Walter Investment Management Corp. Announces Full Year And Fourth Quarter 2013 Financial Results, Updated 2014 Outlook And Recent Events

TAMPA, Fla., Feb. 27, 2014 /PRNewswire/ -- Walter Investment Management Corp. (NYSE: WAC) ("Walter Investment" or the "Company") today announced financial results for the full year and quarter ended December 31, 2013, as well as updates on operational highlights and recent developments for the Company.

GAAP net income for the year ended December 31, 2013 was $253.5 million, or $6.63 per diluted share, compared to a net loss of $22.1 million, or $0.73 per diluted share for 2012.  Core earnings for the year was $363.2 million after taxes, or $9.63 per diluted share, increasing 337% as compared to the prior year.  Adjusted EBITDA ("AEBITDA") for the full year of 2013 was $691.7 million, also significantly higher when compared to AEBITDA of $241.7 million for 2012.

The Company reported GAAP net income for the fourth quarter of 2013 of $9.8 million, or $0.26 per diluted share, compared to a net loss of $34.1 million, or $0.98 per diluted share, in the fourth quarter of 2012.  Core earnings for the fourth quarter was $40.6 million after taxes, or $1.07 per diluted share, increasing 80% as compared to the same quarter of last year.  AEBITDA for the quarter was $128.8 million, also significantly higher when compared to AEBITDA of $64.1 million in the fourth quarter of 2012.

Full year and fourth quarter results reflected strong earnings growth in the Servicing segment, predominantly driven by the higher volume of units serviced as compared to the prior year periods.  Servicing results also reflected increases in the value of the Company's mortgage servicing rights ("MSRs"), which added approximately $0.38 to both GAAP net income and core earnings per diluted share in the quarter and approximately $2.86 per diluted share for the full year.   The Company's Originations segment's performance moderated toward a more normalized operating level in the quarter, delivering solid results and strong margins from the consumer direct channel, while continuing to develop its retail and correspondent channels.

Other notable developments included:

• Completed financings including issuance of $1.5 billion first lien term loan and $575 million of senior unsecured notes resulting in a reduced rate, covenant light term loan facility and diversification of the Company's capital structure;
• Funded over 63,000 HARP loans, providing homeowners an opportunity to refinance at attractive rates not otherwise available;
• Maintained FNMA 4 Star rating and maintained or improved servicer ratings at S&P, Moodys and Fitch while significantly increasing the size of the serviced portfolio;
• The Company continues to make significant progress toward the completion of Walter Capital Opportunity Corp in partnership with York Capital Management which we expect will provide an attractive alternative source of capital and build our asset management revenue stream.

"During 2013 Walter Investment executed against its strategic plan, profitably growing its Servicing business, launching its Originations platform to opportunistically harvest the HARP opportunity and extending its core competencies to the reverse mortgage market," said Mark J. O'Brien, Walter Investment's Chairman and CEO.   "We more than doubled the serviced book of business to over $200 billion of UPB, funded $16 billion of originations volume and were the #1 HECM issuer in the reverse mortgage space while growing our serviced book of business by 23%.  I would like to thank the Walter Investment team for their significant efforts which delivered these results."

Fourth Quarter 2013 Financial and Operating Highlights

Total revenue for the fourth quarter was $402.8 million, as compared to $171.0 million in the same quarter last year.  The year-over-year increase in revenue reflects a $69.6 million increase in net servicing revenue and fees, an increase of $130.2 million in net gain on sales of loans in the Originations segment and a $19.1 million increase related to fair value gains on reverse loans and related HMBS obligations.  Other revenues increased $12.9 million, driven by higher fee income in the Servicing, Originations and Reverse segments. 

Total expense increased from $176.0 million in the fourth quarter of 2012 to $382.6 million in the fourth quarter of 2013.  The year-over-year increase reflects additional operating and overhead costs, including salaries and benefits and general and administrative expenses, associated with growth in the serviced portfolio and the acquisition and expansion of other businesses.  The additions of the Originations and Reverse Mortgage segments added approximately $100.6 million and $32.8 million to expenses, respectively.  Interest expense increased by $29.9 million over the prior year primarily reflecting increased corporate debt outstanding, and increased servicing advance liabilities and warehouse activity in the Company's Originations and Reverse Mortgage segments. 

Segments

Results for the Company's segments are presented below.

