Alesco Financial Inc. Announces Third Quarter 2008 Financial Results
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Monday November 3, 4:25 pm ET
PHILADELPHIA, Nov. 3 /PRNewswire-FirstCall/ -- Alesco Financial Inc. (NYSE: AFN - News; "AFN" or the "Company"), a specialty finance real estate investment trust, today announced financial results for the three-months and nine-months ended September 30, 2008.
AFN reported GAAP net income for the three-months ended September 30, 2008 of $64.1 million, or $1.07 per diluted common share, as compared to a net loss of ($496.6) million, or ($8.36) per diluted common share, for the three-months ended September 30, 2007. AFN's net income for the three-month period ended September 30, 2008 included a gain of $43.9 million due to the repurchase and retirement of convertible debt at a discount and a gain of $30.4 million relating to changes in the fair value of financial instruments.
AFN reported GAAP net income for the nine-months ended September 30, 2008 of $67.7 million, or $1.14 per diluted common share, as compared to a net loss of ($532.0) million, or ($9.59) per diluted common share, for the nine-months ended September 30, 2007. AFN's net income for the nine-month period ended September 30, 2008 included a gain of $43.9 million due to the repurchase and retirement of convertible debt described previously and a gain of $58.4 million relating to changes in the fair value of financial instruments, offset by charges of ($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.
Book Value and Investment Portfolio Summary
The following table summarizes our allocation of capital and book value as of September 30, 2008 (amounts in thousands, except share and per share data):
Net Investment
Capital GAAP Income for the
Allocation Book Value Three-Month
as of as of Period Ended
September % of September September
30, 2008 Capital 30, 2008 30, 2008
(A) (B)
TruPS investments $236,234 37% $140,215 $21,283
Leveraged loan
investments 88,857 14% 75,744 1,756
Kleros Real Estate MBS
investments 90,000 14% - 3,158
Residential mortgages 79,784 12% 54,523 (6,613)
Other investments 54,026 8% 10,844 586
Total uninvested cash© 95,811 15% 95,811 -
Total investible capital 644,712 100% 377,137 20,170
Recourse
indebtedness(D)(E) (109,304) (109,304) (3,379)
Total $535,408 $267,833 $16,791
Common stock
outstanding as of
September 30, 2008 59,132,488
GAAP Book Value per share $4.53
1. Represents net cash invested through September 30, 2008.
2. 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 $6.0 million and $6.8 million, respectively, for provisions for loan losses recorded during the three-months ended September 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 $9.7 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 $9.7 million relates to the following asset classes: $6.5 million decrease to TruPS investments, $3.8 million decrease to Kleros Real Estate MBS investments, and a $0.6 million increase to Residential Mortgages.
3. Reduced for payments due to broker of $0.4 million at September 30, 2008 related to common stock repurchases that settled in October 2008.
4. Amount is net of our $1.5 million investment in common securities of the trusts that issued our junior subordinated debentures. The $1.5 million is recorded within other assets in our consolidated financial statements.
5. Subsequent to September 30, 2008, we repurchased and retired an additional $32.5 million par value of convertible debt for $17.6 million. As of the date of this release, our outstanding convertible debt balance is $28.7 million.
Investments in Debt Securities
The following table summarizes our investments in debt securities as of September 30, 2008 (dollars in thousands):
Weighted-
Net Weighted Average
Amortized Change in Estimated Average Years to
Cost Fair Value Fair Value Coupon Maturity
TruPS and
subordinated
debentures $5,543,044 $(3,317,013) $2,226,031 5.8% 27.6
MBS 2,054,468 (1,309,921) 744,547 3.8% 6.5
Other
investments 630 - 630 - 6.7
Total $7,598,142 $(4,626,934) $2,971,208 5.2% 21.9
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, estimates of the term of the particular contract, 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 September 30, 2008, the aggregate principal amount of investments in the 25 TruPS investments that have defaulted or are currently deferring interest payments is $490.5 million, representing approximately 9.5% of our combined TruPS portfolio. As of September 30, 2008, $162.5 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 September 30, 2008, investment interest income does not include $6.2 million of interest earnings on the $490.5 million of currently deferring or defaulted securities. The TruPS deferrals and defaults described above have resulted in the over-collateralization tests being triggered in all eight CDOs in which we hold equity interests. The trigger of an over-collateralization test in a TruPS CDO means that AFN, as a holder of equity securities, will not receive current distributions of cash in respect of its equity interests until sufficient cash or collateral is retained in the CDOs to cure the over-collateralization tests.
