WASHINGTON, D.C. 20549
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the
registrant under any of the following provisions (see General Instruction A.2. below):
The SPA contains certain customary representations and warranties made by each party, which are qualified by the confidential disclosures provided
to the Company in connection with the SPA. The Company, LSF and Caliber have agreed to various
customary covenants, including, among others, covenants regarding the conduct of Caliber’s business prior to the Closing (as defined in the SPA) and covenants requiring the Company,
LSF, and Caliber to use commercially reasonable best efforts to obtain certain governmental consents, approvals or other authorizations required in connection with the Transaction
subject to certain limitations. Subject to certain limited exceptions the representations and warranties and covenants made by each party do not survive the Closing.
Item 2.02 |
Results of Operations and Financial Condition.
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Today,
the Company disclosed the following estimated preliminary results of operations for its first quarter ended
March 31, 2021.
Preliminary Unaudited Financial Results for the First Quarter Ended
March 31, 2021
Estimated Preliminary Financial Results
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Three Months Ended
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GAAP Net Income Per Diluted Share(1)
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$0.64 to $0.70
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Core Earnings Per Diluted Share(1)*
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$0.31 to $0.37
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Book Value Per Share(2)
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$11.32 to $11.42
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* |
Core earnings is a non-GAAP measure. For a reconciliation of core earnings to GAAP net income, as well as an explanation of this measure, please
refer to “Non-GAAP Measures and Reconciliation to GAAP Net Income” below.
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(1)
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Per common share calculations of GAAP net income and core earnings are based on 429,491,379 weighted average
diluted common shares during the quarter ended March 31, 2021.
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(2)
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Book value per share based on 414,795,505 basic shares outstanding as of March 31, 2021.
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For the first quarter of 2021,
the Company estimates that GAAP net income will be in the range of $0.64 to $0.70 per diluted share,
that core earnings will be in the range of $0.31 to $0.37 per diluted share and that book value will be in the range of $11.32 to $11.42 per share. A reconciliation of GAAP net income to core earnings is set forth below.
The Company’s preliminary financial results may change as a result of the completion of its closing procedures for
the quarter ended
March 31, 2021 and, as a result,
the Company’s final results upon completion of the closing procedures may vary from the preliminary estimates. These preliminary results, which are the responsibility of
the Company’s management,
were prepared by its management in connection with the preparation of
the Company’s financial statements and are based upon a number of assumptions. Additional items that may require adjustments to the preliminary operating results may be
identified and could result in material changes to
the Company’s estimated preliminary operating results. The preliminary operating results are inherently uncertain and
the Company undertakes no obligation to update this information. Ernst &
Young LLP,
the Company’s independent registered public accounting firm, has not audited, reviewed or performed any procedures with respect to this preliminary financial information. Accordingly, Ernst & Young LLP does not express an opinion
or provide any form of assurance with respect thereto.
Non-GAAP Measures and Reconciliation to GAAP Net Income
Estimated Preliminary Financial Results (dollars in thousands, except per share data)
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Net (loss) income attributable to common stockholders
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Adjustments for Non-Core Earnings:
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Unrealized and realized (gain) loss, net
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(310,542
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)
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(310,542
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)
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Preferred stock management fee to affiliate
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3,048
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3,048
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Deferred taxes
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109,952
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109,952
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Other
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Core Earnings
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$
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132,063
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$
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157,832
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Net Income Per Diluted Share
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$
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0.64
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$
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0.70
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Core Earnings Per Diluted Share
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$
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0.31
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$
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0.37
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Weighted Average Number of Shares of Common Stock Outstanding, Diluted
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429,491,379
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429,491,379
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The reconciliation of estimated preliminary net income to core earnings results was calculated across the low and high net income
ranges based on the Company’s preliminary estimates of the expected base case differences between net income and core earnings. Similar to the estimated preliminary operating results noted above, the Company’s final reconciliation upon
completion of its closing procedures may vary from the preliminary estimates.
The Company has five primary variables that impact its operating performance: (i) the current yield earned on its investments, (ii) the
interest expense under the debt incurred to finance its investments, (iii) its operating expenses and taxes, (iv) its realized and unrealized gains or losses on its investments, including any impairment or reserve for expected credit losses and
(v) income from its origination and servicing businesses.
