Tiptree Inc.
Q1 2016 Earnings Call Transcript

Published: 11 May 2016

[Operator:]

Greetings and welcome to the Tiptree Financial Inc. First Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sandra Bell, Chief Financial Officer. Thank you. You may begin.

[Sandra Bell:]

Good morning and welcome to our first quarter 2016 earnings call. I am joined today by our Executive Chairman, Michael Barnes; and Chief Executive Officer, Jonathan Ilany. I'm Sandra Bell, the Chief Financial Officer of Tiptree Financial. Prior to this call, we posted the earnings release and presentation on our website at tiptreefinancial.com. The presentation provides supplemental information to our prepared remarks, which we will refer to by page during the call. We list our required disclosures in detail on Page 1 of the presentation. Our remarks on this call are qualified in their entirety by the disclaimers on this page. This presentation is being provided as a supplement to our SEC filings solely for information purposes. Throughout the presentation there are forward-looking statements. Our businesses are subject to risks and uncertainties which are outlined in our SEC filings, and which could impact our expectations of future results. Except as required by the securities laws, we undertake no obligation to update any forward-looking statements. Lastly, we use non-GAAP measures, throughout the presentation. We believe these measures provide supplemental information useful to investors. As these measures are not GAAP, they should not be used as a substitute for GAAP. The appendix provides a reconciliation of each of these non-GAAP measures to their GAAP equivalent. With that disclaimer, let me turn it over to Michael.

[Michael Barnes:]

Thank you, Sandra. Good morning and thank you for joining our call. Tiptree had a strong start to the year, as we are seeing positive momentum in many of our businesses. On a consolidated basis total revenues grew 48% to $132 million while contributing $15.3 million of adjusted EBITDA. Net income attributable to our publicly traded shares was $5.6 million. Earnings and other performance measures were up significantly against the first quarter of 2015. We continue to execute against our strategic priorities. On Page 3, we summarize some of the key achievements for the quarter. Fortegra adjusted EBITDA was up 46% with net revenues growing 15%. Growing demand for credit protection and specialty insurance products were the catalyst for improvement in the segment. Care; our senior's housing business continued a strategy of building out a real-estate portfolio by acquiring $55 million of new investments. Throughout 2016, we expect to see benefits from recent acquisitions as actions taken to improve property occupancy levels and net operating income flowed to the bottom line. We continued adding to our investment in non-performing mortgage loans ending the quarter with the portfolio of $52 million. Toward the end of March, we begin to see the volatility in middle market term loan prices stabilized. Which allowed Telos Asset Management to launch its 7 CLO in early April? Tiptree purchased $26 million of subordinated notes similar to prior CLOs. We believe leveraging our credit skills to invest in middle market loans generally with tighter covenants and greater spreads will generate stable cash distribution and CLO asset management fees overtime. We completed a tax restructuring to form a consolidating group, which further simplified our structure and will result in go forward efficiencies. Consistent with our decision to exist non-core asset, we sold our interest in Star Asia on April 8 for proceeds of $13.4 million, which was 49% of our December 31, book value. Additionally, we exited the remainder of a legacy tax-exempt loan portfolio managed by MFCA for proceeds of $8.9 million, with approximately $1 million loss versus our December 31, book value. Lastly, the company returned $1.8 million to shareholders in the form of dividends and stock buyback. On the next page, we wanted to share our priorities for the remainder of the year. Within our core businesses, we are focused on growing revenues, growing adjusted EBITDA and optimizing capital allocation by continuing to exit non-core or underperforming assets. As of yesterday May 10, Fortegra was upgraded by A.M. Best to an A minus excellent rating, as result of actions taken by Tiptree to improve Fortegra's balance sheet. This upgrade should open new channel opportunities and allow us to further distribute our core product offerings. Overtime the additional written premiums should increase the size of our investment portfolio. As of March 31, the Fortegra investment portfolio was $208 million which represented an increase to 17% over prior year. Within our other segments, we remained positive and our expectations for continued growth and margin improvement at the specialty finance and senior housing businesses, as well as the growth in asset management through the creation of new CLOs and managed accounts. We are as always looking to opportunistically acquire and invest in high returning cash flow businesses. In order to fund this activity, we expect to use excess liquidity from our primary sources of cash, which include distributions from Fortegra, Care, Telos and our principal investments and capital generated from sales of investments and non-core assets. With that, I'll hand it back to Sandra who will discuss the financial results.

