non-cash interest income

(1,176)

(365)

-

-

-

(11,936)

-

-

(13,477)

Depreciation and amortization

9,947

1,093

1,961

622

-

-

6

-

13,629

Amortization and fair value adjustments of servicing rights 

(62,669)

2,742

-

-

-

-

-

-

(59,927)

Pro forma synergies

-

-

-

-

-

-

-

-

-

Provision for loan losses

-

-

-

-

-

2,366

-

-

2,366

Residual Trusts cash flows

-

-

-

-

-

3,373

-

-

3,373

Other

2,176

(4)

5,550

26

65

(2,418)

212

-

5,607

Total adjustments

(51,722)

3,493

7,511

648

65

(8,615)

82,828

-

34,208

Adjusted EBITDA

$    199,748

$    40,821

$       246,524

$              14,602

$    40,541

$      19,220

$            1,457

$                   -

562,913

 

Segment Revenues and Operating Income

For the Nine Months Ended September 30, 2012

($ in thousands)

Servicing

Reverse Mortgage

Originations

Asset Receivables Management

Insurance

Loans and Residuals

Other

Eliminations

Total Consolidated

REVENUES:

Servicing revenue and fees

$    256,064

$              -

$                   -

$           27,584

$              -

$               -

$                  -

$        (15,901)

$             267,747

Gain on loan sales, net

-

-

-

-

-

-

-

-

-

Interest income on loans

-

-

-

-

-

117,697

-

-

117,697

Net fair value gains on reverse loans and related HMBS     obligations

-

-

-

-

-

-

-

-

-

Insurance revenue

-

-

-

-

54,100

-

-

-

54,100

Other income

2,281

-

3,517

-

577

-

6,884

-

13,259

Total revenues

258,345

-

3,517

27,584

54,677

117,697

6,884

(15,901)

452,803

EXPENSES:

Interest expense

3,808

-

-

-

-

70,484

60,055

-

134,347

Depreciation and amortization

25,916

-

55

5,901

4,026

-

22

-

35,920

Provision for loan losses

-

-

-

-

-

8,122

-

-

8,122

Other expenses, net

194,341

-

4,150

16,473

26,123

21,082

17,210

(15,901)

263,478

Total expenses

224,065

-

4,205

22,374

30,149

99,688

77,287

(15,901)

441,867

OTHER GAINS (LOSSES)

Net fair value gains (losses)

(783)

-

-

-

-

305

9,152

-

8,674

Other

-

-

-

-

-

-

-

-

-

Total other gains (losses)

(783)

-

-

-

-

305

9,152

-

8,674

Income (loss) before income taxes

33,497

-

(688)

5,210

24,528

18,314

(61,251)

-

19,610

CORE EARNINGS

Step-up depreciation and amortization

19,924

-

55

5,901

4,026

-

22

-

29,928

Step-up amortization of sub-servicing contracts

29,808

-

-

-

-

-

-

29,808

Share-based compensation expense

8,231

-

113

671

1,736

-

479

-

11,230

Transaction and integration costs

1,868

-

-

-

-

-

4,704

-

6,572

Non-cash interest expense

684

-

-

-

186

1,011

-

-

1,881

Net impact of Non-Residual Trusts

-

-

-

-

-

-

(2,389)

-

(2,389)

Fair value to cash adjustments for reverse loans

-

-

-

-

-

-

-

-

-

Other

-

-

-

-

-

-

1,153

-

1,153

Total adjustments

60,515

-

168

6,572

5,948

1,011

3,969

-

78,183

Core earnings (loss) before income taxes

94,012

-

(520)

11,782

30,476

19,325

(57,282)

-

97,793

ADJUSTED EBITDA

Interest expense on debt

126

-

-

-

-

-

60,056

-

60,182

Non-cash interest income

(2,236)

-

-

-

(574)

(11,701)

-

-

(14,511)