“Core earnings” is a non-GAAP measure of
the Company’s operating performance, excluding the fourth variable above and adjusts the earnings from the consumer loan investment to a level
yield basis. Core earnings is used by management to evaluate
the Company’s performance without taking into account: (i) realized and unrealized gains and losses, which although they represent a part of
the Company’s recurring operations, are
subject to significant variability and are generally limited to a potential indicator of future economic performance; (ii) incentive compensation paid to FIG LLC (the
“Manager”); (iii) non-capitalized transaction-related expenses; and (iv)
deferred taxes, which are not representative of current operations.
The Company’s definition of core earnings includes accretion on held-for-sale loans as if they continued to be held-for-investment.
Although
the Company intends to sell such loans, there is no guarantee that such loans will be sold or that they will be sold within any expected timeframe. During the period prior to sale,
the Company continues to receive cash flows from such
loans and believes that it is appropriate to record a yield thereon. In addition,
the Company’s definition of core earnings excludes all deferred taxes, rather than just deferred taxes related to unrealized gains or losses, because
the Company
believes deferred taxes are not representative of current operations.
The Company’s definition of core earnings also limits accreted interest income on RMBS where it receives par upon the exercise of associated call rights based on the estimated
value of the underlying collateral, net of related costs including advances.
The Company created this limit in order to be able to accrete to the lower of par or the net value of the underlying collateral, in instances where the net value of the
underlying collateral is lower than par.
The Company believes this amount represents the amount of accretion it would have expected to earn on such bonds had the call rights not been exercised.
Beginning
January 1, 2020,
the Company’s investments in consumer loans are accounted for under the fair value option. Core earnings
adjusts earnings on consumer loans to a level yield to present income recognition across the consumer loan portfolio in the manner in which it is economically earned, to avoid potential delays in loss recognition, and align it with
the Company’s
overall portfolio of mortgage-related assets which generally record income on a level yield basis. With respect to consumer loans classified as held-for-sale, the level yield is computed through the expected sale date. With respect to the gains
recorded under GAAP in 2014 and 2016 as a result of a refinancing of, and the consolidation of, the debt related to
the Company’s investments in consumer loans, and the consolidation of entities that own
the Company’s investments in consumer
loans, respectively,
the Company continues to record a level yield on those assets based on their original purchase price.
While incentive compensation paid to the Manager may be a material operating expense,
the Company excludes it from core earnings
because (i) from time to time, a component of the computation of this expense will relate to items (such as gains or losses) that are excluded from core earnings, and (ii) it is impractical to determine the portion of the expense related to core
earnings and non-core earnings, and the type of earnings (loss) that created an excess (deficit) above or below, as applicable, the incentive compensation threshold. To illustrate why it is impractical to determine the portion of incentive
compensation expense that should be allocated to core earnings,
the Company notes that, as an example, in a given period, it may have core earnings in excess of the incentive compensation threshold but incur losses (which are excluded from core
earnings) that reduce total earnings below the incentive compensation threshold. In such case,
the Company would either need to (a) allocate zero incentive compensation expense to core earnings, even though core earnings exceeded the incentive
compensation threshold, or (b) assign a
“pro forma” amount of incentive compensation expense to core earnings, even though no incentive compensation was actually incurred.
The Company believes that neither of these allocation methodologies
achieves a logical result. Accordingly, the exclusion of incentive compensation facilitates comparability between periods and avoids the distortion to
the Company’s non-GAAP operating measure that would result from the inclusion of incentive
compensation that relates to non-core earnings.
With regard to non-capitalized transaction-related expenses, management does not view these costs as part of
the Company’s core
operations, as they are considered by management to be similar to realized losses incurred at acquisition. Non-capitalized transaction-related expenses are generally legal and valuation service costs, as well as other professional service fees,
incurred when
the Company’s acquires certain investments, as well as costs associated with the acquisition and integration of acquired businesses.
Since the third quarter of 2018, as a result of the Shellpoint Partners LLC (
“Shellpoint”) acquisition,
the Company, through its wholly
owned subsidiary, NewRez, originates conventional, government-insured and nonconforming residential mortgage loans for sale and securitization. In connection with the transfer of loans to the Government-sponsored enterprises (
“GSEs”) or mortgage
investors,
the Company reports realized gains or losses on the sale of originated residential mortgage loans and retention of mortgage servicing rights, which
the Company believes is an indicator of performance for its servicing and origination
segments and therefore included in core earnings. Realized gains or losses on the sale of originated residential mortgage loans had no impact on core earnings in any prior period, but may impact core earnings in future periods.
