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Press Release

Five Oaks Investment Corp. Reports Second Quarter 2016 Financial Results
Further Reduced Exposure to Credit and Financing Market Volatility

NEW YORK, Aug. 9, 2016 /PRNewswire/ -- Five Oaks Investment Corp. (NYSE: OAKS) ("we", "Five Oaks" or "the Company") today announced its financial results for the second quarter ended June 30, 2016. For the second quarter, the Company reported a GAAP net loss of $4.9 million, or $0.34 per basic and diluted share, a comprehensive loss of $0.9 million, or $0.06 per basic and diluted share, and core earnings(1) of $3.0 million, or $0.21 per basic and diluted share. The Company also reported a net book value of $7.88 per share on a basic and diluted basis at June 30, 2016. 

Second Quarter and Subsequent Events Summary

  • We realized a negative economic return on our common stock of 0.7% after accounting for dividends of $0.18, primarily resulting from non-recurring costs associated with the re-securitization of certain of our Multi-Family MBS positions, designed to effectively term out our financing of these investments.(2)
  • Reflecting our continued concern with market volatility in general and credit market conditions in particular, we further reduced our Non-Agency RMBS exposure from $84.4 million at March 31, 2016 to $57.4 million at June 30, 2016. 
  • On April 25, 2016, we effected a re-securitization ("Re-REMIC") of certain first loss Multi-Family MBS securities backed by Freddie Mac K Certificates with a certificate principal balance of approximately $32.1 million, permitting the repayment of all related repurchase agreement financing. Additionally, on April 21, 2016, we sold first loss securities from another Freddie Mac K Series transaction with a certificate principal balance of approximately $79.7 million, plus related interest only securities, permitting the repayment of all related repurchase agreement financing. In both cases, we purchased first-loss securities issued by the re-securitization transactions, or the Re-REMIC transactions, while the more senior-ranking securities were sold to institutional investors, thereby effectively "locking-in" term financing for a portion of the risk previously held on our balance sheet. Accordingly, our Multi-Family MBS exposure was reduced from $173.8 million at March 31, 2016 to $107.6 million at June 30, 2016.
  • The economic impact of the Re-REMIC transactions was the primary driver of the decline in our book value during the second quarter. By term financing these two positions, we have traded a one-time reduction in book value for a more stable future income stream, and by replacing short-term repo financing, simultaneously reduced exposure to potential future margin calls. Absent the Re-REMIC impact, we estimate that net book value per common share would have increased during the second quarter by approximately 1.4%.

(1)  Core Earnings is a non-GAAP measure that we define as GAAP net income, excluding impairment losses, realized and unrealized gains or losses on the aggregate portfolio and certain non-recurring upfront costs related to securitization transactions. As defined, Core Earnings includes interest income or expense and premium income or loss on derivative instruments.

(2)  Economic return is a non-GAAP measure that we define as the sum of the change in net book value per common share and dividends declared on our common stock during the period over the beginning net book value per common share. See "Reconciliation of GAAP to Core Earnings" below.

Management Observations

David Carroll, Five Oaks' Chairman and CEO commented: "During the second quarter, we took further significant steps to reduce our vulnerability to both credit and financing market instability. We continued selling legacy Non-Agency RMBS, and also sold the remaining positions in our first new-issue Non-Agency RMBS deal – the JPMMT 2014-OAK4 Trust – thereby also de-consolidating the trust and beginning to simplify our business model. Additionally, we completed re-securitizations of two equity positions in the Freddie K-series Multi-Family MBS portfolio, permitting us to repay all related repo, release capital, and effectively lock-in mid-teen yields on our first-loss investments. We believe the one-time economic impact of around $5.2 million will be recouped over time, and absent these non-recurring items our book value would have been up slightly quarter-on-quarter based on our interest rate positioning.

Following quarter-end, we also announced that we would no longer aggregate prime jumbo residential mortgage loans, due to continued unfavorable economics for the business of aggregating and securitizing such loans. We will continue to manage our sponsor obligations for past securitization transactions, but we see no near-term catalyst to change the disappointing lack of support for private capital in the mortgage market. We anticipate annualized cost savings of $2 million from this determination, and we believe additional savings of an equivalent amount are achievable from our ongoing efforts to reorient our business. We are on record as stating that regulatory disintermediation renders a repo-financed securities arbitrage model less attractive going forward; we continue examining the reallocation of capital towards opportunities with positive fundamentals, term financing and characteristics that not only help us maximize stockholder value, but are also simpler for investors to understand.

