DFR Profitable - Liquidity Position Stable
Declares Cash Dividend of $0.085 Per Share
Announces up to $1.0 Million Share Repurchase Program
Board Establishes Special Committee and Retains UBS Investment Bank to Explore Strategic Alternatives
CHICAGO, Aug. 11 /PRNewswire-FirstCall/ -- Deerfield Capital Corp.
(NYSE: DFR) today announced the results of operations for its second quarter
ended June 30, 2008 and provided a corporate update.
SECOND QUARTER 2008 SUMMARY AND CORPORATE UPDATE
-- Net income for the quarter totaled $5.7 million, or $0.08 per diluted
common share, compared with net income of $14.5 million, or $0.28 per
diluted common share in the prior year quarter.
-- Estimated REIT taxable income, a non-GAAP financial measure, was a loss
of $34.0 million, or $0.49 per diluted common share, compared to income
of $20.5 million, or $0.40 per share in the second quarter of 2007 (see
reconciliation of GAAP net income (loss) to estimated REIT taxable loss
attached).
-- Assets under management (AUM) totaled approximately $13.0 billion at
July 1, 2008.
-- Book value per share was $3.37 at June 30, 2008, up from $3.26 at
March 31, 2008.
-- Economic book value per share, a non-GAAP financial measure, was $3.41
at June 30, 2008 (see Economic Book Value section that follows and
reconciliation of book value to economic book value attached).
-- Unrestricted cash, cash equivalents, unencumbered liquid securities and
net equity in financed liquid securities totaled approximately
$85.7 million at quarter end.
-- Closed the acquisition of the management contract for Robeco CDO II
Limited in July 2008, adding approximately $201 million in AUM.
Results of Operations
In December 2007, the company acquired its external manager, Deerfield
Capital Management LLC (DCM), a fixed income asset manager with a diversified
revenue and fee income stream (the Merger). In the following discussion, the
agency residential mortgage backed securities (RMBS) and corporate debt
businesses are referred to as the Principal Investing segment and the asset
management business acquired in the Merger is referred to as the Investment
Management segment.
Results for the quarter ended June 30, 2008 reflect the impact of a
downsized balance sheet with less leverage and fee income from asset
management activities. Net income for the quarter totaled $5.7 million, or
$0.08 per diluted common share, compared with net income of $14.5 million, or
$0.28 per share, for the second quarter of 2007. Results were positively
affected by the Merger, but also reflect better performance in the RMBS
trading and loan held for sale portfolios, offset by a decline in net interest
income, and impairment charges on commercial mortgage backed securities (CMBS)
and intangible assets.
Net interest income totaled $9.4 million in the quarter ending
June 30, 2008, compared with $27.2 million in the second quarter of 2007. The
decrease was largely driven by significantly lower balances in the RMBS
portfolio due to sales in the first quarter of 2008 and interest expense on
the company's Series A and Series B notes issued in connection with the
Merger.
Investment advisory fees totaled $12.4 million in the quarter reflecting
the Merger. Results included a $2.7 million non-recurring performance fee
earned with respect to one of the company's asset-backed securities (ABS)
collateralized debt obligations (CDO) that exceeded a net interest spread
hurdle during its initial asset ramp-up period.
The provision for loan losses was $2.3 million for the quarter, down by
$2.8 million from the prior year quarter, reflecting credit loss provisions on
three commercial real estate impaired loans in the current quarter compared to
one larger loss provision on a single impaired middle market loan in the prior
year quarter.
Expenses totaled $16.9 million for the quarter, up by $11.7 million over
the prior year quarter. The increase was largely due to the Merger, as well
as intangible asset impairment of $1.0 million attributable to loss of
expected revenues associated with the pending liquidation of one of the
company's ABS CDOs that triggered an event of default due primarily to
downgrades of its underlying collateral.
Other income and gain (loss) was a net gain of $6.0 million in the
quarter, compared with a net loss of $2.5 million in the prior year quarter.
The improved performance was primarily due to better net results in the RMBS
and associated interest rate swap portfolios and current quarter market price
recovery in the syndicated bank loan held for sale portfolio, partially offset
by a $3.9 million impairment charge on CMBS holdings.