[Sandra Bell:]

Thank you, Michael. For the first quarter, we reported net income of $7.4 million for the operating company and $5.6 million for Tiptree Financial. This was up from prior period losses of $2 million and $1 million respectively. Results from continuing operations were positively impacted period-over-period by the improved profitability of Fortegra, increases in principal investment income, increased rental income at Care, both from recent acquisitions and improving results at existing properties and the benefits associated with the tax restructuring mentioned earlier. This was partially offset by reductions in specialty finance organic volumes combined with higher expenses, as we increased headcount to drive future sales growth. Declining interest rates quarter-over-quarter resulting in a $1.4 million fair value loss on interest rate swap in our real estate segment and higher corporate expenses to enhance our controls and infrastructure. On Page 7, we've laid out the components of our revenue and adjusted EBITDA growth by segment. First quarter revenue grew $43 million primarily driven by 23% growth in insurance and 48% growth in real estate. Adjusted EBITDA from continuing operations increased $10.5 million over the prior year driven by Fortegra margin improvements increased Care NOI both from acquisitions and improving yields on managed properties and higher principal investment income in unrealized gain. With that, we will now transition to a more detailed analysis of each segments performance and outlook. Starting on Page 9, we highlight three metrics that we use to measure our insurance and insurance services segment results. As adjusted revenue, as adjusted net revenues and adjusted EBITDA. All three are non-GAAP measures that remove the purchase accounting adjustments from their comparable GAAP metrics. We use these metrics to review relative performance year-over-year. While purchase accountings values acquired contracts advent to our balance sheet and amortizes them overtime. The single line item amortization eliminates visibility in comparing the performance of the older contract with newly generated contracts in particular relative to the decision to reinsure a retained interest [ph]. As such, we believe that reallocating the amortization, the appropriate revenue and expense line items facilitates a better understanding of how the business is doing period-over-period. For the quarter, adjusted EBITDA was $12 million up from $8.2 million in the prior year. As adjusted net revenues were up $4 million or 15%, as a result of favorable claim activity and credit protection and increased top line growth in specialty products. Investment income improved as we have begun to more actively manage the investment portfolio as Michael mentioned earlier. Net written premiums of volume metrics and leading indicator future revenues increased by 49% with all three product lines ginning momentum. This is particularly encouraging as warranty net written premiums reverse trend and were up nearly 25%. Going forward, while we expect earnings growth to be supported by expansion in product revenues and investment income, we expect it to be at a lesser pace than that, that was seen this quarter. Moving to specialty finance on Page 10, adjusted EBITDA was a loss of $730,000 for the first quarter, a $1.3 million decline over 2015. This was driven by seasonal declines in our mortgages volumes and weakening market demand for refinancing as interest rates have remained relatively flat year-over-year. Mortgage originations for the overall market were also down 16% versus the first quarter of 2015, which was in line with our organic volume performance excluding the impact of the Reliance acquisition. We invested in additional headcount in mortgage which was up approximately 20% from last year, along with the expenditure of higher marketing cost for these new loan officers. With the strategy of adding additional volume to drive market share in the second half of 2016 and beyond. CMS our middle market lending platform increased average earning assets by 24%. Turning to the real estate segment on the following page; we continue to see improvement as a result of additional property acquisitions and improving margins on existing properties. Adjusted EBITDA was $2.1 million up significantly from last year driven by NOI increases of $1.8 million. The acquisitions over the last 18 months were primarily managed properties where we partner with existing operators to focus on faculties that are undergoing capital expenditure upgrades and enhancements to allow them to operate more efficiently. On the bottom left of the page, you can see the improvements to-date. As NOI margins on managed properties are up from 23.7% to 26%. As the newer facilities ramp up and stabilize, we expect our results to reflect additional improvements. For asset management on the next page, adjusted EBITDA was down slightly year-over-year from a combination of reduced fee earning assets under management and the timing of bonus accruals in the first quarter of 2016. As Michael mentioned, Telos 7 was launched in early April. We expect to see modest increases in fee revenue in subsequent quarters and are continuing to pursue opportunities to increase AUM for this segment. Turning to the corporate and other segments on Page 13, adjusted EBITDA was up by $6.8 million from the prior year driven by a $3.9 million unrealized gain on Star Asia which was subsequently sold in April. Improved CLO or equity earnings compared to the prior year primarily as a result of reduced mark-to-market losses. Earnings of $2.8 million from our Telos 7 warehouse and credit opportunities fund plus other unrealized gains on our principal investments of $2.3 million. These increases were offset by increases in payroll expenses of $1.2 million and professional fees of $3.1 million respectively, which reflect our efforts to improve the controls and reporting infrastructure and looking forward, we expect our NPL investments to generate realizations on sales of mortgage loans and REO in the second half of 2016. Now I will pass it back to Michael to wrap up.