During the second quarter, through our taxable REIT subsidiary FOAC, we also completed the first test trade for residential mortgage loans sold through a new loan exchange known as LoanExchange and operated by MAXEX, LLC; we have subsequently completed a second such trade. The intent of LoanExchange is to create a whole loan mortgage trading platform which encompasses a centralized counterparty with a standardized purchase and sale contract and an independent dispute resolution process. We believe the residential mortgage market is ready for the concept of a centralized market utility for the secondary mortgage market, and we look forward to being able to share with you more on this opportunity and our role as the exchange gets closer to its rollout."

Investment Portfolio and Capital Allocation

The following table summarizes certain characteristics of our investment portfolio and the related allocation of our equity capital on a non-GAAP combined basis as of June 30, 2016:

 

As of June 30, 2016

Agency MBS

Multi-Family
MBS (1)(2)

Non-Agency
RMBS (1)(2)

Residential
Loans (3)

Unrestricted
Cash  (4)

Total

Amortized Cost

$

609,734,113

$

107,431,894

$

74,014,142

$

17,581,748

$

25,536,658

$

834,298,555

Market Value

619,814,935

107,627,795

57,396,596

17,301,609

25,536,658

827,677,593

Repurchase Agreements

(586,566,000)

(52,680,000)

(37,951,000)

(10,406,770)

-

(687,603,770)

Hedges

(5,175,168)

(2,779,420)

-

-

-

(7,954,588)

Other (5)

5,096,427

109,721

281,706

84,955

53,011

5,625,820

Restricted Cash

10,232,984

3,434,887

786,337

-

-

14,454,208

Equity Allocated

$

43,403,178

$

55,712,983

$

20,513,639

$

6,979,794

$

25,589,669

$

152,199,263








Debt/Net Equity (6)

13.51

0.95

1.85

1.49

-

4.52








For the Quarter Ended
June 30, 2016

Agency MBS

Multi-Family MBS

Non-Agency RMBS

Residential
Loans (7)

Unrestricted Cash

Total

Yield on Earning Assets (8)

2.54%

8.54%

5.10%

13.46%

-

4.08%

Less Cost of Funds

0.65%

1.27%

1.27%

2.31%

-

0.82%

Net Interest Margin (9)

1.89%

7.27%

3.83%

11.16%

-

3.26%















(1) On a GAAP basis, which excludes the impact of consolidation of the FREMF 2011-K13, FREMF 2012-KF01, and CSMC 2014-OAK1 Trusts, the fair value of our investments in Non-Agency RMBS is $43,935,733, and the fair value of our investments in Multi-Family MBS is $90,601,375. Information with respect to Non-Agency RMBS and Multi-Family MBS, and the resulting total is presented here on a non-GAAP basis.

(2) Includes the fair value of our net investments in the FREMF 2011-K13, FREMF 2012-KF01, and CSMC 2014-OAK1 Trusts.

(3) On a GAAP basis, which excludes the impact of consolidation of the CSMC 2014-OAK1 Trust, the fair value of our investments in mortgage servicing rights is $3,229,937.  Information with respect to Residential Loans and the resulting total is presented here on a non-GAAP basis and includes the fair value of our mortgage servicing rights, $4,392,012

(4) Includes cash and cash equivalents.

(5) Includes interest receivable, prepaid and other assets, interest payable, dividend payable and accrued expenses and other liabilities.

(6) Ratio is a reflection of the average haircuts for each asset categories. It does not reflect or include the unrestricted cash that the Company set aside for these asset categories.

(7) Includes income on mortgage servicing rights.

(8) On a GAAP basis, the total yield on average interest earning assets is 3.91%. Information is presented here on a non-GAAP basis.

(9) Net Interest Margin is the difference between our Yield on Earning Assets and our Cost of Funds.

