PHILADELPHIA, Aug. 5 PA-Alesco-Q2-earns
PHILADELPHIA, Aug. 5 /PRNewswire-FirstCall/ -- Alesco Financial Inc.
(NYSE: AFN) ("AFN"), a specialty finance real estate investment trust, today
announced financial results for the three-months and six-months ended June 30,
2008.
AFN reported GAAP net loss for the three-months ended June 30, 2008 of
($81.2) million, or ($1.36) per diluted common share, as compared to a net
loss of ($47.2) million, or ($0.86) per diluted common share, for the
three-months ended June 30, 2007. AFN's net loss for the three-month period
ended June 30, 2008 included charges to earnings of ($44.7) million relating
to changes in the fair value of financial instruments and ($40.6) million due
to the reclassification into the income statement of MBS related cash-flow
hedging losses that were previously included in accumulated other
comprehensive loss.
AFN reported GAAP net income for the six-months ended June 30, 2008 of
$3.7 million, or $0.06 per diluted common share, as compared to a net loss of
($35.4) million, or ($0.65) per diluted common share, for the six-months ended
June 30, 2007. AFN's net income for the six-month period ended June 30, 2008
included a gain of $28.0 million relating to changes in the fair value of
financial instruments and the charge of ($40.6) million due to the MBS
portfolio hedging matter described previously.
Book Value and Investment Portfolio Summary
The following table summarizes our allocation of capital and book value as
of June 30, 2008 (amounts in thousands, except share and per share data):
Net
Investment
Income
Capital for the
AllocationGAAP Three-Month
as of % of Book Value Period Ended
June 30, 2008 Capital as of June 30,
( A ) June 30, 2008 ( B )
2008
TruPS investments $239,249 35%$106,040 $24,078
Leveraged loan investments 88,171 13% 79,069 4,711
Kleros Real Estate MBS
investments90,000 13% - 7,713
Residential mortgages 86,401 13% 68,037 (5,114)
Other investments 54,026 8% 17,616 567
Total uninvested cash ( C )120,733 18% 120,733 -
Total investible capital 678,580100% 391,495 31,955
Recourse indebtedness (188,125) (188,125) (3,914)
Total $490,455$203,370 $28,041
Common stock outstanding as
of June 30, 2008 59,592,131
Book Value per share $3.41
( A ) Represents net cash invested through June 30, 2008.
( B ) Net investment income includes amounts earned by the minority
interest holders in certain consolidated VIEs. Net investment income for the
leveraged loans asset class and the residential mortgage loans asset class is
presented net of $2.3 million and $5.6 million, respectively, for provisions
for loan losses recorded during the three-months ended June 30, 2008. Net
investment income does not include interest income of $0.6 million on
uninvested cash, or $0.4 million of interest earnings on the restricted cash
at our consolidated CDO entities. Additionally, net investment income
excludes $11.6 million of net periodic interest payments that relate to
interest rate swap contracts that are no longer accounted for as cash flow
hedges upon the adoption of FAS 159 The Fair Value Option for Financial Assets
and Financial Liabilities. The $11.6 million relates to the following asset
classes: $6.9 million decrease to TruPS investments, $5.5 million decrease to
Kleros Real Estate MBS investments, and a $0.8 million increase to Residential
Mortgages.
( C ) Reduced for dividend payable of $15.2 million at June 30, 2008.
Investments in Debt Securities
The following table summarizes our investments in debt securities as of
June 30, 2008 (dollars in thousands):
Weighted-
Cumulative Weighted- Average
Investment AmortizedChange inEstimated AverageYears to
Description Cost Fair Value Fair Value CouponMaturity
Investments in
TruPS and
subordinated
debentures $5,535,368 $(2,290,109) $3,245,259 5.5% 27.8
MBS 2,063,532 (1,138,309) 925,223 3.7% 6.4
Other investments 1,654-1,654 -7.1
Total$7,600,554 $(3,428,418) $4,172,136 5.0% 22.0
The estimated fair values of our investments are based primarily on quoted
market prices from independent pricing sources, or when quoted market prices
are not available because certain securities do not actively trade in the
public markets, from internal pricing models. These internal pricing models
include discounted cash flow analyses developed by management using current
interest rates, specific issuer information and other market data for
securities without an active market. Management's estimates of fair value
require significant management judgment and are subject to a high degree of
variability based upon market conditions, the availability of specific issuer
information and management's assumptions.