Depreciation and amortization

5,992

-

-

-

-

-

-

-

5,992

Amortization and fair value adjustments of servicing rights 

8,001

-

-

-

-

-

-

-

8,001

Pro forma synergies

2,651

-

-

-

-

-

1,118

-

3,769

Provision for loan losses

-

-

-

-

-

8,122

-

-

8,122

Residual Trusts cash flows

-

-

-

-

-

6,105

-

-

6,105

Other

999

-

2

24

33

831

305

-

2,194

Total adjustments

15,533

-

2

24

(541)

3,357

61,479

-

79,854

Adjusted EBITDA

$    109,545

$              -

$             (518)

$           11,806

$    29,935

$      22,682

$          4,197

$                   -

177,647

 

Walter Investment Management Corp. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

(in thousands, except per share data)

For the Three Months

For the Nine Months

Ended September 30,

Ended September 30,

2013

2012

2013

2012

REVENUES

Net servicing revenue and fees

$     218,731

$    89,344

$     613,046

$   267,747

Net gains on sales of loans

153,710

-

468,104

-

Interest income on loans

35,702

37,964

109,396

117,697

Net fair value gains on reverse loans and related HMBS obligations

30,476

-

93,995

-

Insurance revenue

28,896

17,335

64,480

54,100

Other revenues

21,652

4,430

50,639

13,259

     Total revenues

489,167

149,073

1,399,660

452,803

EXPENSES

Salaries and benefits

150,253

52,554

402,268

165,498

General and administrative

128,443

27,668

341,595

90,584

Interest expense

75,017

43,986

197,449

134,347

Depreciation and amortization

17,757

12,087

51,704

35,920

Provision for loan losses

545

4,596

2,366

8,122

Other expenses, net

2,841

730

5,267

7,396

     Total expenses

374,856

141,621

1,000,649

441,867

OTHER GAINS

Other net fair value gains

6,507

3,123

6,902

8,674

Income before income taxes

120,818

10,575

405,913

19,610

Income tax expense

48,129

4,164

162,243

7,636

     Net income

$       72,689

$      6,411

$     243,670

$     11,974

Comprehensive income

$       72,658

$      6,451

$     243,616

$     12,066

Net income

$       72,689

$      6,411

$     243,670

$     11,974

Basic earnings per common and common equivalent share

$          1.93

$       0.22

$          6.49

$         0.40

Diluted earnings per common and common equivalent share

1.90

0.21

6.37

0.40

Weighted-average common and common equivalent shares outstanding — basic 

36,973

28,990

36,926

28,902

Weighted-average common and common equivalent shares outstanding — diluted

37,675

29,397

37,634

29,158

 

Walter Investment Management Corp. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share and per share data)

September 30,

December 31,

2013

2012

(Unaudited)

ASSETS

Cash and cash equivalents

$     405,355

$     442,054

Restricted cash and cash equivalents

922,522

653,338

Residential loans at amortized cost, net

1,417,020

1,490,321

Residential loans at fair value

10,172,160

6,710,211

Receivables, net (includes $45,849 and $53,975 at fair value at September 30, 2013 and

December 31, 2012, respectively)

253,959

259,009

Servicer and protective advances, net

1,186,066

173,047

Servicing rights, net (includes $1,006,031 and $0 at fair value 

at September 30, 2013 and December 31, 2012, respectively)

1,189,078

242,712

Goodwill

659,055

580,378

Intangible assets, net

130,045

144,492

Premises and equipment, net

154,650

137,785

Other assets (includes $115,920 and $949 at fair value at September 30, 2013 and

December 31, 2012, respectively)

317,389

144,830

Total assets

$ 16,807,299

$10,978,177

LIABILITIES AND STOCKHOLDERS' EQUITY

Payables and accrued liabilities (includes $99,802 and $25,348 at fair value at 

September 30, 2013 and December 31, 2012, respectively)

$     549,702

$     260,610

Servicer payables

851,231

587,929

Servicing advance liabilities

834,160

100,164

Debt 

3,269,710

1,146,249

Mortgage-backed debt (includes $708,013 and $757,286 at fair value at September 30, 2013

and December 31, 2012, respectively)