Servicing

The Servicing segment generated revenue of $162.9 million in the fourth quarter, which included $142.3 million of gross servicing fees, $25.6 million of incentive and performance-based fees, and $20.1 million of ancillary and other fees.  Servicing revenues for the fourth quarter of 2013 are net of $8.5 million in amortization on MSRs accounted for at amortized cost and include $23.4 million of gains related to MSRs accounted for at fair value.

Servicing segment revenues were up 80% over the fourth quarter of 2012, principally reflecting the significant increase in UPB serviced over the past year, as well as the positive fair value adjustment recognized in the fourth quarter of this year.  The segment continued its trend of producing strong results with respect to generating incentive and performance-based fees, which increased more than 30% as compared to the prior year.  The application of proprietary protocols to the first lien GSE pools boarded in the first and second quarters resulted in a reduction of 30+ day delinquencies by approximately 300 bps as compared to the end of the second quarter of 2013. 

Expense for the Servicing segment was $142.6 million, which included $10.2 million of depreciation and amortization costs and $9.7 million of interest expense.  The segment generated core earnings before income taxes of $34.3 million for the quarter ended December 31, 2013, compared to core earnings before income taxes of $31.3 million in the fourth quarter of 2012, and AEBITDA of $64.9 million, an increase of 80% as compared to the prior year period. These results compare to revenue of $208.5 million, expenses of $139.3 million, core earnings before income taxes of $84.0 million and AEBITDA of $65.4 million in the third quarter of 2013.  The decline in core earnings before income taxes as compared to the third quarter resulted from a decrease of $37.1 million in the amount of the fair value adjustment to the MSR. 

The Servicing segment ended the quarter with approximately 2.0 million total accounts serviced, with a UPB of roughly $202 billion.  During the quarter, the Company experienced a net normalized disappearance rate of 14%.  All of these results were in line with or better than Company expectations and projections.   

Originations

The Originations segment generated revenue of $135.8 million in the fourth quarter, driven primarily by the consumer lending channel, which targets refinancing and recapture of accounts from the serviced portfolio.  Expense for the Originations segment was $104.7 million, which included $8.8 million of interest expense and $3.7 million of depreciation and amortization.  The segment generated core earnings before income taxes of $34.1 million for the fourth quarter of 2013 and AEBITDA of $37.6 million.  These results compare to revenue of $167.4 million, expenses of $115.6 million, core earnings before income taxes of $54.5 million and AEBITDA of $58.6 million in the third quarter of 2013. The decline in core earnings before income taxes and AEBITDA as compared to the third quarter resulted from expected decreases in locked volumes coupled with higher expenses in the consumer direct channel during the fourth quarter.  Direct margins in the consumer direct channel were 309 bps in the fourth quarter of 2013, slightly higher as compared to the third quarter, principally associated with the higher gain on sale margin offset by the recognition of lower fee income and higher direct expenses in the channel.

Funded loans in the fourth quarter totaled $4.7 billion, with 55% of that volume in the consumer lending channel and 45% generated by the correspondent lending channel.  The total pull through adjusted locked volume for the fourth quarter was $4.6 billion, as compared to $5.4 billion for the third quarter.

Reverse Mortgage

The Reverse Mortgage segment generated revenue of $39.1 million for the quarter, which included a $26.4 million gain from the net impact of HECM loan and related HMBS obligation fair value adjustments, $6.9 million in servicing fees and $5.8 million of other revenue.  Total expenses for the fourth quarter were $43.3 million, including $1.0 million of interest expense and $2.9 million of depreciation and amortization.   The segment reported core earnings before income taxes of $3.0 million and Adjusted EBITDA of $4.3 million for the fourth quarter.  These results compare to revenue of $41.7 million, expenses of $39.5 million, core earnings before income taxes of $3.1 million and AEBITDA of $4.5 million in the third quarter of 2013.  The quarter ended December 31, 2012 reflected two months of activity for the segment which generated revenue of $13.6 million, expenses of $10.4 million, core earnings before income taxes of $6.9 million and AEBITDA of $7.7 million.

Other Segments

The ARM segment generated revenue of $9.7 million and incurred expense of $7.2 million in the quarter ended December 31, 2013. Core earnings before income taxes was $3.8 million and AEBITDA was $4.0 million for the fourth quarter.  These results compare with revenue of $9.9 million, expenses of $6.8 million, core earnings before income taxes of $4.5 million and AEBITDA of $4.7 million in the third quarter of 2013.  The segment generated revenues of $11.3 million, expenses of $8.0 million, core earnings before income taxes of $5.4 million and AEBITDA of $5.4 million in the fourth quarter of 2012. 