 

Comparative Expenses

The following table provides a detailed breakdown of the composition of our expenses on a non-GAAP basis for the quarter ended June 30, 2016 and December 31, 2015:

 

Expenses

For the quarter ended
June 30, 2016


For the quarter ended
March 31, 2016







Management Fees

$

626,738


$

623,223


G&A Expenses (1)

$

886,459


$

762,357


Operating Expenses Reimbursable to Manager

$

1,184,243


$

1,204,811


Other Operating Expenses

$

350,061


$

882,206


Compensation Expense

$

24,248


$

69,639


Total Expenses

$

3,071,749


$

3,542,236







Period-End Capital

$

152,199,263


$

155,668,632







Management Fees

$

626,738


$

623,223


G&A, Other Operating Expenses and Reimbursable

$

2,149,392


$

2,442,010


Compensation Expenses

$

24,248


$

69,639


Expenses related to Prime Jumbo Loans

$

271,371


$

407,364







Management Fees as % of Capital


1.65%



1.60%


G&A, Other, Reimbursable and Compensation as % of Capital


5.71%



6.45%


Expenses related to Prime Jumbo Loans as % of Capital


0.71%



1.05%



(1) Excludes $792,673 and $870,154 in expense attributable to the consolidated trusts for the quarters ended June 30, 2016 and March 31, 2016, respectively.

 

The decrease in G&A, Other Operating, Reimbursable and Compensation Expenses as a percentage of Capital compared to the prior quarter is primarily a function of lower legal expenses relative to the first quarter.

Operating Performance

The following table summarizes the Company's GAAP and non-GAAP earnings measurements for the years ended June 30, 2016 and March 31, 2016:

 


Quarter Ended June 30, 2016    

Quarter Ended March 31, 2016




Earnings

Earnings

Per diluted
weighted share

Annualized
return on
average equity

Earnings

Per diluted
weighted share

Annualized
return on
average equity

Core Earnings *

$

3,031,562

$

0.21

$

6.43%

$

3,512,283

$

0.24

$

7.44%

GAAP Net Income (Loss)

$

(4,947,003)

$

(0.34)

$

(10.49)%

$

(17,828,123)

$

(1.22)

$

(37.78)%

Comprehensive Income (Loss)

$

(850,163)

$

(0.06)

$

(1.80)%

$

(18,929,449)

$

(1.30)

$

(40.11)%















Weighted Ave Shares Outstanding     


14,597,894


14,605,515



Weighted Average Equity 


$

188,992,291


$

189,091,189



 

Stockholders' Equity and Book Value Per Share

As of June 30, 2016, our stockholders' equity was $152.2 million and our book value per common share was $7.88 on a basic and fully diluted basis.

Dividends

The Company declared a dividend of $0.06 per share of common stock for the months of July, August and September 2016. Based on the closing price of $5.48 at June 30, 2016, this equates to an annualized dividend yield of 13.1%.

Forward-Looking Statements

This press release includes "forward-looking statements" within the meaning of the U.S. securities laws that are subject to risks and uncertainties.  These forward-looking statements include information about possible or assumed future results of the Company's business, financial condition, liquidity, results of operations, plans and objectives. You can identify forward-looking statements by use of words  such as "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may" or similar expressions or other comparable terms, or by discussions of strategy, plans or intentions.  Statements regarding the following subjects, among others, may be forward-looking: the return on equity; the yield on investments; the ability to borrow to finance assets; and risks associated with investing in real estate assets, including changes in business conditions and the general economy.  Forward-looking statements are based on the Company's beliefs, assumptions and expectations of its future performance, taking into account all information currently available to the Company.  Actual results may differ from expectations, estimates and projections and, consequently, you should not rely on these forward looking statements as predictions of future events.  Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the Company's control.  Additional information concerning these and other risk factors are contained in the Company's most recent filings with the Securities and Exchange Commission, which are available on the Securities and Exchange Commission's website at www.sec.gov    

All subsequent written and oral forward-looking statements that the Company makes, or that are attributable to the Company, are expressly qualified in their entirety by this cautionary notice.  Any forward-looking statement speaks only as of the date on which it is made.  Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Non-GAAP Financial Measures