As of June 30, 2008, the aggregate principal amount of investments in the
eleven TruPS investments that are defaulted or are currently deferring
interest payments is $282.3 million, representing approximately 5.5% of our
combined TruPS portfolio. As of June 30, 2008, the $145 million of defaulted
securities, which includes securities issued by IndyMac Bancorp, have been
completely written off in our consolidated financial statements. For the
three-months ended June 30, 2008, investment interest income is net of a $4.4
million reserve for interest income related to $245.5 million of the currently
deferring or defaulted securities.
The TruPS deferrals and defaults described above have resulted in the
over-collateralization tests being triggered in seven of the eight CDOs in
which we hold equity interests. One of the CDO over-collateralization
failures has since been cured, bringing the total number of TruPS CDOs in
over-collateralization failure status to six as of the date of this release.
The trigger of an over-collateralization test in a TruPS CDO means that we, as
a holder of equity securities, will no longer receive current distributions of
cash in respect of our equity interests until sufficient cash or collateral is
retained in the CDOs to cure the over-collateralization tests. We currently
project that three of the six affected CDOs may cure the
over-collateralization failures and recommence making equity distributions
within 3 to 6 quarters and the other three may do so within 20 to 35 quarters.
These cash flow projections assume zero recovery of principal or interest on
any of the currently deferring or defaulted securities and no additional
deferrals. There can be no assurance that we will not experience additional
deferrals or defaults that will result in further over-collateralization test
failures or extend the expected cure periods of the deals currently failing
over-collateralization tests.
As previously disclosed, the Kleros Real Estate CDOs have all failed
over-collateralization tests as a result of significant ratings agency
downgrade activity and are no longer making cash distributions to us. The net
cash flows of the Kleros Real Estate CDOs are currently being used to pay down
the controlling class debtholders in each of the Kleros Real Estate CDOs.
Despite the fact that each Kleros Real Estate CDO has failed
over-collateralization tests, the net interest earnings of these CDOs
continues to be reflected in our net investment income and taxable income. In
addition, we received written notice from the trustees of Kleros Real Estate
I, II, and III that each CDO has experienced an event of default. These
events of default resulted from the failure of certain additional
over-collateralization tests primarily due to credit rating agency downgrades.
The events of default provide the controlling class debtholder in each CDO
with the option to liquidate all of the MBS assets collateralizing the
particular CDO. The proceeds of any such liquidation would be used to repay
the controlling class debtholder.
On May 1, 2008, we received written notice from the trustee of Kleros Real
Estate III that the controlling class debtholder has submitted a notice of
liquidation. The liquidation of Kleros Real Estate III occurred in June 2008
through a series of auctions of the underlying collateral and the final
distribution of the liquidation proceeds was delivered to the controlling
class debtholder in the same period. Upon the commencement of the liquidation
process we determined that we were no longer the primary beneficiary of Kleros
Real Estate III, and in accordance with FIN 46(R) deconsolidated the Kleros
Real Estate III entity from our consolidated financial statements in June
2008.
As of the current date, the controlling class debtholders of Kleros Real
Estate I and II have not exercised their rights to liquidate either CDO.
Since we are not receiving any cash flow from our investments in any of the
Kleros Real Estate CDOs, the events of default and liquidation described above
do not have any further impact on our cash flows. However, the assets of the
Kleros Real Estate I and II CDOs and the income they generate for tax purposes
are a component of our REIT qualifying assets and income. If more than one of
the three remaining Kleros Real Estate CDOs is liquidated, we may have to
deploy additional capital into REIT qualifying assets in order to continue to
qualify as a REIT. If we are not able to invest in sufficient other REIT
qualifying assets, our ability to qualify as a REIT could be materially
adversely affected.
