ZAIS Financial Corp. Reports Fourth Quarter 2013 Results

RED BANK, N.J., March 5, 2014 /PRNewswire/ -- ZAIS Financial Corp. (NYSE: ZFC) ("ZAIS Financial" or the "Company") today reported financial results for the three and twelve months ended December 31, 2013.  The quarter ended December 31, 2013 was the third full quarter in which the Company operated as a public mortgage REIT following its initial public offering ("IPO") completed on February 13, 2013.

FOURTH QUARTER 2013 AND RECENT HIGHLIGHTS

• GAAP net income of $9.0 million, or $0.98 per diluted weighted average share outstanding
• Core Earnings (a non-GAAP financial measure as defined below) of $3.0 million, or $0.31 per diluted weighted average share outstanding
• Fourth quarter regular cash dividend of $0.40 and an additional special cash dividend of $0.55 per share of the Company's common stock and operating partnership unit ("OP unit") were declared on December 19, 2013 and paid on January 15, 2014
• Book value per share of common stock and OP unit of $19.98 as of December 31, 2013, as compared with $19.92 as of September 30, 2013
• Issued $57.5 million of 8% Exchangeable Senior Notes due November 15, 2016 ("Notes")
• Residential mortgage loan portfolio with an unpaid principal balance of $398.8 million and a fair value of $331.8 million, as of December 31, 2013
• Residential mortgage-backed securities ("RMBS") consisting of non-Agency RMBS with a fair value of $226.2 million, as of December 31, 2013
  • During the three months ended December 31, 2013, acquired non-Agency RMBS with a fair value of $41.0 million, as of December 31, 2013
• 2.42x leverage ratio as of December 31, 2013

"We are very pleased with our fourth quarter performance which demonstrates the strength of our residential mortgage credit focused strategy, particularly our ability to grow book value while at the same time declaring a total of $0.95 per share in regular and special dividends," commented Michael Szymanski, President and Chief Executive Officer of ZAIS Financial.  "We continue to see attractive opportunities in the market and remain focused on positioning ZFC to benefit from the ongoing recovery and evolution of the residential mortgage market."

FOURTH QUARTER 2013 RESULTS

ZAIS Financial reported GAAP net income for the three months ended December 31, 2013 of $9.0 million, or $0.98 per diluted weighted average share outstanding compared with net income of $2.6 million, or $0.90 per diluted weighted average share outstanding for the three months ended December 31, 2012.  The increase was primarily related to an increase in net interest income of $3.9 million and an increase in other gains / (losses) of $3.0 million, partially offset by an increase in operating expenses of $0.5 million.  For the three months ended December 31, 2013, the Company reported Core Earnings (which excludes 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) of $3.0 million, or $0.31 per diluted weighted average share outstanding compared with Core Earnings of $1.5 million, or $0.67 per diluted weighted average share outstanding for the quarter ended December 31, 2012.  Core Earnings is a non-GAAP financial measure.

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

The December 31, 2013 book value of $19.98 per share of common stock and OP unit increased from the September 30, 2013 book value per share of common stock and OP unit of $19.92.  The December 31, 2013 book value includes $8.5 million in dividends payable related to the December 19, 2013 dividend declaration. 

The Company earned interest income of $8.8 million for the three months ended December 31, 2013, compared with $2.2 million of interest income for the three months ended December 31, 2012.  The increase in interest income was primarily due to the deployment of capital raised in the Company's February IPO and the acquisition of whole loans, which increased interest income by $5.5 million. Other factors contributing to the increase in interest income included increases in the Company's average RMBS portfolio balance and the average RMBS portfolio yield, which raised interest income by $0.7 million and $0.4 million, respectively.  The Company incurred interest expense of $3.1 million for this period, compared with $0.3 million for the three months ended December 31, 2012.  The increase in interest expense was mainly 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"), securities repurchase agreements used to finance the Company's RMBS portfolio and the issuance of the Notes.

As of December 31, 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 3.91% for the Company's mortgage loans and 4.61% for the Company's non-Agency RMBS.  As of December 31, 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 2.28% for the Company's Agency RMBS and 5.47% for the Company's non-Agency RMBS.