1,939,082

2,072,728

HMBS related obligations at fair value

8,132,753

5,874,552

Deferred tax liability, net

79,293

41,017

Total liabilities

15,655,931

10,083,249

Stockholders' equity:

Preferred stock, $0.01 par value per share:

Authorized - 10,000,000 shares;

Issued and outstanding - 0 shares at September 30, 2013 and December 31, 2012

-

-

Common stock, $0.01 par value per share:

Authorized - 90,000,000 shares;

Issued and outstanding - 37,014,110 and 36,687,785 shares at September 30, 2013 and

December 31, 2012, respectively

370

367

Additional paid-in capital

574,784

561,963

Retained earnings

575,775

332,105

Accumulated other comprehensive income

439

493

Total stockholders' equity

1,151,368

894,928

Total liabilities and stockholders' equity

$ 16,807,299

$10,978,177

September 30,

December 31,

2013

2012

(Unaudited)

ASSETS OF CONSOLIDATED VARIABLE INTEREST ENTITIES THAT CAN ONLY BE USED TO SETTLE THE

OBLIGATIONS OF CONSOLIDATED VARIABLE INTEREST ENTITIES:

Restricted cash and cash equivalents

$       59,015

$       58,253

Residential loans at amortized cost, net

1,400,314

1,475,782

Residential loans at fair value

609,399

646,498

Receivables at fair value

45,849

53,975

Servicer and protective advances, net

78,225

77,082

Other assets

57,313

62,683

Total assets

$  2,250,115

$  2,374,273

LIABILITIES OF THE CONSOLIDATED VARIABLE INTEREST ENTITIES FOR WHICH CREDITORS OR BENEFICIAL

INTEREST HOLDERS DO NOT HAVE RECOURSE TO THE COMPANY:

Payables and accrued liabilities

$         8,655

$        9,007

Servicing advance liabilities

65,379

64,552

Mortgage-backed debt (includes $708,013 and $757,286 at fair value at September 30, 2013 and

December 31, 2012, respectively)

1,939,082

2,072,728

Total liabilities 

$  2,013,116

$  2,146,287

 

Reconciliation of GAAP Income Before Income Taxes to

Non-GAAP Core Earnings

(in millions except per share amounts)

For the Three Months Ended

For the Three Months Ended

September 30, 2013

September 30, 2012

Core Earnings

Income before income taxes

$                              120.8

$                                10.6

Add back:

Transaction and integration costs

2.6

3.0

Step-up depreciation and amortization

12.4

10.0

Step-up amortization of sub-servicing rights (MSRs)

7.7

9.1

Fair value to cash adjustments for reverse loans

(2.8)

-

Non-cash interest expense

2.9

0.3

Non-cash share-based compensation expense

3.3

2.8

Net impact of Non-Residual Trusts

(4.3)

(0.5)

Other

1.0

0.3

Core Earnings before income taxes

$                              143.6

$                                35.6

Core earnings after tax (39%)

87.6

22.1

Core earnings after tax per diluted common and common equivalent share.

$                                2.33

$                                0.75

 

Reconciliation of GAAP Income Before Income Taxes to

Non-GAAP Adjusted EBITDA

(in millions)

For the Three Months Ended

For the Three Months Ended

September 30, 2013

September 30, 2012

Income before income taxes

$                              120.8

$                                10.6

Add:

Depreciation and amortization

17.8

12.1

Interest expense

34.0

20.1

EBITDA

172.6

42.8

Add/(Subtract):

Fair value to cash adjustments for reverse loans

(2.8)

-

Transaction and integration-related costs

2.6

3.0

Non-cash share-based compensation expense

3.3

2.8

Provision for loan losses

0.5

4.6

Residual Trusts cash flows

1.9

0.5

Amortization and fair value adjustments of servicing rights

(14.5)

11.7

Non-cash interest income

(4.3)

(4.1)

Net impact of Non-Residual Trusts 

(4.3)

(0.5)

Other

5.8

(0.5)

Sub-total

(11.8)

