2008-08-11 15:01:00
Deerfield Capital Corp. Announces Second Quarter 2008 Results
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 /EMWNews/ -- 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.
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