Credit Default Swaps (CDS)
During the second quarter of 2007, we began to purchase CDS contracts
referenced to certain MBS and CDOs that trade in the public markets. In June
2008, we sold the subsidiary that owned the remaining $87.5 million notional
of CDS positions for $70.4 million in proceeds (inclusive of the $69.3 million
of counterparty margin held as of March 31, 2008). During the three-month
period ended June 30, 2008, we recorded a net loss upon disposition of the
consolidated subsidiary of $5.6 million, which was offset by approximately
$6.2 million of unrealized gains on CDS recorded during the same period. We
record both realized and unrealized changes in fair value on the CDS contracts
within net change in fair value of derivative contracts in the consolidated
statements of income (loss). Following the June 2008 sale, we no longer hold
any investments in CDS.
Investments in Loans
Our investments in loans are accounted for at amortized cost. The
following table summarizes our investments in loans as of June 30, 2008
(dollars in thousands):
Weighted-
Weighted- Average
UnpaidUnamortized Number Average Contractual
Principal Premium/ Amortized of Interest Maturity
Balance (Discount) CostLoansRateDate
5/1 Adjustable
rate residential
mortgages $648,471 $5,885 $654,356 1,5706.3% July 2036
7/1 Adjustable
rate residential
mortgages229,3323,199232,531 5256.6%Dec 2036
10/1 Adjustable
rate residential
mortgages 74,0181,237 75,255 1956.8% Sept 2036
Commercial loan 7,464- 7,464 1 21.0%-
Leveraged loans 857,522 (4,487) 853,035 4106.7%Apr 2013
Total $1,816,807 $5,834 $1,822,641 2,7016.5% (1)
(1) Weighted-average interest rate excludes non-interest accruing
commercial loan.
Indebtedness
The following table summarizes our total indebtedness (including recourse
and non-recourse indebtedness) as of June 30, 2008 (dollars in thousands):
Amortized Cumulative Change Carrying
Description Costin Fair Value Amount
Non-recourse indebtedness:
Trust preferred
obligations (1) $382,600 $(160,257) $222,343
Securitized mortgage debt 888,920 - 888,920
CDO notes payable(2) 8,471,370 (4,080,294) 4,391,076
Warehouse credit facilities130,687 - 130,687
Total non-recourse
indebtedness $9,873,577$(4,240,551) $5,633,026
Recourse indebtedness:
Junior subordinated
debentures $49,614 - $49,614
Contingent convertible
debt 140,000 - 140,000
Total recourse
indebtedness $189,614 -$189,614
Total indebtedness$10,063,191$(4,240,551) $5,822,640
Current Weighted-
InterestWeighted- Average
RateAverageContractual
TermsInterest Rate Maturity
Description
Non-recourse indebtedness:
Trust preferred
obligations (1) 4.3% to 8.7% 5.7% Oct 2036
Securitized mortgage debt 5.0% to 6.0% 5.7% Mar 2017
CDO notes payable(2)2.6% to 7.9% 3.2% Apr 2039
Warehouse credit facilities 3.9% 3.9% May 2009
Total non-recourse
indebtedness
Recourse indebtedness:
Junior subordinated
debentures 7.0% to 9.5% 8.4% Sept 2038
Contingent convertible debt 7.6% 7.6% May 2027
Total recourse indebtedness
Total indebtedness
(1) Carried at fair value.
(2) Excludes CDO notes payable purchased by AFN which are eliminated in
consolidation. Carrying amount includes $3,710,746 of liabilities at fair
value.
Recourse indebtedness refers to indebtedness that is recourse to our
general assets. As indicated in the table above, our consolidated financial
statements include recourse indebtedness of $189.6 million as of June 30,
2008. Non-recourse indebtedness consists of indebtedness of consolidated VIEs
(i.e. CDOs, CLOs and other securitization vehicles) which is recourse only to
specific assets pledged as collateral to the lenders. The creditors of each
consolidated VIE have no recourse to our general credit. Our maximum exposure
to economic loss as a result of our involvement with each VIE is the $461.8
million of capital that we invested in warehouse first-loss deposits and the
preference shares or debt of the CDO, CLO or other types of securitization
structures. None of the indebtedness shown in the table above subjects us to
potential margin calls for additional pledges of cash or other assets.