Walter Investment's Insurance segment generated revenue of $20.0 million, offset by expenses of $9.9 million for the fourth quarter.  Insurance segment core earnings before income taxes was $11.4 million and AEBITDA was $11.5 million for the quarter ended December 31, 2013.  These results compare to revenue of $28.9 million, expenses of $9.7 million, core earnings before income taxes of $20.7 million and AEBITDA of $20.7 million in the third quarter of 2013 which reflected reductions in the cancellation experience on newly instituted policies.  In the fourth quarter of 2012, the Insurance segment generated revenue of $19.2 million, expenses of $10.4 million, core earnings before income taxes of $10.6 million and AEBITDA of $10.6 million. 

The Loans and Residuals segment, which includes the legacy Walter Investment owned portfolio, generated interest income of $35.3 million for the fourth quarter of 2013.  Total expense for the segment was $29.2 million, including $21.5 million of interest expense on securitized debt.  The Loans and Residuals segment generated pre-tax core earnings of $7.3 million and AEBITDA of $2.0 million for the fourth quarter of 2013, compared to pre-tax core earnings of $1.5 million and AEBITDA of $6.2 million for the fourth quarter of 2012. These results compare to interest income of $35.7 million, expenses of $28.4 million, core earnings before income taxes of $7.8 million and AEBITDA of $6.4 million in the third quarter of 2013.

Market Commentary and Outlook

The overall economic environment continues to provide a solid base for the business, and positive catalysts within the mortgage sector continue to drive the demand for movement of non-core, credit-sensitive assets from depositories to specialty servicers.  The Company anticipates these trends will continue driving long-term growth opportunities for the sector and for the Company.  The business development pipeline currently exceeds $345 billion and dialogue with clients has remained steady in the first quarter.  Recent public commentary confirms the view and previous commentary that the regulatory environment and oversight regarding MSR sales and servicing is increasing. The Company believes that this is a necessary part of the maturation of the sector and while it may have a short term impact on transactions and timing, ultimately, these changes will benefit those participants such as Walter Investment who have a demonstrated track record of efficiently managing transfers and highly rated platforms.

Based on current market conditions and our view of the sector and our businesses, the Company is updating its outlook for 2014 to an Adjusted EBITDA range of $650 to $725 million along with a range of core earnings per share after tax of $5.25 to $6.25.  These ranges include estimates for certain business development and growth opportunities, depreciation and amortization and the Company's expected capital structure.  The 2014 core earnings range does not include an estimate for future fair value adjustments.

About Walter Investment Management Corp.

Walter Investment Management Corp. is an asset manager, mortgage servicer and originator focused on finding solutions for consumers and credit owners.  Based in Tampa, Fla., the Company has over 6,400 employees and services a diverse loan portfolio.  For more information about Walter Investment Management Corp., please visit the Company's website at www.walterinvestment.com.  The information on our website is not a part of this release.

Conference Call Webcast

Members of the Company's leadership team will discuss Walter Investment's fourth quarter and full year results and other general business matters during a conference call and live webcast to be held on Thursday, February 27, 2014, at 10 a.m. Eastern Time.  To listen to the event live or in an archive, and to access presentation slides which will be available for at least 30 days, visit the Company's website at www.walterinvestment.com.

This press release and the accompanying reconciliations include non-GAAP financial measures.  For a description of these non-GAAP financial measures, including the reasons management uses each measure, and reconciliations of these non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with GAAP, please see the reconciliations as well as "Use of Non-GAAP Measures" at the end of this press release. 

Disclaimer and Cautionary Note Regarding Forward-Looking Statements

This document contains forward-looking statements, including forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, but are not limited to, statements concerning Walter Investment's plans, beliefs, objectives, expectations, level of confidence, guidance and intentions and other statements that are not historical or current facts. Forward-looking statements are based on Walter Investment's current expectations and involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in such forward-looking statements. In addition, these statements are based on a number of assumptions that are subject to change.  Accordingly, actual results may be materially higher or lower than those projected. The inclusion of such projections herein should not be regarded as a representation by Walter Investment that the projections will prove to be correct. This document speaks only as of this date. Walter Investment disclaims any duty to update the information herein except as otherwise required by law.

