In compliance with REIT qualifications at March 31, 2008
Reduced leverage improves stability in liquidity position
CHICAGO, May 12 /PRNewswire-FirstCall/ -- Deerfield Capital Corp.(NYSE: DFR) today announced the results of operations for its first quarterended March 31, 2008. Information in this release provides a more detailedreview of first quarter 2008 results reaffirming the updates of material firstquarter events described in press releases earlier this year.
FIRST QUARTER 2008 SUMMARY
-- The net loss for the quarter totaled $463.6 million, or $8.43 per diluted common share, compared with net income of $22.5 million, or $0.44 per diluted common share in the prior year quarter. -- The 2008 first quarter loss was primarily due to net losses in the RMBS and interest rate swap portfolios totaling $198.6 million and $219.3 million, respectively. -- Estimated REIT taxable income, a non-GAAP financial measure, was a loss of $16.4 million, or $0.30 per diluted common share, compared to income of $22.9 million, or $0.44 per share in the first quarter of 2007 (see reconciliation of GAAP loss to estimated REIT taxable loss attached). -- Book value per share was $3.26 at March 31, 2008, down from $9.07 at the end of the fourth quarter. -- Economic book value per share, a non-GAAP financial measure, was $3.38 at March 31, 2008 (see Economic Book Value section that follows and reconciliation of book value to economic book value attached). -- Cash, unencumbered liquid securities and net equity in financed liquid securities totaled approximately $91.6 million at quarter end.
Results of Operations
In December 2007, the company acquired its external manager, DeerfieldCapital Management LLC (DCM), a fixed income asset manager with a diversifiedrevenue and fee income stream. In the following discussion, the Agency RMBSand corporate debt businesses are referred to as the Principal Investingsegment, and the newly acquired asset management business as the InvestmentManagement segment.
Results for the quarter ended March 31, 2008, were materially impacted bya significant reduction in value of AAA-rated non-Agency and Agency RMBS. Thenet loss for the quarter totaled $463.6 million, or $8.43 per diluted commonshare, compared with net income of $22.5 million, or $0.44 per share, for thefirst quarter of 2007. The decrease reflected realized and unrealized netlosses on RMBS, net losses in the interest rate swap trading portfolio (usedas an economic hedge of the RMBS portfolio), an accelerated recognition ofdeferred net losses on interest rate swaps, lower valuations in the loansheld-for-sale portfolio, and impairment charges on goodwill and intangibleassets. Providing a partial offset were gains on the sale of Agency RMBS andinvestment advisory fees from the recently acquired investment managementbusiness.
Net interest income totaled $13.8 million in the quarter ending March 31,2008, compared with $23.8 million in the first quarter of 2007. The decreasewas largely driven by significantly lower balances in the RMBS portfolio dueto sales in the quarter and a full quarter of interest expense on thecompany's Series A and Series B notes issued in connection with theacquisition of DCM in late 2007.
Investment advisory fees totaled $12.1 million in the quarter reflectingthe acquisition of DCM near the end of last year.
The provision for loan losses was $2.2 million, up by $0.4 million fromthe prior year quarter, reflecting an additional loss provision on apreviously identified impaired middle market loan.
Expenses totaled $44.1 million, up by $37.5 million over the prior yearquarter. The increase was primarily due to goodwill impairment of$20.0 million, intangible asset impairment of $7.9 million and the inclusionof current period operating expenses incurred by DCM.
Other income and gain (loss) was a net loss of $450.4 million in thequarter, compared with a net gain of $7.5 million in the prior year quarter.
The loss primarily reflected the following:
-- AAA-rated non-Agency RMBS with an amortized cost of $1.6 billion were sold in the first quarter of 2008 to reduce leverage and maintain adequate liquidity, resulting in net realized losses of $193.5 million. -- The undesignated interest rate swap portfolio, which is used as an economic hedge of the RMBS book, generated losses totaling $127.6 million due to falling swap rates during the quarter. -- $91.7 million of accelerated recognition of previously deferred net swap losses from designated interest rate swaps that were subsequently terminated or de-designated as a hedge was recognized in the quarter. This write-off did not affect book value since the net losses had been deferred in the accumulated other comprehensive loss category of stockholders' equity as of year end. -- Unrealized net losses in the RMBS portfolio totaled $29.5 million during the quarter primarily due to wider spreads. -- A broad-based risk aversion across the credit spectrum pushed down loan prices producing a net unrealized loss of $18.7 million on corporate bank loans held for sale in the Market Square CLO during the quarter. -- Realized and unrealized losses totaling $3.1 million were recognized on junior participation interests in commercial mortgages in the process of liquidation. -- Realized net gains of $24.4 million on the sale of Agency RMBS provided a favorable offset.
Estimated REIT taxable income, a non-GAAP financial measure, for thequarter ended March 31, 2008, totaled a loss of $16.4 million, or $0.30 perdiluted common share, compared to income of $22.9 million or $0.44 per sharein the first quarter of 2007. A reconciliation of GAAP net income toestimated REIT taxable income is attached.
Commenting on first quarter results, Jonathan Trutter, chief executiveofficer, said, 'Our first quarter results reflect the very difficult marketconditions for mortgage REITs during this time period. Pricing pressure onfinancial assets has abated since quarter end, and we have successfullystabilized our capital structure.'