Liquidity
As of June 30, 2008, our consolidated financial statements include $136.0
million of available, unrestricted cash and cash equivalents. This amount
includes $15.2 million of cash dividends that were paid to our shareholders on
July 10, 2008. Management has evaluated our current and forecasted liquidity
and continues to monitor evolving market conditions. Future investment
alternatives and operating activities will continue to be evaluated against
anticipated current and longer term liquidity demands. As previously
disclosed, the realized tax losses that we have experienced during 2008,
including those resulting from the failure of IndyMac Bancorp and losses on
MBS in our KRE portfolio, are expected to significantly offset or eliminate
our expected taxable income for the year ending December 31, 2008. Decisions
regarding future dividends will continue to consider projections regarding our
taxable income and are subject to the review and approval of our board of
directors.
As of June 30, 2008, our consolidated financial statements include $87.0
million of restricted cash. The $87.0 million is primarily restricted for the
following purposes: $42.0 million at consolidated CDO entities to be used to
acquire additional assets and $45.0 million of undistributed cash flows from
operations at consolidated CDO entities.
Adjusted Earnings and Adjusted Book Value
We have not reported Adjusted Earnings this quarter because it would
include significant positive non-cash net interest income from the 6 CDOs that
have failed over-collateralization tests and would not include realized tax
losses on defaulted securities; therefore, it is not a meaningful measure of
performance for the quarter. In addition, since the adoption of SFAS 159,
book value determined in accordance with GAAP reflects changes in the fair
value of the assets and liabilities associated with our TruPS and MBS related
instruments; therefore, we no longer believe that adjusted book value is a
useful alternative measure for investors to consider.
Dividend Summary
On June 10, 2008, we announced a cash dividend for the quarter ended June
30, 2008 of $0.25 per common share. The dividend was paid on July 10, 2008 to
shareholders of record as of the close of business on June 20, 2008.
Conference Call
As previously announced, a conference call to discuss these financial
results with investors and analysts will be held on August 6, 2008 at 10:00 AM
ET. Interested parties can listen to the live webcast of our earnings
conference call by clicking on the webcast link on our homepage at
www.alescofinancial.com. The conference call may also be accessed by dialing
866-831-6272 or, for those calling from overseas, 617-213-8859 a few minutes
in advance of the scheduled time. A replay of the conference call will be
available for two weeks at 888-286-8010, passcode 55802183.
About Alesco Financial Inc.
Alesco Financial Inc. is a specialty finance REIT headquartered in
Philadelphia, Pennsylvania and trades on the New York Stock Exchange under the
symbol "AFN." Alesco Financial Inc. is externally managed by Cohen & Company
Management, LLC, a subsidiary of Cohen Brothers, LLC (which does business as
Cohen & Company), an alternative investment management firm, which, since
2001, has provided financing to small and mid-sized companies in financial
services, real estate and other sectors. For more information, please visit
www.alescofinancial.com.
Forward-Looking Statements
Information set forth in this release contains forward-looking statements,
which involve a number of risks and uncertainties. Alesco Financial Inc.
cautions readers that any forward-looking information is not a guarantee of
future performance and that actual results could differ materially from those
contained or implied in the forward-looking information.
The following factors, among others, could cause actual results to differ
from those set forth in the forward-looking statements: the failure of Alesco
Financial Inc. to successfully execute its business plans or gain access to
additional financing, continued disruption in the U.S. credit markets
generally and the mortgage loan and CDO markets particularly, the limited
availability of additional investment portfolios for future acquisition,
performance of existing investments, continued qualification as a REIT and the
cost of capital. Additional factors that may affect future results are
contained in our filings with the SEC, which are available at the SEC's web
site www.sec.gov and Alesco Financial Inc.'s web site,
www.alescofinancial.com. Alesco Financial Inc. disclaims any obligation to
update and revise statements contained in these materials based on new
information or otherwise.
Alesco Financial Inc.