Estimated REIT taxable income, a non-GAAP financial measure, for the
quarter ended June 30, 2008, totaled a loss of $34.0 million, or $0.49 per
diluted common share, compared to income of $20.5 million or $0.40 per share,
in the second quarter of 2007. A reconciliation of GAAP net income to
estimated REIT taxable income is attached.
Commenting on second quarter results, Jonathan Trutter, chief executive
officer, said, 'Our second quarter results reflect the combination of a less
levered operating strategy and reduced volatility in overall market
conditions. Liquidity has stabilized and we are generating net positive cash
flow from operations that is being conservatively invested in short-term,
highly liquid securities pending longer term strategic deployment of those
funds.'
Trutter added, 'We are also very pleased to have closed our first
transaction in our previously announced CDO roll-up strategy and believe
Deerfield is well positioned in the marketplace to secure more of these types
of transactions.'
Investment Management Segment
The investment management group specializes in credit and relative value
products, with teams dedicated to bank loans, corporate debt securities,
asset-backed securities and government arbitrage.
As of July 1, 2008, AUM totaled approximately $13.0 billion held in
twenty-nine CDOs and one structured loan fund, one private investment fund and
six separately managed accounts. The following table summarizes AUM and
investment advisory fees for each product category:
Three months
ended
July 1, 2008 (1) June 30, 2008 April 1, 2008 (1)
Investment
# of Average Advisory # of
Accounts AUM (3) AUM (1) (2) Fees Accounts AUM
(in thousands) (in thousands)
CDOs
Bank loans (4) 15 $5,151,278 $5,043,703 $5,678 16 $5,907,280
Asset backed
securities 13 6,336,532 6,523,294 4,142 13 6,675,779
Investment
grade credit 2 620,883 631,058 284 2 636,145
Total CDOs 30 12,108,693 12,198,055 10,104 31 13,219,204
Investment
Funds (5)
Fixed income
arbitrage 1 436,156 509,036 1,992 2 618,540
Separately
Managed
Accounts (6) 6 431,480 423,364 263 6 399,006
Total AUM (7) $12,976,329 $13,130,455 $12,359 $14,236,750
(1) AUM numbers are reported as of April 1, 2008 and July 1, 2008, rather
than as of the last day of the prior month, to be inclusive of any
investment fund contributions effective on the first day of the month.
(2) Average AUM is calculated as the average of the April 1, May 1 and
June 1, 2008 AUM.
(3) CDO AUM numbers generally reflect the aggregate principal or notional
balance of the collateral and, in some cases, the cash balance held by
the CDOs and are as of the date of the last trustee report received
for each CDO prior to the AUM date. Our CDOs/Bank loans AUM includes
AUM related to our structured loan fund.
(4) The AUM for our Euro-denominated bank loan CDOs have been converted
into U.S. dollars using the spot rate of exchange as of the respective
AUM dates.
(5) The Number of Accounts for the Investment Funds does not include
feeder funds, which are funds that invest all or substantially all of
their assets into a trading fund which we manage, although some of our
management fees are paid pursuant to contracts with those feeder
funds.
(6) The AUM for certain of the separately managed accounts is a multiple
of the capital actually invested in such account. Management fees for
these accounts are paid on this levered AUM number.
(7) Included in the Total AUM are $295.3 million and $300.8 million as of
July 1, 2008 and $294.7 million and $300.5 million as of April 1, 2008
related to Market Square CLO and DFR MM CLO, respectively, which
amounts are also included in the Principal Investing segment
discussion. DCM manages these vehicles but is not contractually
entitled to receive any management fees for so long as 100% of the
equity in these vehicles is held by DC LLC or an affiliate thereof.
All other amounts included in the Principal Investing segment are
excluded from Total AUM.
AUM totaled approximately $13.0 billion as of July 1, 2008, down by
approximately $1.3 billion or 8.9% from April 1, 2008. The decline was
primarily due to the loss of Coltrane CLO PLC which triggered a market value-
based event of default during the first quarter of 2008 and is currently being
liquidated by a receiver. Coltrane CLO PLC AUM included in the company's
April 1, 2008 total AUM was $644.6 million. In addition, the smaller of the
company's two investment funds with an April 1, 2008 AUM of $97.8 million was
liquidated in the second quarter of 2008 due to significant redemptions.
