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. Empirical net duration, which is based on actual price
movements observed in the market, is estimated to be significantly less than
the model-driven results.
The RMBS holdings consisted of hybrid adjustable rate and fixed rate bonds
as of June 30, 2008, as follows:
Par and
Notional Estimated
Security Description Amount Fair Value
(In thousands)
Hybrid Adjustable Rate RMBS:
Rate reset in 1 year or less $45,071 $45,086
Rate reset in 1 to 3 years 224,061 225,950
Rate reset in 3 to 5 years 89,069 90,205
Rate reset in 7 to 10 years 38,355 32,792
Fixed Rate RMBS
30 year 57,488 50,152
Total RMBS - June 30, 2008 $454,044 $444,185
RMBS - March 31, 2008 $476,700 $467,651
Weighted Average
Months Constant
to Yield Prepayment
Security Reset to Contractual Rate Modified
Description Coupon (1) Maturity Maturity (2) Duration (3)
Hybrid Adjustable
Rate RMBS:
Rate reset in
1 year or less 5.57% 5 4.63% 12/2036 17.4 1.1
Rate reset in
1 to 3 years 4.83% 19 4.47% 2/2035 11.0 1.6
Rate reset in
3 to 5 years 5.13% 40 4.71% 9/2035 10.2 2.6
Rate reset in
7 to 10 years 5.62% 90 8.02% 2/2036 7.0 6.5
Fixed Rate RMBS
30 year 6.11% n/a 8.13% 6/2035 10.7 7.1
Total RMBS -
June 30, 2008
RMBS -
March 31, 2008 n/a - not applicable
(1) Represents number of months before conversion to floating rate.
(2) Constant prepayment rate refers to the expected average annualized
percentage rate of principal prepayments over the remaining life of
the security. The values represented in this table are estimates
only and the results of a third party financial model.
(3) Modified duration represents the approximate percentage change in
market value per 100 basis point change in interest rates.
Alternative Assets Portfolio
During the second quarter of 2008, the structured and syndicated assets
portion of the alternative assets portfolio, primarily the corporate leveraged
loan book, decreased by 9.0% to $396.8 million from $436.2 million at March
31, 2008. The decrease was largely due to select asset sales and paydowns.
A provision for loan loss of $2.3 million was recognized in the quarter on
three commercial real estate loans, two of which are in the process of being
sold and for which no further impairment charges are expected.
Liquidity
The company manages short-term liquidity by maintaining a portfolio of
unrestricted cash, overnight investments and unencumbered RMBS. These assets
are available to meet margin calls on existing repurchase (repo) financing
agreements and interest rate swap contracts, and to pledge against new repo
borrowings and swap agreements. The repo borrowings are primarily overnight
to thirty-day contracts that generally roll over and reprice at maturity.
Unencumbered RMBS and unrestricted cash and cash equivalents as of June
30, 2008 totaled $57.4 million compared to $56.4 million as of the end of the
first quarter. In addition, the net equity in the financed RMBS portfolio,
including associated interest rate swaps totaled approximately $28.3 million
at quarter end. The total cash, cash equivalents, unencumbered liquid
securities and net equity in financed liquid securities was approximately
$85.7 million at June 30, 2008. The company believes these amounts, together
with available financing sources and expected cash flows from operations, are
adequate to meet its anticipated long-term (greater than one year) liquidity
requirements.
Longer term funding totaled $755.5 million at June 30, 2008 and is
summarized as follows:
Weighted
Carrying Average
Value Rate
(In thousands)
Revolving warehouse facility $53,412 4.79%
Market Square CLO 276,000 3.31%
DFR MM CLO 231,000 3.40%
Trust preferred securities 123,717 5.67%
Series A and B Notes 71,412 7.70%
Total $755,541 4.24%
The revolving warehouse facility and CLO borrowings are in bankruptcy
remote subsidiaries and debt holders have recourse only to the collateral
within these entities. Recourse obligations include three separate issuances
of 30-year Trust preferred securities and 5-year, non-amortizing Series A and
Series B notes which were issued in connection with the Merger. The debt to
equity ratio (leverage) at June 30, 2008 of 9.6 is down from 10.1 at the end
of the first quarter.