17.5

Adjusted EBITDA

$                              160.8

$                                60.3

 

Reconciliation of Estimated Core Earnings to

Estimated GAAP Income Before Income Taxes

For the Year Ended

For the Year Ended

December 31, 2013

December 31, 2014

Estimated pre-tax core earnings(1)

$                                  599.5

$                                 388.0

Less:

Step up depreciation and amortization, including step up amortization of sub-servicing contracts

(83.0)

(67.0)

Share-based compensation expense 

(12.0)

(14.0)

Transaction and integration costs(2) 

(22.9)

-

Fair value to cash adjustments for reverse loans(3)

(17.6)

-

Non-cash interest expense

(12.0)

(10.0)

Other (2) 

(2.2)

-

Estimated income before income taxes

$                                  449.8

$                                 297.0

(1)

  At the mid-point of the earnings guidance range.

(2)

   We do not predict special items that might occur in the future.  The amount reflected includes only actual amounts that occurred in the first nine months of 2013.

(3)

   Fair value adjustments are by their nature subject to multiple factors that could materially change these amounts, many of which are beyond our control.  The amount reflected includes only actual amounts that occurred in the first nine months of 2013.

 

Use of Non-GAAP Measures

Generally Accepted Accounting Principles ("GAAP") is the term used to refer to the standard framework of guidelines for financial accounting. GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing transactions and in the preparation of financial statements. In addition to reporting financial results in accordance with GAAP, the Company has provided non-GAAP financial measures, which it believes are useful to help investors better understand its financial performance, competitive position and prospects for the future.

Core earnings (pre-tax and after-tax), core earnings per share and Adjusted EBITDA are financial measures that are not in accordance with GAAP.  See the Definitions included in this document for a description of how these items are reported and see the Non-GAAP Reconciliations for a reconciliation of these measures to the most directly comparable GAAP financial measures.

The Company believes that these Non-GAAP Financial Measures can be useful to investors because they provide a means by which investors can evaluate the Company's underlying key drivers and operating performance of the business, exclusive of certain adjustments and activities that investors may consider to be unrelated to the underlying economic performance of the business for a given period.  Core earnings and Adjusted EBITDA are not presentations made in accordance with GAAP and use of these terms may vary from other companies in our industry.  Core earnings should not be considered as alternatives to (1) net income (loss) or any other performance measures determined in accordance with GAAP or (2) operating cash flows determined in accordance with GAAP. Core earnings and Adjusted EBITDA have important limitations as analytical tools, and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP.  Adjusted EBITDA and Pro Forma Adjusted EBITDA allow the Company to add back certain non-cash, one-time or unusual charges or costs that are deducted in calculating net income.  Such definitions allow the Company to add back charges resulting from matters that we may not consider indicative of the Company's ongoing performance. However, these are expenses that may recur, vary greatly, and are difficult to predict. In addition, certain of these expenses can represent reductions of cash that could be used for other corporate purposes.  Because of these limitations, core earnings and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business.  They should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP.

Use of Core Earnings and Adjusted EBITDA by Management

The Company manages the business based upon the achievement of core earnings, Adjusted EBITDA and similar targets and has designed certain management incentives based upon the achievement of pre-tax income and Adjusted EBITDA in order to assess the underlying operational performance of the continuing operations of the business for the year and to have a basis to compare underlying operating results to prior and future periods.

Limitations on the Use of Core Earnings and Adjusted EBITDA

Since core earnings (pre-tax and after-tax) and core earnings per share measure the Company's financial performance excluding certain depreciation and amortization costs related to acquisitions, transaction and integration costs, share-based compensation expense, certain other non-cash adjustments, and the net impact of the consolidated Non-Residual Trust VIEs, they may not reflect all amounts associated with our results as determined in accordance with GAAP.

Adjusted EBITDA measures the Company's financial performance excluding depreciation and amortization costs, corporate and MSR facility interest expense, transaction and integration costs, share-based compensation expense, certain other non-cash adjustments, the net impact of the consolidated Non-Residual Trust VIEs and certain other items, including, but not limited to pro-forma synergies, they may not reflect all amounts associated with our results as determined in accordance with GAAP.