Beginning with the third quarter of 2019, as a result of the continued evaluation of how Shellpoint operates its business and its
impact on
the Company’s operating performance, core earnings includes Shellpoint’s GAAP net income with the exception of the unrealized gains or losses due to changes in valuation inputs and assumptions on MSRs owned by NewRez, and
non-capitalized transaction-related expenses. This change was not material to core earnings for the quarter ended
September 30, 2019.
Management believes that the adjustments to compute
“core earnings” specified above allow investors and analysts to readily identify
and track the operating performance of the assets that form the core of
the Company’s activity, assist in comparing the core operating results between periods, and enable investors to evaluate the Company’s current core performance using the
same measure that management uses to operate the business. Management also utilizes core earnings as a measure in its decision-making process relating to improvements to the underlying fundamental operations of
the Company’s investments, as well
as the allocation of resources between those investments, and management also relies on core earnings as an indicator of the results of such decisions. Core earnings excludes certain recurring items, such as gains and losses (including impairment
and reserves, as well as derivative activities) and non-capitalized transaction-related expenses, because they are not considered by management to be part of
the Company’s core operations for the reasons described herein. As such, core earnings
is not intended to reflect all of
the Company’s activity and should be considered as only one of the factors used by management in assessing
the Company’s performance, along with GAAP net income which is inclusive of all of
the Company’s
activities.
The primary differences between core earnings and the measure
the Company uses to calculate incentive compensation relate to (i)
realized gains and losses (including impairments and reserves for expected credit losses), (ii) non-capitalized transaction-related expenses and (iii) deferred taxes (other than those related to unrealized gains and losses). Each are excluded
from core earnings and included in
the Company’s incentive compensation measure (either immediately or through amortization). In addition,
the Company’s incentive compensation measure does not include accretion on held-for-sale loans and the
timing of recognition of income from consumer loans is different. Unlike core earnings,
the Company’s incentive compensation measure is intended to reflect all realized results of operations.
Core earnings does not represent and should not be considered as a substitute for, or superior to, net income or as a substitute for,
or superior to, cash flows from operating activities, each as determined in accordance with U.S. GAAP, and
the Company’s calculation of this measure may not be comparable to similarly entitled measures reported by other companies.
The information in this Item 2.02 is being furnished and shall not be deemed to be filed for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended (the
“Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be
incorporated by reference into any of
the Company’s filings under the Securities Act of 1933, as amended, or the
Exchange Act, unless expressly set forth as being
incorporated by reference into such filing.
Certain information in this Current Report on Form 8-K constitutes
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995, including, but not limited to (i) statements regarding the Transaction, including the ability to obtain all required approvals and consummate the Transaction on a timely basis or at all, (ii) Caliber’s future
performance, including its ability to grow, and (iii) statements regarding Caliber’s impact on
the Company's business and future performance. These statements are not historical facts. They represent management’s current expectations regarding
future events and are subject to a number of trends and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those described in the forward-looking statements. Accordingly, you should not
place undue reliance on any forward-looking statements contained herein. These risks and factors include, but are not limited to, the risks relating to the Transaction, including in respect of the satisfaction of closing conditions and the timing
thereof; unanticipated difficulties financing the Transaction; unexpected challenges related to the integration of Caliber’s businesses and operations; changes in general economic and/or industry specific conditions; difficulties in obtaining
governmental and other third party consents in connection with the Transaction; changes in general economic and/or industry specific conditions; unanticipated expenditures relating to or liabilities arising from the Transaction or the acquired
businesses; uncertainties as to the timing of the Transaction; litigation or regulatory issues relating to the Transaction, LSF,
the Company or the acquired businesses; the impact of the Transaction on relationships with, and potential difficulties
retaining, employees, customers and other third parties; and the inability to obtain, or delays in obtaining, expected benefits from the Transaction. In addition, risks and uncertainties to which Caliber’s business is subject could affect the
Transaction and, following the closing of the Transaction,
the Company may be subject to such risks and uncertainties (including certain risks and uncertainties that currently apply to
the Company and certain new risks and uncertainties applicable
to Caliber). Forward-looking statements contained herein speak only as of the date of this Current Report on Form 8-K, and
the Company expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in
the Company’s expectations with regard thereto or change in events, conditions or circumstances on which any statement is based. For a discussion of some of the risks and important factors that could
affect such forward-looking statements, see the sections entitled
“Cautionary Statements Regarding Forward Looking Statements,” “Risk Factors” and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the
Company’s annual and quarterly reports filed with the SEC, which are available on
the Company’s
website (
www.newresi.com).