Book Value
Book value per share at June 30, 2008 was $3.37 compared to $3.26 at
March 31, 2008. The increase in reported book value per share was primarily
attributable to higher retained earnings due to net income in the second
quarter of 2008 and the absence of a first quarter dividend.
Economic Book Value
At June 30, 2008, Market Square CLO Ltd. (Market Square CLO) total equity
was negative $2.4 million primarily due to dividends paid in excess of its
book earnings. Generally accepted accounting principles currently require the
negative equity of this consolidated subsidiary to flow into the company's
financial statements even though the Market Square CLO is a bankruptcy remote
entity, and the company's economic exposure is limited to its equity
investment.
Economic book value at June 30, 2008 of $227.2 million, or $3.41 per
share, includes an add-back of $2.4 million, or $0.04 per share. To date, the
company has received approximately $19.3 million in distributions from the
Market Square CLO on the original investment of $24 million. A reconciliation
of GAAP book value to economic book value is attached.
REIT Status
Similar to the end of the first quarter of 2008, the company held
approximately $1.0 billion of U.S. Treasury bills as of June 30, 2008. These
securities were purchased to assist the company in complying with the
applicable REIT qualification tests as of June 30, 2008 and matured on
July 3, 2008. The company does not expect to hold significant amounts of U.S.
Treasury bills as part of its long-term investment strategy.
As a result of the sale of substantially all of the AAA-rated non-agency
RMBS portfolio and a large portion of the agency RMBS portfolio in the first
quarter of 2008, it will be challenging for the company to comply with its
annual REIT gross income test for the 2008 calendar year. If the company
fails this test, it will likely fail to qualify as a REIT for 2008 unless such
failure of the annual gross income test is due to reasonable cause and is not
due to willful neglect. The company is exploring alternative legal and tax
structures and strategic opportunities in order to maximize value for DFR
shareholders and is focused on optimizing the future benefits from its
significant tax losses.
Dividend
The company announced today that its board of directors declared a cash
dividend of $0.085 per share on the company's common stock. On the dividend
payment date, the company will also pay $1.7 million on account of accrued
dividends with respect to the Series A preferred stock issued in late 2007,
which was converted into common stock in March 2008. The record date for the
common dividend is August 28, 2008, and the payment date will be October 15,
2008. The payment date for the accrued preferred dividend will be the same
date. As a result of these dividend payments, the company expects to be
treated as having distributed 100% of its 2007 REIT taxable income, thereby
eliminating corporate level income tax on the company's taxable income for
that year.
Share Repurchase Program
The company also announced today that its board of directors authorized
the repurchase of up to $1 million of the company's outstanding common stock.
The amount of the authorized repurchase was capped by the terms of the Series
A and Series B notes issued by the company in connection with the Merger which
limit the aggregate amount of common stock repurchases to $1 million during
the term of the note agreements. As of June 30, 2008, the company had
66.7 million shares outstanding.
Commenting on the share repurchase program, Mr. Trutter said, 'With this
share repurchase program, we are affirming our confidence in the long-term
future of the company. We continue to actively explore opportunities to
increase long-term value for our shareholders.'
The share repurchases may occur from time-to-time through open market
purchases, privately negotiated transactions and/or transactions structured
through investment banking institutions as permitted by securities laws and
other legal requirements. The manner, timing and amount of any purchases will
be determined by the company based on an evaluation of market conditions,
stock price and other factors. The program does not obligate the company to
acquire any particular amount of common stock, and it may be modified or
suspended at any time at the company's discretion. The company does not
intend to repurchase any shares from its management team or other insiders.
The share repurchase will be funded using the company's existing cash
balance.
Board Retains UBS Investment Bank
The company also announced today that its board of directors has formed a
special committee, the Strategic Relations Committee, to explore opportunities
to enhance shareholder value and has hired UBS Investment Bank to assist in
that process.
Conference Call
The company will host a live conference call to discuss its financial
results on Tuesday, August 12, 2008, at 11:00 a.m. Eastern Time. The
conference call will be accessible by telephone and through the Internet.
Interested individuals are invited to access the call by dialing 888-663-2241.
To participate on the webcast, log on to the company's website at
http://www.deerfieldcapital.com 15 minutes before the call to download the
necessary software.
For those unable to listen to the call live, a replay will be available
beginning one hour following the completion of the call on August 12, and will
continue through August 19. To access the rebroadcast, dial 888-203-1112 and
request reservation number 4624996. A replay of the call will also be
available on the Internet at http://www.deerfieldcapital.com for 30 days.