Principal Investing Segment
Investment Portfolio
The following table summarizes the carrying value of the company's
invested assets and the respective balance sheet classifications as of June
30, 2008 (in thousands):
Carrying Value
Available- Loans
for-Sale Trading Other Held for
Description Securities Securities Securities Sale Loans
Agency
RMBS $- $415,336 $- $- $-
Non-agency
RMBS - 28,849 - - -
Total RMBS - 444,185 - - -
U.S. Treasury
bills - 999,954 - - -
Corporate
leveraged
loans: (1)
Loans held in
DFR MM CLO - - - - 259,577
Loans held in
Wachovia
facility - - - 4,484 85,143
Other corporate
leveraged
loans - - - - 24,879
Commercial
mortgage-
backed assets 1,012 - - 2,136 14,064
Equity
securities - - 5,472 - -
Total
structured &
syndicated
assets (2) 1,012 - 5,472 6,620 383,663
Assets held
in Market
Square CLO (3) 5,098 - - 257,939 -
Other
investments
and loans (4) 1,293 1,663 - - -
Total
alternative
assets 7,403 1,663 5,472 264,559 383,663
Total
invested
assets -
June 30,
2008 $7,403 $1,445,802 $5,472 $264,559 $383,663
Total
invested
assets -
March 31,
2008 $9,935 $1,469,742 $5,472 $246,548 $427,903
Total Total
Jun 30, Mar 31,
Description 2008 2008
Agency RMBS $415,336 $437,902
Non-agency RMBS 28,849 29,749
Total RMBS 444,185 467,651
U.S. Treasury bills 999,954 999,300
Corporate leveraged loans: (1)
Loans held in DFR MM CLO 259,577 277,481
Loans held in Wachovia facility 89,627 105,698
Other corporate leveraged loans (2) 24,879 23,798
Commercial mortgage-backed assets 17,212 23,750
Equity securities 5,472 5,472
Total structured & syndicated assets 396,767 436,199
Assets held in Market Square CLO (3) 263,037 251,517
Other investments and loans (4) 2,956 4,933
Total alternative assets 662,760 692,649
Total invested assets - June 30, 2008 $2,106,899 $2,159,600
Total invested assets - March 31, 2008 $2,159,600
(1) Corporate leveraged loans exclude credit default swaps with an
estimated net negative fair value of $0.1 million and a $11.0 million
gross notional value. Also excluded are total return swaps with an
estimated net negative fair value of $0.4 million and a $14.4 million
notional value .
(2) This amount is reported gross of the $7.9 million allowance for loan
losses.
(3) Assets held in Market Square CLO include syndicated bank loans of
$257.9 million, high yield corporate bonds of $3.3 million and
asset-backed securities of $1.8 million as of June 30, 2008.
(4) Other investments and loans includes $1.7 million of preferred shares
of CDOs owned by DCM and considered assets of our Investment
Management segment.
Total invested assets were down $52.7 million, or 2.4%, to $2.1 billion as
of June 30, 2008 compared to the end of the prior quarter. The decrease was
primarily attributable to principal paydowns received on the RMBS portfolio
and select sales of corporate leveraged loans that have been financed through
the company's revolving warehouse funding facility with Wachovia Capital
Markets, LLC (the Wachovia Facility).
Mortgage Securities Portfolio
During the second quarter of 2008, the RMBS portfolio decreased by 5.0% to
$444.2 million from $467.7 million as of March 31, 2008. The notional amount
of interest rate swaps totaled $454.0 million at quarter end. The net
portfolio duration, which is the difference between the duration of the RMBS
and that of the repurchase agreements funding these investments, adjusted for
the effects of the company's swap portfolio, was approximately 1.33 years at
June 30, 2008, based on model-driven results, compared to 1.21 years at March
31, 2008. This means the company could expect approximately a 1.33% change in
value of the combined RMBS and interest rate swap portfolios given a 1% change
in interest rates.