Core earnings (pre-tax and after-tax), core earnings per share and Adjusted EBITDA involve differences from segment profit (loss), income (loss) before income taxes, net income (loss), basic earnings (loss) per share and diluted earnings (loss) per share computed in accordance with GAAP. Core earnings (pre-tax and after-tax), core earnings per share  and Adjusted EBITDA should be considered as supplementary to, and not as a substitute for, segment profit (loss), income (loss) before income taxes, net income (loss), basic earnings (loss) per share and diluted earnings (loss) per share computed in accordance with GAAP as a measure of the Company's financial performance.

Any non-GAAP measures should be considered in context with the GAAP financial presentation and should not be considered in isolation or as a substitute for GAAP earnings.  Further, the non-GAAP measures presented by Walter Investment may be defined or calculated differently from similarly titled measures of other companies.

Definitions

Core Earnings This disclaimer applies to every usage of Core Earnings and related terms such as Pre Tax Core Earnings, Core Earnings After Taxes and Core Earnings Per Share ("EPS") in this document.  Core Earnings is a metric that is used by management to exclude certain items in an attempt to provide a better earnings per share metric to evaluate the Company's underlying key drivers and operating performance of the business, exclusive of certain adjustments and activities that investors may consider to be unrelated to the underlying economic performance of the business for a given period.  Core Earnings excludes certain depreciation and amortization costs related to the increased basis in assets acquired within business combination transactions, or step-up depreciation and amortization transaction and integration costs, share-based compensation expense, certain other non-cash adjustments, and the net impact of the consolidated Non-Residual Trust VIEsCore Earnings includes both cash and non-cash gains from forward mortgage origination activities.  Non-cash gains are net of non-cash charges or reserves provided.  Core Earnings excludes the impact of the adoption of fair value accounting and includes cash gains for reverse mortgage origination activities.  Core Earnings may also include other adjustments, as applicable based upon facts and circumstances, consistent with the intent of providing investors a means of evaluating our core operating performance.

Adjusted EBITDA This disclaimer applies to every usage of Adjusted EBITDA and related terms such as Pro-Forma Adjusted EBITDA and  AEBITDA in this document.  Adjusted EBITDA is a key performance metric used by management in evaluating the performance of our Company and its segments.  Adjusted EBITDA represents income before income taxes, depreciation and amortization, interest expense on corporate debt, transaction and integration related costs, the net effect of the non-residual VIEs and certain other non-cash income and expense items. Adjusted EBITDA includes both cash and non-cash gains from forward mortgage origination activities.  Adjusted EBITDA excludes the impact of the adoption of fair value accounting and includes cash gains for reverse mortgage origination activities.  Adjusted EBITDA may also include other adjustments, as applicable based upon facts and circumstances, consistent with the intent of providing investors a means of evaluating our core operating performance. The definition of Adjusted EBITDA used in this document differs from the definition of Pro-Forma adjusted EBITDA in our Term Loan primarily in that it excludes pro forma adjustments for the projected EBITDA of certain acquisitions and includes the non-cash gains from forward mortgage origination activities in Adjusted EBITDA.

2013 Estimated Adjusted EBITDA, 2013 Estimated Core Earnings, 2014 Estimated Core Earnings and other amounts or metrics that relate to future earnings projections are forward-looking and subject to significant business, economic, regulatory and competitive uncertainties, many of which are beyond the control of Walter Investment and its management, and are based upon assumptions with respect to future decisions, which are subject to change.  Actual results will vary and those variations may be material.  Nothing in this presentation should be regarded as a representation by any person that this target will be achieved and the Company undertakes no duty to update this target.  Please refer to the introductory slides of this presentation, as well as additional disclosures in this Appendix and in our Form 10-K and other filings with the SEC, for important information regarding Forward Looking Statements and the use of Non-GAAP Financial Measures.

SOURCE Walter Investment Management Corp.



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