Consolidated Statements of Income
(Unaudited and in thousands, except share and per share information)
For the For the For theFor the
Three-Month Three-Month Six-Month Six-Month
Period Period Period Period
Ended Ended Ended Ended
June 30,June 30,June 30,June 30,
2008200720082007
Net investment income:
Investment interest income $137,520 $173,333 $311,415$334,651
Investment interest expense (101,588) (151,133) (241,372) (293,437)
Provision for loan losses (7,891)(3,285) (15,455) (5,459)
Net investment income 28,041 18,915 54,588 35,755
Expenses:
Related party management
compensation 4,197 4,344 8,942 7,727
General and
administrative 3,545 2,982 7,160 5,396
Total expenses 7,742 7,326 16,102 13,123
Income before interest and
other income, minority
interest and taxes 20,299 11,589 38,486 22,632
Interest and other income 1,131 5,646 2,625 11,654
Net change in fair value
of investments in debt
securities and non-recourse
indebtedness (132,651) - 70,208 -
Net change in fair value
of derivative contracts 37,055 17,239(45,808) 19,592
Credit default swap premiums (1,536) (185)(2,872) (185)
Impairments on investments
and intangible assets(4,286) (74,443) (12,844)(74,428)
Loss on disposition of
consolidated entities(5,558) - (5,558) -
Net realized loss on sale
of assets(1,742) (723)(3,191) (4,397)
Income(loss) before minority
interest and benefit
(provision)
for income taxes (87,288) (40,877)41,046 (25,132)
Minority interest 3,109 (6,127) (40,765) (9,697)
Income (loss) before benefit
(provision) for income taxes (84,179) (47,004) 281 (34,829)
Benefit (provision) for
income taxes 2,975 (213) 3,402(610)
Net income (loss) $(81,204) $(47,217)$3,683$(35,439)
Earnings (loss) per share-
basic:
Basic earnings (loss)
per share$(1.36)$(0.86) $0.06 $(0.65)
Weighted-average shares
outstanding-Basic59,512,594 54,902,323 59,422,581 54,800,726
Earnings (loss) per share-
diluted:
Diluted earnings (loss)
per share$(1.36)$(0.86) $0.06 $(0.65)
Weighted-average shares
outstanding-Diluted59,512,594 54,902,323 59,635,405 54,800,726
Distributions declared per
common share $0.25 $0.31 $0.50 $0.61
Alesco Financial Inc.
Consolidated Balance Sheets
(Unaudited and in thousands, except share and per share information)
As of As of
June 30, December 31,
20082007
Assets
Investments in debt securities and
security-related receivables (including amounts
at fair value of $4,172,136 and $5,888,650,
respectively)$4,172,136 $6,628,991
Investments in loans
Residential mortgages 962,142 1,047,195
Commercial mortgages 7,464 7,332
Leveraged loans853,035 836,953
Loan loss reserve (33,535)(18,080)
Total investments in loans, net1,789,106 1,873,400
Cash and cash equivalents135,971 80,176
Restricted cash and warehouse deposits86,955 95,476
Accrued interest receivable 35,058 49,806
Other assets 46,834 207,527
Total assets $6,266,060 $8,935,376
Liabilities and stockholders' equity (deficit)
Indebtedness
Trust preferred obligations (including amounts
at fair value of $222,343 and $0, respectively) $222,343$382,600
Securitized mortgage debt 888,920 959,558
CDO notes payable (including amounts at fair
value of $3,710,746 and $0, respectively) 4,391,076 9,409,027
Warehouse credit facilities130,687 155,984
Recourse indebtedness 189,614 189,614
Total indebtedness 5,822,640 11,096,783
Accrued interest payable 30,794 54,380
Related party payable 2,956 2,800
Other liabilities131,511 161,408
Total liabilities 5,987,901 11,315,371
Minority interests74,789 19,543
Stockholders' equity (deficit)
Preferred stock, $0.001 par value per share,
50,000,000 shares authorized, no shares issued
and outstanding - -
Common stock, $0.001 par value per share,
100,000,000 shares authorized, 60,953,473 and
60,548,032 issued and outstanding, including
1,361,342 and 1,228,234 unvested restricted
share awards, respectively 60 59
Additional paid-in-capital 482,809 481,850
Accumulated other comprehensive loss (24,028) (1,545,464)
Accumulated deficit (255,471) (1,335,983)
Total stockholders' equity (deficit) 203,370 (2,399,538)
Total liabilities and stockholders' equity
(deficit) $6,266,060 $8,935,376
Investors: Media:
John LonginoJoseph Kuo
Chief Financial Officer Kekst and Company
215-701-8952212-521-4863
info@alescofinancial.com
SOURCE Alesco Financial Inc.