For financial statement reporting purposes, GAAP requires us to consolidate the assets and liabilities of the FREMF 2011-K13 Trust; FREMF 2012-KF01 and CSMC 2014-OAK1. However, our maximum exposure to loss from consolidation of the consolidated trusts is limited to the fair value of our net investment therein. We therefore have also presented certain information as of June 30, 2016 and March 31, 2016 that includes our net investments in the consolidated trusts. For a reconciliation to GAAP, see "Additional Information" below. This information as well as core earnings, economic return and comparative expenses constitute non-GAAP financial measures within the meaning of Item 10(e) of Regulation S-K, as promulgated by the SEC.  While we believe the non-GAAP information included in this press release provides supplemental information to assist investors in analyzing that portion of our portfolio composed of Non-Agency RMBS and Multi-Family MBS, and to assist investors in comparing our results with other peer issuers, these measures are not in accordance with GAAP, and they should not be considered a substitute for, or superior to, our financial information calculated in accordance with GAAP. Our GAAP financial results and the reconciliations from these results should be carefully evaluated.

Reconciliation of GAAP to Core Earnings

 

GAAP to Core Earnings Reconciliation

Three Months Ended






June 30, 2016





Reconciliation of GAAP to non-GAAP Information






Net Income (loss) attributable to common shareholders

$

(4,947,003)





Adjustments for non-core earnings






Realized (Gain) Loss on sale of investments, net

$

(3,771,148)





Unrealized (Gain) Loss on fair value securities

$

2,239,654





Realized (Gain) Loss on derivative contracts, net

$

761,362





Unrealized (Gain) Loss on derivative contracts, net

$

2,050,538





Realized (Gain) Loss on mortgage loans held-for-sale

$

(69,734)





Unrealized (Gain) Loss on mortgage loans held-for-sale

$

62,002





Unrealized (Gain) Loss on mortgage servicing rights

$

138,447





Unrealized (Gain) Loss on multi-family loans held in securitization trusts

$

8,071,468





Unrealized (Gain) Loss on residential loans held in securitization trusts

$

(3,399,187)





Other income

$

(1,826)





Subtotal

$

6,081,576











Other-than-temporary impairments:






Increase (decrease) in credit reserves

$

146,224





Additional other-than-temporary credit impairment losses

$

-





Net other-than-temporary impairments

$

146,224





Other Adjustments






Recognized compensation expense related to restricted  common stock

$

8,415





Adjustment for consolidated securities/securitization costs

$

1,742,350





Adjustment for one-time charges

$

-





Non-GAAP Core Earnings

$

3,031,562











Weighted average shares outstanding - Basic and Diluted

14,597,894











Core Earnings per weighted share outstanding - Basic and Diluted

$

0.21














 

Additional Information Regarding our Financial Presentations

As of June 30, 2016, following completion of the two Re-REMIC transactions, we continued to determine that we were the primary beneficiary of two Multi-Family MBS securitization trusts, the FREMF 2011-K13 Trust, and the FREMF 2012-KF01 Trust. As a result, we are required to consolidate the trusts' underlying multi-family loans together with their liabilities, income and expenses in our consolidated financial statements. We have elected the fair value option on the assets and liabilities held within the trusts, which requires that changes in valuation in the assets and liabilities of these trusts be reflected in our consolidated statements of operations.

A reconciliation of our net investment in multi-family investments to our GAAP financial statements as of June 30, 2016 is set forth below:

 

Multi-Family Loans held in Securitization Trusts, at fair value

$

1,310,347,394

Multi-Family Securitized Debt Obligations (non-recourse)

$

(1,293,320,974)

Net Carrying Value

$

17,026,420

Multi-Family MBS (1)

$

19,918,544

Multi-Family MBS PO (2)

$

70,682,831

Cash and Other

$

765,188

Repurchase Agreements

$

(52,680,000)

Net Investment in Multi-Family Securitization Trusts

$

55,712,983



(1)   Excludes $5,784,282 in Multi-Family MBS that is consolidated

(2)   Excludes $11,242,138 in Multi-Family MBS that is consolidated

 

As of June 30, 2016, we continued to determine that we were the primary beneficiary of one prime jumbo residential mortgage securitization trust, CSMC 2014-OAK1. As a result, we are required to consolidate the trust's underlying prime jumbo residential loans together with their liabilities, income and expenses in our consolidated financial statements. We have elected the fair value option on the assets and liabilities held within the trust, which requires that changes in valuation in the assets and liabilities of the trusts be reflected in our consolidated statements of operations.