As previously disclosed, we received written notice from the trustees of Kleros Real Estate I and II that each CDO had experienced an event of default. On October 30, 2008, we received written notice from the trustee of Kleros Real Estate IV that the 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. As of the current date, the controlling class debtholders of Kleros Real Estate I, II, and IV have not exercised their rights to liquidate either CDO. As previously disclosed, Kleros Real Estate III was liquidated in June 2008. Since we are not receiving any cash flow from our investments in any of the Kleros Real Estate CDOs, the events of default described above do not have any further impact on our cash flows. However, the assets of the Kleros Real Estate I, II, and IV 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.
Investments in Loans
Our investments in loans are accounted for at amortized cost. The following table summarizes our investments in loans as of September 30, 2008 (dollars in thousands):
Weighted-
Weighted- Average
Unpaid Unamortized Number Average Contractual
Principal Premium/ Carrying of Interest Maturity
Balance (Discount) Amount Loans Rate Date
5/1 Adjustable
rate residential
mortgages $630,891 $5,517 $636,408 1,561 6.3% July 2036
7/1 Adjustable
rate residential
mortgages 220,561 3,019 223,580 518 6.6% Dec 2036
10/1 Adjustable
rate residential
mortgages 71,851 1,180 73,031 190 6.7% Sept 2036
Commercial loan 7,464 - 7,464 1 21.0% -
Leveraged loans 882,508 (5,417) 877,091 422 6.8% Apr 2013
Total $1,813,275 $4,299 $1,817,574 2,692 6.6% (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 September 30, 2008 (dollars in thousands):
Current
Weighted- Weighted
Net Interest Average Average
Amortized Change in Carrying Rate Interest Contractual
Cost Fair Value Amount Terms Rate Maturity
Description
Non-recourse
indebtedness:
Trust
preferred
oblig-
ations $385,600 $(232,940) $152,660 5.5% 6.5% Oct 2036
to
8.7%
Securitized
mortgage
debt 866,004 - 866,004 5.0% 5.7% Mar 2017
to
6.0%
CDO notes
payable
(1) 8,462,610 (5,276,155) 3,186,455 2.7% 3.3% Apr 2039
to
7.9%
Warehouse
credit
facilities 133,206 - 133,206 4.2% 4.2% May 2009
Total
non-
recourse
indebted-
ness $9,847,420 $(5,509,095) $4,338,325
Recourse
indebtedness:
Junior
Subordi-
nated
debentures $49,614 - $49,614 7.0% 8.8% Aug 2036
to
9.5%
Contingent
convertible
debt 61,179 - 61,179 7.6% 7.6% May 2027
Total
recourse
indebted-
ness $110,793 - $110,793
Total
Indebted-
ness $9,958,213 $(5,509,095) $4,449,118
1. Excludes CDO notes payable purchased by the Company which are eliminated in consolidation. Carrying amount includes $2,491,125 of liabilities at fair value.
Recourse indebtedness refers to indebtedness that is recourse to the general assets of AFN. During the three-month period ended September 30, 2008, we repurchased and retired $78.8 million par value of our outstanding convertible debt securities for $33.0 million. We realized a gain of $43.9 million on these transactions, net of a $1.9 million write-off of related deferred costs. Subsequent to September 30, 2008, we repurchased and retired an additional $32.5 million par value of convertible debt securities for $17.6 million. As of the date of this release, $28.7 million principal amount of our convertible debt securities remain outstanding.
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 the general credit of AFN. As of September 30, 2008, our maximum exposure to economic loss as a result of our involvement with each VIE is the $460.7 million of capital that we have 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 AFN to potential margin calls for additional pledges of cash or other assets.
Liquidity
As of September 30, 2008, our consolidated financial statements include $96.2 million of available, unrestricted cash and cash equivalents. 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 Kleros Real Estate portfolio, are expected to 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 liquidity position and are subject to the review and approval of our board of directors.
Common Stock Repurchase
During the three-month period ended September 30, 2008 we repurchased 629,596 shares of common stock for $0.6 million, at a weighted-average price of $0.99 per share. Additionally, during October 2008 we repurchased 112,800 shares of common stock for $0.1 million, at a weighted-average price of $1.02 per share.
Conference Call
As previously announced, a conference call to discuss these financial results with investors and analysts will be held on November 4, 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 96286323.
About Alesco Financial Inc.