Factors that could cause Walter Investment's results to differ materially from current expectations or affect the Company's ability to achieve anticipated core earnings and AEBITDA include, but are not limited to:

• local, regional, national and global economic trends and developments in general, and local, regional and national real estate and residential mortgage market trends in particular;
• continued uncertainty in the United States, or U.S., home sales market, including both the volume and pricing of sales, due to adverse economic conditions or otherwise;
• fluctuations in interest rates and levels of mortgage originations and prepayments;
• risks related to our acquisitions, including our ability to successfully integrate large volumes of assets and servicing rights, as well as businesses and platforms that we have acquired or may acquire in the future into our business, and our ability to obtain approvals required to acquire these assets and servicing rights;
• risks related to the financing incurred in connection with past or future acquisitions, including our ability to achieve cash flows sufficient to carry our debt and otherwise comply with the covenants of our debt;
• delay or failure to realize the anticipated benefits we expect to realize from past or future acquisitions including any indemnification rights;
• our ability to successfully operate the loan originations platforms that we acquired in early 2013 and 2012, which are significantly larger than our prior originations business;
• the occurrence of anticipated growth of the specialty servicing sector and the reverse mortgage sector;
• the effects of competition on our existing and potential future business, including the impact of competitors with greater financial resources and broader scopes of operation;
• our ability to raise capital  whether directly or through an external capital vehicle to make suitable investments to offset run-off in a number of the portfolios we service and to otherwise grow our business;
• our ability to implement strategic initiatives, particularly as they relate to our ability to develop new business, including the development of our originations business, the implementation of delinquency flow programs and the receipt of new business, all of which are subject to customer demand and approval;
• our ability to earn anticipated levels of performance and incentive fees on serviced business;
• the availability of suitable investments for any capital that we are able to raise and risks associated with any such investments we may pursue;
• changes in federal, state and local policies, laws and regulations affecting our business, including mortgage and reverse mortgage originations and/or servicing, and changes to our licensing requirements;
• changes caused by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, including regulations required by the Dodd-Frank Act that have not yet been promulgated or have yet to be finalized;
• increased scrutiny and potential enforcement actions by the Consumer Financial Protection Bureau, or the CFPB;
• uncertainties related to regulatory pressures on large banks related to their mortgage servicing, as well as regulatory pressure on the rest of the mortgage servicing sector, including increased performance and compliance standards and reporting obligations and increases to the cost of doing business as a result thereof;
• changes in regards to the rights and obligations of property owners, mortgagors and tenants;
• our ability to remain qualified as a government-sponsored entity, or GSE, approved seller, servicer or component servicer, including the ability to continue to comply with the GSEs' respective loan and selling and servicing guides;
• changes to the Home Affordable Modification Program, or the HAMP, the Home Affordable Refinance Program, or HARP, the Home Equity Conversion Mortgage, or HECM, Program or other similar government programs;
• loss of our loan servicing, loan origination, insurance agency, and collection agency licenses;
• uncertainty relating to the status of GSEs;
• uncertainty related to inquiries from government agencies into servicing, foreclosure, loss mitigation, and lender-placed insurance practices;
• uncertainties related to the processes for judicial and non-judicial foreclosure proceedings, including potential additional costs, delays or moratoria in the future or claims pertaining to past practices;
• unexpected losses resulting from pending, threatened or unforeseen litigation or other third-party claims against the Company;
• changes in public opinion on mortgage origination, loan servicing and debt collection practices;
• the effects of any changes to the servicing compensation structure for mortgage servicers pursuant to programs of government-sponsored entities or various regulatory authorities; changes to our insurance agency business, including increased scrutiny by federal and state regulators and GSEs on lender-placed insurance practices and restrictions on our insurance agency's receipt of commissions on lender-placed insurance;
• the effect of our risk management strategies, including the management and protection of the personal and private information of our customers and mortgage holders and the protection of our information systems from third-party interference (cyber security);
• changes in accounting rules and standards, which are highly complex and continuing to evolve in the forward and reverse servicing and originations sectors;
• uncertainties relating to interest curtailment obligations and any related financial and litigation exposure;
• the satisfactory maintenance of effective internal control over financial reporting and disclosure controls and procedures;
• our continued listing on the New York Stock Exchange, or the NYSE; and
• the ability or willingness of Walter Energy, Inc., or Walter Energy, our prior parent, and other counterparties to satisfy material obligations under agreements with us;
• Other factors relating to our business in general as detailed in Walter Investment's 2013 Annual Report on Form 10-K and other periodic reports filed with the U.S. Securities and Exchange Commission.