A reconciliation of our net investment in Non-Agency RMBS to our GAAP financial statements as of June 30, 2016 is set forth below:

 

Residential Loans held in Securitization Trusts, at fair value (1)

$

173,674,636

Residential Securitized Debt Obligations (non-recourse)

$

(160,213,774)

Net Carrying Value

$

13,460,862

Non-Agency RMBS

$

43,935,734

Cash and Other

$

1,068,043

Repurchase Agreements

$

(37,951,000)

Net Investment in Non-Agency RMBS

$

20,513,639



(1) Excludes $1,162,075 in Mortgage Servicing Rights     


      

Five Oaks Investment Corp.

Five Oaks Investment Corp. is a real estate investment trust ("REIT") focused with its subsidiaries on investing on a leveraged basis in mortgage and other real estate-related assets, particularly residential mortgage loans, mortgage servicing rights, and mortgage-backed securities ("MBS"), including residential mortgage-backed securities ("RMBS") and multi-family mortgage-backed securities ("Multi-Family MBS"). The Company's objective remains to deliver attractive cash flow returns over time to its investors, primarily through dividends and secondarily through capital appreciation.

Five Oaks Investment Corp. is externally managed and advised by Oak Circle Capital Partners LLC.

Additional Information Regarding Our Company and Where to Find It

Investors, security holders and other interested persons may find additional information regarding our Company at the SEC's  Internet site at http://www.sec.gov/  or the Company website www.fiveoaksinvestment.com or by directing requests to: Five Oaks Investment Corp., 540 Madison Avenue, 19th Floor, New York, NY 10022, Attention: Investor Relations.

 

FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES





Condensed Consolidated Statements of Operations












Three Months Ended


Three Months Ended



June 30, 2016


June 30, 2015



(unaudited)


(unaudited)

Revenues:






Interest income:







Available-for-sale securities

$

5,331,794

$

6,753,580



Mortgage loans held-for-sale


167,070


585,566



Multi-family loans held in securitization trusts


14,692,902


17,249,728



Residential loans held in securitization trusts


3,408,847


5,039,380



Cash and cash equivalents


8,945


4,236


Interest expense:







Repurchase agreements - available-for-sale securities


(1,338,815)


(1,789,532)



Repurchase agreements - mortgage loans held-for-sale


(94,084)


(392,394)



Multi-family securitized debt obligations


(13,814,743)


(15,778,322)



Residential securitized debt obligations


(2,589,846)


(3,102,240)











Net interest income


5,772,070


8,570,002









Other-than-temporary impairments






Increase in credit reserves


(146,224)


567,205


Additional other-than-temporary credit impairment losses


-


-












Total impairment losses recognized in earnings


(146,224)


567,205









Other income:






Realized gain (loss) on sale of investments, net


3,771,148


524,156


Change in unrealized gain (loss) on fair value option securities


(2,239,654)


(232,273)


Realized gain (loss) on derivative contracts, net


(761,362)


(1,217,392)


Change in unrealized gain (loss) on derivative contracts, net


(2,050,538)


902,032


Realized gain (loss) on mortgage loans held-for-sale


69,734


759,059


Change in unrealized gain (loss) on mortgage loans held-for-sale


(62,002)


(594,542)


Change in unrealized gain (loss) on mortgage service rights


(138,447)


(268,311)


Change in unrealized gain (loss) on multi-family loans held in securitization trusts


(8,071,468)


1,803,472


Change in unrealized gain (loss) on residential loans held in securitization trusts


3,399,187


(2,975,798)


Servicing income


243,875


56,538


Other income


1,826


26,611












Total other income (loss)


(5,837,701)


(1,216,448)









Expenses:






Management fee


626,738


698,629


General and administrative expenses


1,679,132


1,717,361


Operating expenses reimbursable to Manager


1,184,243


1,055,075


Other operating expenses


350,061


586,298


Compensation expense


24,248


62,348












Total expenses


3,864,422


4,119,711












Net income (loss) before provision for income taxes


(4,076,277)