About the Company
Deerfield Capital Corp. is a Maryland corporation with a principal
investing portfolio comprised of fixed income investments, including
residential mortgage backed securities (RMBS), government securities and
corporate debt. In addition, through its subsidiary, Deerfield Capital
Management LLC (DCM), the company manages client assets, including government
securities, corporate debt, RMBS and asset backed securities (ABS).
For more information, please go to the company website, at
http://www.deerfieldcapital.com
* * Notes and Tables to Follow * *
NOTES TO PRESS RELEASE
Certain statements in this press release are forward-looking as defined by
the Private Securities Litigation Reform Act of 1995. These include
statements regarding future results or expectations. Forward-looking
statements can be identified by forward looking language, including words such
as 'believes,' 'anticipates,' 'expects,' 'estimates,' 'intends,' 'may,'
'plans,' 'projects,' 'will' and similar expressions, or the negative of these
words. Such forward-looking statements are based on facts and conditions as
they exist at the time such statements are made. Forward-looking statements
are also based on predictions as to future facts and conditions, the accurate
prediction of which may be difficult and involve the assessment of events
beyond the control of Deerfield Capital Corp. and its subsidiaries ('DFR').
Forward-looking statements are further based on various operating assumptions.
Caution must be exercised in relying on forward-looking statements. Due to
known and unknown risks, actual results may differ materially from
expectations or projections. DFR does not undertake any obligation to update
any forward-looking statement, whether written or oral, relating to matters
discussed in this press release, except as may be required by applicable
securities laws.
Various factors could cause DFR's actual results to differ materially from
those described in any forward-looking statements. These factors include, but
are not limited to: changes in economic and market conditions, particularly as
they relate to the market for debt securities, such as mortgage-backed
securities, and collateralized debt obligations; changes in DFR's investment,
hedging or credit strategies or the performance of its investment portfolios;
the effects of defaults or terminations under, and DFR's ability to enter into
replacement transactions with respect to, repurchase agreements, interest rate
swaps and long-term debt obligations; reductions in DFR's assets under
management and related management and advisory fee revenue; DFR's ability to
maintain compliance with its existing debt instruments and other contractual
obligations; DFR's ability to maintain compliance with applicable REIT
qualification standards; DFR's ability to maintain its exemption from
registration as an investment company pursuant to the Investment Company Act
of 1940; DFR's ability to restore compliance with New York Stock Exchange (the
'NYSE') continued listing standards or, in the event that DFR is unable to
maintain its listing with the NYSE, its ability to comply with the initial
listing standards of the NYSE or another securities exchange; the cost,
uncertainties and effect of any legal and administrative proceedings, such as
the current Securities and Exchange Commission investigation into certain
mortgage-backed securities trading procedures in connection with which the SEC
has requested certain information from DFR regarding certain of its mortgage
securities trades; DFR's ability to complete the integration of, and realize
the economic benefits of, its acquisition of Deerfield Capital Management LLC;
and changes in, and the ability of DFR to remain in compliance with, law,
regulations or government policies affecting DFR's business, including
investment management regulations and accounting standards.
These and other factors that could cause DFR's actual results to differ
materially from those described in the forward-looking statements are set
forth in DFR's annual report on Form 10-K, as amended, for the year ended
December 31, 2007, DFR's quarterly reports on Form 10-Q for the quarters ended
June 30 and March 31, 2008 and DFR's other public filings with the SEC and
public statements. Readers of this press release are cautioned to consider
these risks and uncertainties and not to place undue reliance on any
forward-looking statements.