Alesco Financial Inc. is a specialty finance REIT headquartered in Philadelphia, Pennsylvania. 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, AFN's ability to restore compliance with New York Stock Exchange (the "NYSE") continued listing standards or, in the event that AFN 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, 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 the For the
Three- Three- Nine- Nine-
Month Month Month Month
Period Period Period Period
Ended Ended Ended Ended
September September September September
30, 2008 30, 2007 30, 2008 30, 2007
Net investment income:
Investment interest income $125,585 $194,649 $436,999 $529,299
Investment interest expense (95,954) (168,794) (337,326) (462,230)
Provision for loan losses (12,840) (4,055) (28,295) (9,514)
Net investment income 16,791 21,800 71,378 57,555
Expenses:
Related party management
compensation 6,711 4,886 15,653 12,612
General and administrative 3,591 3,113 10,750 8,510
Total expenses 10,302 7,999 26,403 21,122
Income before interest and
other income, minority
interest and taxes 6,489 13,801 44,975 36,433
Interest and other income 1,282 4,327 3,907 15,981
Net change in fair value of
investments in debt
securities and non-recourse
indebtedness 70,028 - 140,236 -
Net change in fair value of
derivative contracts (25,967) 25,308 (71,775) 44,899
Credit default swap premiums - (1,411) (2,872) (1,595)
Impairments on other
investments and intangible
assets (1,533) (535,057) (14,378) (609,485)
Loss on disposition of
consolidated entities - 10,293 (5,558) 10,293
Gain on repurchase of debt 43,912 - 43,912 -
Net realized loss on sale of
assets (2,196) (11,182) (5,387) (15,579)
Income (loss) before
minority interest and
benefit for income taxes 92,015 (493,921) 133,060 (519,053)
Minority interest (29,802) (4,467) (70,567) (14,164)
Income (loss) before benefit
for income taxes 62,213 (498,388) 62,493 (533,217)
Benefit for income taxes 1,841 1,784 5,243 1,174
Net income (loss) $64,054 $(496,604) $67,736 $(532,043)
Earnings (loss) per
share-basic:
Basic earnings (loss)
per share $1.07 $ (8.36) $1.14 $ (9.59)
Weighted-average shares
outstanding-Basic 59,660,289 59,425,920 59,470,678 55,456,088
Earnings (loss) per
Share-diluted:
Diluted earnings
(loss) per share $1.07 $(8.36) $1.14 $(9.59)
Weighted-average shares
outstanding-Diluted 59,660,289 59,425,920 59,470,678 55,456,088
Distributions declared
per common share $- $0.31 $0.50 $0.92
Alesco Financial Inc.
Consolidated Balance Sheets
(Unaudited and in thousands, except share and per share information)
As of As of
September 30, December 31,
2008 2007
Assets
Investments in debt securities and
security-related receivables
(including amounts at fair value
of $2,971,208 and $5,888,650,
respectively) $2,971,208 $6,628,991
Investments in loans
Residential mortgages 933,019 1,047,195
Commercial mortgages 7,464 7,332
Leveraged loans 877,091 836,953
Loan loss reserve (46,376) (18,080)
Total investments in loans, net 1,771,198 1,873,400
Cash and cash equivalents 96,219 80,176
Restricted cash and warehouse deposits 68,490 95,476
Accrued interest receivable 34,073 49,806
Other assets 46,165 207,527
Total assets $4,987,353 $8,935,376
Liabilities and stockholders' equity (deficit)
Indebtedness
Trust preferred obligations
(including amounts at fair value
of $152,660 and $0, respectively) $152,660 $382,600
Securitized mortgage debt 866,004 959,558
CDO notes payable (including
amounts at fair value of
$2,491,125 and $0, respectively) 3,186,455 9,409,027
Warehouse credit facilities 133,206 155,984
Recourse indebtedness 110,793 189,614
Total indebtedness 4,449,118 11,096,783
Accrued interest payable 31,473 54,380
Related party payable 6,428 2,800
Other liabilities 127,897 161,408
Total liabilities 4,614,916 11,315,371
Minority interests 104,604 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, 60,323,877 and
60,548,032 issued and outstanding,
including 1,191,389 and 1,228,234
unvested restricted share awards,
respectively 59 59
Additional paid-in-capital 482,351 481,850
Accumulated other comprehensive loss (23,160) (1,545,464)
Accumulated deficit (191,417) (1,335,983)
Total stockholders' equity
(deficit) 267,833 (2,399,538)
Total liabilities and stockholders'
equity (deficit) $4,987,353 $8,935,376
Investors: Media:
John Longino Joseph Kuo
Chief Financial Officer Kekst and Company
215-701-8952 212-521-4863
info@alescofinancial.com
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