3,801,048




(Provision for) benefit from income taxes


-


-




Net income (loss)


(4,076,277)


3,801,048












Dividends to preferred stockholders


(870,726)


(870,726)












Net income (loss) attributable to common stockholders

$

(4,947,003)

$

2,930,322










Earnings (loss) per share:







Net income (loss) attributable to common stockholders (basic and diluted)

$

(4,947,003)

$

2,930,322




Weighted average number of shares of common stock outstanding


14,597,894


14,721,492




Basic and diluted income per share

$

(0.34)

$

0.20



Dividends declared per share of common stock

$

0.18

$

0.38

 

 

FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets



















June 30, 2016 (1)


December 31, 2015 (1)





 (unaudited) 



ASSETS





Available-for-sale securities, at fair value (includes pledged securities of $762,812,906 and $571,086,035 for





     June 30, 2016 and December 31, 2015, respectively)

$

754,352,044

$

571,466,581

Mortgage loans held-for-sale, at fair value (includes pledged loans of $11,787,050 and $10,900,402 for





     June 30, 2016 and December 31, 2015, respectively)


12,909,597


10,900,402

Multi-family loans held in securitization trusts, at fair value


1,305,586,768


1,449,774,383

Residential loans held in securitization trusts, at fair value


174,269,940


411,881,097

Mortgage servicing rights, at fair value


3,229,937


4,268,673

Cash and cash equivalents


25,536,658


26,140,718

Restricted cash



14,454,208


8,174,638

Accrued interest receivable


7,661,978


8,650,986

Dividends receivable


2,014


26,022

Investment related receivable


3,566,968


1,591,343

FHLB stock




11,300


2,403,000

Other assets




1,104,520


530,468









Total assets

$

2,302,685,932

$

2,498,366,661








LIABILITIES AND STOCKHOLDERS' EQUITY












LIABILITIES:





Repurchase agreements:






Available-for-sale securities

$

677,197,000

$

509,231,000


Mortgage loans held-for-sale


10,406,770


9,504,457

FHLB Advances


-


49,697,000

Multi-family securitized debt obligations


1,288,578,921


1,364,077,012

Residential securitized debt obligations


159,799,323


380,638,423

Derivative liabilities, at fair value


7,954,588


-

Accrued interest payable


5,498,559


6,574,699

Dividends payable


29,349


39,132

Fees and expenses payable to Manager


686,187


842,903

Other accounts payable and accrued expenses


335,972


267,507










Total liabilities


2,150,486,669


2,320,872,133









STOCKHOLDERS' EQUITY:





Preferred Stock: par value $0.01 per share; 50,000,000 shares authorized, 8.75% Series A cumulative





     redeemable, $25 liquidation preference, 1,610,000 and 1,610,000 issued and outstanding at June 30,





     2016 and December 31, 2015, respectively


37,156,972


37,156,972

Common Stock: par value $0.01 per share; 450,000,000 shares authorized, 14,597,894 and 14,656,394





     shares issued and outstanding, at June 30, 2016 and December 31, 2015, respectively


145,979


146,409

Additional paid-in capital


188,780,121


189,037,702

Accumulated other comprehensive income (loss)


2,599,743


(395,771)

Cumulative distributions to stockholders


(62,812,117)


(55,803,240)

Accumulated earnings


(13,671,435)


7,352,456










Total stockholders' equity


152,199,263


177,494,528










Total liabilities and stockholders' equity

$

2,302,685,932

$

2,498,366,661















(1)  Our consolidated balance sheets include assets and liabilities of consolidated variable interest entities ("VIE's) as the Company is the primary beneficiary 

       of these VIEs.  As of June 30, 2016 and December 31, 2015, assets of consolidated VIEs totaled $1,485,184,105 and $1,868,482,556, respectively, and the 

       liabilities of consolidated VIEs totaled $1,453,534,748 and $1,750,916,265, respectively

 

Five Oaks Investment Corp. logo.

 

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SOURCE Five Oaks Investment Corp.

David Oston, Chief Financial Officer, Five Oaks Investment Corp., (212) 257 5073