DEERFIELD CAPITAL CORP. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)
June 30, December 31,
2008 2007
ASSETS
Cash and cash equivalents $44,532 $113,733
Due from broker 20,716 270,630
Restricted cash and cash
equivalents 68,462 47,125
Available-for-sale securities,
including zero and $4,884,023
pledged-at fair value 7,403 4,897,972
Trading securities, including
$1,434,493 and $733,782 pledged-at
fair value 1,445,802 1,444,505
Other investments 5,472 5,472
Derivative assets 1,780 4,537
Loans held for sale 264,559 267,335
Loans 383,663 466,360
Allowance for loan losses (7,883) (5,300)
Loans, net of allowance for loan
losses 375,780 461,060
Investment advisory fee receivable 5,142 6,409
Interest receivable 8,061 39,216
Other receivable 985 22,912
Prepaid and other assets 13,992 14,721
Deferred tax asset, net 13,422 -
Fixed assets, net 9,793 10,447
Intangible assets, net 70,642 83,225
Goodwill 78,158 98,670
TOTAL ASSETS $2,434,701 $7,787,969
LIABILITIES
Repurchase agreements, including
$915 and $20,528 of accrued interest $1,408,955 $5,303,865
Due to broker 5,649 879,215
Dividends payable 1,667 21,944
Derivative liabilities 6,796 156,813
Interest payable 5,029 28,683
Accrued other liabilities 25,751 35,652
Short term debt 483 1,693
Long term debt 755,541 775,368
TOTAL LIABILITIES 2,209,871 7,203,233
Series A cumulative convertible
preferred stock. $0.001 par value,
zero shares and 14,999,992
shares issued and outstanding
(aggregate liquidation value of zero
and $150,000) - 116,162
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.001:
100,000,000 shares authorized;
zero and 14,999,992 shares
issued and outstanding
as described above - -
Common stock, par value $0.001:
500,000,000 shares authorized;
66,758,356 and 51,752,720
shares issued and 66,693,418
and 51,655,317 shares
outstanding 67 51
Additional paid-in capital 866,200 748,216
Accumulated other comprehensive
loss (2,523) (83,783)
Accumulated deficit (638,914) (195,910)
TOTAL STOCKHOLDERS' EQUITY 224,830 468,574
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $2,434,701 $7,787,969
DEERFIELD CAPITAL CORP. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share amounts)
Three months ended Six months ended
June 30, June 30,
2008 2007 2008 2007
REVENUES
Net interest income:
Interest income $21,824 $129,712 $83,174 $252,411
Interest expense 12,421 102,539 60,021 201,398
Net interest
income 9,403 27,173 23,153 51,013
Provision for loan losses 2,302 5,133 4,502 6,933
Net interest income after
provision for loan losses 7,101 22,040 18,651 44,080
Investment advisory fees 12,359 - 24,478 -
Total net revenues 19,460 22,040 43,129 44,080
EXPENSES
Management fee expense
to related party - 3,430 - 6,760
Incentive fee expense to
related party - - - 2,185
Compensation and
benefits 7,705 - 17,063 -
Depreciation and
amortization 2,580 - 5,267 -
Professional services 2,343 800 3,730 1,417
Insurance expense 733 205 1,467 341
Other general and
administrative expenses 2,459 791 4,510 1,160
Impairment of intangible
assets and goodwill 1,128 - 29,034 -
Total expenses 16,948 5,226 61,071 11,863
OTHER INCOME AND GAIN
(LOSS)
Net gain (loss) on
available-for-sale
securities (3,856) (243) (3,856) 2,306
Net gain (loss) on
trading securities (1,747) (5,688) (202,466) (3,048)
Net gain (loss) on
loans 5,505 (1,492) (21,037) 470
Net gain (loss) on
derivatives 6,070 5,327 (217,145) 5,373
Dividend income and
other net gain (loss) 76 (361) 194 (97)
Net other
income and
gain (loss) 6,048 (2,457) (444,310) 5,004
Income (loss) before
income tax expense 8,560 14,357 (462,252) 37,221
Income tax expense
(benefit) 2,868 (137) (4,334) 200
Net income (loss) $5,692 $14,494 $(457,918) $37,021
NET INCOME (LOSS) PER
SHARE-Basic $0.08 $0.28 $(7.37) $0.72
NET INCOME (LOSS) PER
SHARE-Diluted $0.08 $0.28 $(7.37) $0.72
WEIGHTED-AVERAGE NUMBER OF
SHARES OUTSTANDING -
Basic 68,817,149 51,596,928 62,133,178 51,592,137
WEIGHTED-AVERAGE NUMBER OF
SHARES OUTSTANDING -
Diluted 68,817,149 51,759,376 62,133,178 51,760,265
DEERFIELD CAPITAL CORP. AND ITS SUBSIDIARIES
BOOK VALUE CALCULATIONS
(In thousands, except per share amounts)
Calculation of economic book value
per share:
Stockholders' Equity as of June 30, 2008 $224,830 A
Add back negative equity of Market Square CLO 2,407 B
Pro-forma Stockholders' Equity after add back (A+B) $227,237 C
Total common stock outstanding as of June 30, 2008 66,693 D
Economic book value per share (C/D) $3.41
The company believes that the presentation of economic book value per
share is useful to investors because losses in excess of the equity in a
bankruptcy remote subsidiary would accrue to debt investors in such an entity
rather than the equity investor.