The Company incurred operating expenses of $2.7 million for the three months ended December 31, 2013, compared with $2.2 million for the three months ended December 31, 2012.  The increase in expenses was attributable to several factors related to the Company's IPO and transition to a public company.  These factors included increases in professional fees, advisory fees and general and administrative expenses partially offset by a decrease in the interest on common stock repurchase liability.  Professional fees increased by $0.8 million primarily due to work performed by the independent auditors for quarterly reviews and procedures performed for the 2013 annual financial statement audit.  Advisory fees increased by $0.6 million due to an increase in stockholders' equity resulting from the Company's February 2013 IPO.  General and administrative expenses increased by $0.5 million related to transaction costs, insurance expense, research fees, trustee fees and independent directors' fees.  Loan servicing fees increased by $0.5 million from the prior year period, due to the acquisition of whole loans as the Company executed on its investment strategy.  Increased expenses were partially offset by a decrease in interest on common stock repurchase liability of $1.8 million due to the repurchase of common stock in the first quarter of 2013. 

PORTFOLIO SUMMARY

As of December 31, 2013, the Company held residential mortgage loans with an aggregate unpaid principal balance of $398.8 million and a fair value of $331.8 million and a diversified portfolio of non-Agency RMBS with a fair value of $226.2 million which consisted primarily of senior tranches that were originally highly rated but subsequently downgraded.

The Company acquired non-Agency RMBS with a principal balance of $50.0 million for $41.0 million and sold non-Agency RMBS with a principal balance of $9.3 million for $8.5 million during the fourth quarter.  The Company did not purchase or sell any mortgage loans during the fourth quarter.

As of December 31, 2013, the Company held cash of $57.1 million primarily from the issuance of the Notes in November 2013 and, consequently, was not fully invested in its target assets contemplated by its long-term business plan. 

LEVERAGE, DEBT AND HEDGING ACTIVITIES

As of December 31, 2013, ZAIS Financial had a leverage ratio of 2.42x.  The Company had $430.7 million in aggregate borrowings outstanding as of December 31, 2013, under the Loan Repurchase Facility, four RMBS master repurchase agreements and the Notes.  The Loan Repurchase Facility and RMBS master repurchase agreements are secured by portions of the Company's mortgage loans and non-Agency RMBS, respectively, and bear interest at rates that have historically moved in close relationship to LIBOR.  The Notes are the Company's senior unsecured obligations and bear interest at a rate of 8% per year, payable semiannually in arrears on May 15^th and November 15^th of each year.  The Notes mature on November 15, 2016.

As of December 31, 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 December 31, 2013.

COMMON STOCK DIVIDEND

On December 19, 2013, the Company announced that its Board of Directors declared a regular cash dividend of $0.40 per share of the Company's common stock and OP unit for the three months ended December 31, 2013, and an additional special cash dividend of $0.55 per share of the Company's common stock and OP unit.  The Company declared the additional special cash dividend to distribute taxable income from 2013 attributable to the termination of interest rate swap contracts.  The dividends were payable on January 15, 2014 to stockholders and OP unit holders of record as of the close of business on December 31, 2013. 

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.

INVESTOR CONFERENCE CALL

Management will host a conference call today, March 5, 2014, at 10:00 a.m. eastern time to review the Company's financial results.  The number to call for this interactive teleconference is (480) 629-9835. 

A replay of the conference call will be available through Wednesday, March 12, 2014, by dialing (303) 590-3030 and entering the confirmation number, 4669315. 

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 Wednesday, March 5, 2014, 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.

FOURTH QUARTER INVESTOR PRESENTATION

The Company's Fourth Quarter Investor Presentation – December 31, 2013, is available on the Company's website at www.zaisfinancial.com.  To access the presentation, select the Q4 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 to Core Earnings:

The following table sets forth certain information regarding the Company's mortgage loans as of December 31, 2013:

The following table sets forth certain information regarding the Company's RMBS as of December 31, 2013:

The following table presents information about the Company's interest rate swap agreements as of December 31, 2013:

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 most recent Annual Report on Form 10-K  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.

SOURCE ZAIS Financial Corp.