Trutter added, 'We are now turning our attention to the execution of thestrategic rationale for the acquisition of the Investment Management business,which is to grow our fee based revenue streams. We are currently pursuingseveral investment strategies within our core fixed income competencies,including raising new investment funds and acquiring management contracts forCLO and CDO assets. While the recent period has been challenging, thedislocation in global markets has created tremendous opportunities. Ourstrong brand combined with the solid skill set embedded in our employee basepositions us well to capitalize on those opportunities. The management team
is re-energized and enthusiastic about building upon our current book ofbusiness.'
Principal Investing Segment
Investment Portfolio
The following table summarizes the carrying value of our invested assetsand the respective balance sheet classifications as of March 31, 2008 (inthousands):
Carrying Value Available- Loans for-Sale Trading Other Held for Description Securities Securities Securities Sale Loans
RMBS Agency $- $437,902 $- $- $- Non-agency - 29,749 - - - - 467,651 - - -
U.S. Treasury bills - 999,300 - - - 999,300 - - -
Corporate leveraged loans (1): Assets held in DFR Middle Market CLO - - - - 277,481 Assets held in Wachovia facility - - - - 105,698 Other corporate leveraged loans (2) - - - - 23,798 Commercial mortgage- backed assets (3) 2,824 - - - 20,926 Equity securities - - 5,472 - - Total structured & syndicated assets 2,824 - 5,472 - 427,903
Assets held in Market Square CLO (4) 4,969 - - 246,548 - Other investments and loans (5) 2,142 2,791 - - - Total corporate debt investments 9,935 2,791 5,472 246,548 427,903
Total invested assets - March 31, 2008 $9,935 $1,469,742 $5,472 $246,548 $427,903
Total invested assets - December 31, 2007 $4,897,972 $1,444,505 $5,472 $267,335 $466,360
Carrying Value Total Total Mar 31, Dec 31, Description 2008 2007
RMBS Agency $437,902 $4,685,139 Non-agency 29,749 1,642,039 467,651 6,327,178
U.S. Treasury bills 999,300 - 999,300 -
Corporate leveraged loans (1): Assets held in DFR Middle Market CLO 277,481 291,189 Assets held in Wachovia facility 105,698 115,203 Other corporate leveraged loans (2) 23,798 31,593 Commercial mortgage-backed assets (3) 23,750 35,295 Equity securities 5,472 5,472 Total structured & syndicated assets 436,199 478,752
Assets held in Market Square CLO (4) 251,517 265,483 Other investments and loans (5) 4,933 10,231 Total corporate debt investments 692,649 754,466
Total invested assets - March 31, 2008 $2,159,600 $7,081,644
Total invested assets - December 31, 2007 $7,081,644
(1) Corporate leveraged loans exclude credit default swaps with an estimated net negative fair value of $0.6 million and a $15.0 million gross notional value. Also excluded are total return swaps with an estimated net negative fair value of $1.2 million and a $14.5 million notional value. (2) This amount is reported gross of the $7.5 million allowance for loan losses. (3) Commercial mortgage-backed assets include participating interests in commercial mortgage loans with a zero carrying value as of March 31, 2008. (4) Assets held in Market Square CLO include syndicated bank loans of $246.5 million, high yield corporate bonds of $3.2 million and asset-backed securities of $1.8 million as of March 31, 2008. (5) Other investments and loans includes $2.8 million of preferred shares of CDOs owned by DCM and considered assets of our Investment Management segment.
Total invested assets were down $4.9 billion, or 69.5% to $2.2 billion asof March 31, 2008 compared to the end of 2007. The decrease was primarilyattributable to the sale of RMBS to increase liquidity and reduce leverage andrisk associated with this portfolio. U.S. Treasury bills totaling$1.0 billion were held as of March 31, 2008. These securities were purchasedto assist the company in complying with the applicable REIT qualificationtests at quarter end and were sold in April 2008. The company does not expectto hold significant amounts of U.S. Treasury bills as part of its long-terminvestment strategy going forward.
Mortgage Securities Portfolio
During the first quarter of 2008, the RMBS portfolio decreased by 92.6% to$0.5 billion from $6.3 billion as of December 31, 2007. RMBS transactions inthe first quarter of 2008 included the following:
-- Agency RMBS with an amortized cost of $4.6 billion were sold resulting in a realized net gain of $24.4 million. -- AAA-rated non-Agency RMBS with an amortized cost of $1.6 billion were sold resulting in a realized net loss of $193.5 million.
As previously noted sales of RMBS resulted in reduced leverage, providedincreased liquidity and reduced risk. The interest rate swap portfolio, whichis used as an economic hedge of the RMBS portfolio, was also reduced as theRMBS portfolio decreased in size. The notional amount of swaps totaled $0.5billion at quarter end. The net portfolio duration, which is the differencebetween the duration of the RMBS and that of the repurchase agreements fundingthese investments, adjusted for the effects of the company's swap portfolio,was approximately 1.21 years at March 31, 2008, based on model-driven results,compared to 0.10 years at year end. This means the company could expectapproximately a 1.21% change in value of the combined RMBS and interest rateswap portfolios given a 1% change in interest rates.