DEERFIELD CAPITAL CORP. AND ITS SUBSIDIARIES
EFFECTIVE RATE AND NET RETURN ANALYSIS (1)
(Dollars in thousands)
Three months ended
Mar 31, Inc /
June 30, 2008 2008 (Dec)
Average Interest Effective Effective Effective
Balance(2) Income Rate(3) Rate(3) Rate(3)
RMBS, U.S. T-bills &
other securities (4) $582,409 $6,770 4.65% 5.10% (0.45)%
Assets held in CLO
(Market Square) 267,545 4,281 6.40% 7.67% (1.27)%
Assets held in CLO
(Middle Market) 313,920 7,003 8.92% 10.56% (1.64)%
Other corporate debt 138,597 3,770 10.88% 11.41% (0.53)%
Total investments $1,302,471 $21,824 6.70% 5.94% 0.76 %
Average Interest Effective Effective Effective
Balance(2) Income Rate(3) Rate(3) Rate(3)
Repurchase agreements
& ST debt (5) (6) $506,320 $3,213 2.54% 4.91% (2.37)%
Long-term debt:
Market Square CLO 276,000 2,563 3.71% 4.86% (1.15)%
Middle Market CLO 231,000 2,264 3.92% 5.12% (1.20)%
Revolving warehouse
facility 61,863 860 5.56% 2.67% 2.89 %
Series A & B notes 71,363 1,536 8.61% 10.90% (2.29)%
Trust preferred
securities (TPS) 123,717 1,985 6.42% 7.31% (0.89)%
Total short-term and
long-term debt $1,270,263 $12,421 3.91% 5.07% (1.16)%
Net
Net return on average Interest Net Net Net
investment Income(7) Return(8)Return(8)Return(8)
RMBS and other short-term
investments (5) $3,557 2.44% 0.76% 1.68 %
Assets held in CLO (Market Square) 1,718 2.57% 2.75% (0.18)%
Assets held in CLO (Middle Market) 4,739 6.04% 6.77% (0.73)%
Other corporate debt 2,910 8.40% 10.23% (1.83)%
Total net return before TPS and
Series A & B notes 12,924 3.97% 1.74% 2.23 %
Trust preferred and Series A & B
notes (3,521) -1.08% -0.41% (0.67)%
Total net return $9,403 2.89% 1.33% 1.56 %
Net return on average Average Net Net Net Net
net investment Investment Return(9)Return(9)Return(9)
RMBS (5) $76,089 18.70% 6.49% 12.21 %
Assets held in CLO
(Market Square) 24,000 28.63% 31.18% (2.55)%
Assets held in CLO (Middle Market) 69,000 27.47% 30.64% (3.17)%
Other corporate debt 76,734 15.17% 18.31% (3.14)%
Total net return (including TPS
and Series A & B notes) $245,823 15.30% 9.40% 5.90 %
(1) This supplemental information is subject to various significant
limitations, including that it is being provided solely for general
informational purposes; it is based on unaudited financial
information; it is subject to revision; the past results presented are
not necessarily indicative of future results; the company makes no
representation about the appropriateness of the information in making
investment decisions; the portfolio instruments that constitute each
asset category reflect subjective judgments by the company and are
subject to change; the information is qualified in its entirety by the
following documents available on our website -- the company's Annual
Report for 2007 on Form 10-K filed with the SEC, the company's
subsequent reports on Form 10-Q filed with the SEC, and the 'Notes to
Press Release' included with this announcement.
(2) Average balance is calculated based on the month-end balances with the
exception of some of the Other alternative assets, which are based on
daily balances. Available-for-sale securities are included in this
analysis using historical cost while all other balances are at
carrying value. Average balances exclude any unsettled purchases and
sales.
(3) Effective rate is calculated by dividing Interest income or Interest
expense by the respective Average balance. The effective rate is
annualized.
(4) RMBS, U.S. T-bills and other securities includes interest earning cash
and short-term investments not held in a CLO.
(5) This calculation includes the amortization of de-designated and
terminated hedging activity resulting in an increase to interest
expense of $5,253 and $61 for the three months ended March 31, 2008
and June 30, 2008, respectively.
(6) Repurchase agreements include an immaterial amount related to Other
corporate debt, however, these amounts are included in the RMBS Net
return calculations.
(7) Net Interest Income excludes 'Provision for loan losses', 'Investment
Advisory Fees', 'Expenses' and 'Other income and gain (loss)',
reported in the Company's Condensed Consolidated Statements of
Operations.
(8) Net return on average investment is calculated by dividing Net
interest income by the average investment balance and the return is
annualized.
(9) Net return on average net investment is calculated by dividing the Net
interest income by the respective average net investment. Average net
investment is calculated for RMBS and Other corporate debt by taking
their investment Average balance less the respective debt Average
balance. Net investment for the Assets held in CLO (Market Square),
Assets held in CLO (Middle Market) is their initial equity of $24,000
and $69,000, respectively. The Return on average net investment is
annualized.
DEERFIELD CAPITAL CORP. AND ITS SUBSIDIARIES
ESTIMATED REIT TAXABLE LOSS (UNAUDITED)
(In thousands, except share and per share amounts)
Six months
Three months ended ended
March 31, June 30, June 30,
2008 2008 2008
GAAP net income (loss) $(463,610) $5,692 $(457,918)
Adjustments to GAAP net income (loss):
Difference in rate of amortization
and accretion (1,372) (46) (1,418)
Interest income on non-accrual loans 508 825 1,333
Tax hedge interest accrual (2,205) (2,084) (4,289)
Tax hedge amortization of deferred
swap gains (losses) (20,933) (29,224) (50,157)
Reverse GAAP amortization of swap
(gains) losses 5,254 62 5,316
Provision for loan losses 2,200 2,302 4,502
Bad debt expense (1,872) - (1,872)
Tax capital losses in excess of
capital gains 304,559 7,630 312,189
Security basis difference recognized
upon sale of RMBS (82,140) - (82,140)
Gain on intercompany sale eliminated
for GAAP 41 (608) (567)
Security basis difference recognized
upon sale of other assets 300 11 311
Tax hedge/GAAP trading swap
adjustments 221,486 4,371 225,857
Other unrealized (gain) loss 2,147 (19,649) (17,502)
Exclusion of taxable REIT subsidiary
pre-tax income 26,376 (6,174) 20,202
Income tax expense (benefit) (7,202) 2,868 (4,334)
Other book/tax adjustments 21 12 33
Net adjustments to GAAP net income
(loss) 447,168 (39,704) 407,464
Estimated REIT taxable loss $(16,442) $(34,012) $(50,454)
Weighted average diluted shares 54,965,218 68,817,149 62,133,178
Taxable earnings per diluted share (1) $(0.30) $(0.49) $(0.81)
(1) Quarters may not sum to period-to-date due to the calculation of
earnings per share for each period on a stand-alone basis.
The company believes that the presentation of estimated REIT taxable
income is useful because it indicates the estimated minimum amount of
distributions it must make in order to avoid corporate level income tax.
However, beyond its intent to distribute to stockholders at least 90% of REIT
taxable income on an annual basis in order to maintain our REIT qualification,
the company does not expect that the amount of distributions it makes will
necessarily correlate to estimated REIT taxable income. Rather, the company
expects to determine the amount of distributions to make based on cash flow,
GAAP net income and what it believes to be an appropriate and competitive
dividend yield relative to other specialty finance companies and mortgage
REITs. Estimated REIT taxable income will not necessarily bear any close
relation to cash flow. Accordingly, the company does not consider estimated
REIT taxable income to be a reliable measure of liquidity although the related
distribution requirement can impact liquidity and capital resources.
Moreover, there are limitations associated with estimated REIT taxable income
as a measure of financial performance over any period, and the presentation of
estimated REIT taxable income may not be comparable to similarly titled
measures of other companies, which may use different calculations. As a
result, estimated REIT taxable income should not be considered as a substitute
for GAAP net income as a measure of financial performance.
SOURCE Deerfield Capital Corp.