[Michael Barnes:]

So to summarize Tiptree's results for the quarter, we had a good first quarter with company having adjusted EBITDA of $15.3 million and net after-tax income of $7.4 million of which $5.6 million was attributable to the Class A shareholders. Our insurance sector was ahead of expectations and with the A.M. Best upgrade, we're optimistic that revenues will grow through increased product origination and returns on the investment pool. Our real sector made further acquisition to senior care facilities and continues to increase revenue in NOI, our asset management sector is stable and aside from CLOs, we're working toward raising capital and other forms of managed accounts. Our specialty finance sector was a bit light this past quarter were partly because of our investment in further building out existing business, which should yield improved production in the future, our corporate and other sector adjusted EBITDA was positive, which not only includes gains of our principal investment but also incorporates our companies corporate expenses. And importantly, we continue to make progress on this year's objectives of exiting non-core underperforming assets, reallocating to existing core businesses and further building out our infrastructure. And with that, we'll now open up for questions.

[Operator:]

[Operator Instructions] our first question comes from the line of Andrew Cowen from Badge Investment, please go ahead.

[Andrew Cowen:]

Hi, everyone nice quarter. I had asked last quarter, if there was any kind of guidance that you guys might be able to provide. I understand that there are going to be certain things or going to be tough to predict and like CLO marks and stuff like that, but is there any kind of guidance you can give by segment at least just it seems like we're on kind of just started doing back of the envelope, but almost cash earnings rate of about $1 a share. I was wondering if you could give any kind of confirmation or detail around anything like that.

[Michael Barnes:]

Andrew, it's Michael. Thank you very much for the question. We don't provide guidance really, is more in favor of philosophy than anything, however many of our businesses as you just suggested certainly have repeatable, predictable. We're not going to provide guidance on this call; we are certainly working each quarter as we seek to improve our financial disclosures to better communicate to investors, our performance and those businesses that we see continuing to perform well in the future. So I would say although, philosophically we're not going to be providing guidance. We're certainly going to be working towards improving our disclosures and transparencies, so that investors can better understand the predictability of our cash flow, but thank you for the question.

[Andrew Cowen:]

Just on a follow-up is there, with something like Fortegra which is going to be somewhat predictable or I guess your most predictable business beyond, I guess ex-real estate. Are these numbers sort of numbers we can look at going forward, something like a $12 million EBITDA quarterly number or anything like that and then maybe something in real estate or just asset management fee-based income?

[Michael Barnes:]

So Andrew, I'm going to have Sandra Bell answer this question. As you see, we're continuing to make acquisitions in a real estate sector, it's our objective that continue to grow our asset management business not only in CLOs, as you've done in the past but also looking to expand and diversify their fee income to other types of managed accounts. So that's certainly something that we would look to grow in the future. With respect to Fortegra, Sandra would you like to take that one?

[Sandra Bell:]

Yes, let me respond on this two ways. First Andrew is when you look at the couple that extra metrics we've added this quarter, our net written premiums and net revenues as well as adjusted EBITDA. You can begin to see the alignment among those metrics. It is a relatively predictable business and the contract terms are couple years long. So as you see written premiums grow, you can begin to translate that into trends. I just want to caution that the first quarter was an extraordinarily good quarter for Fortegra. We do believe, we'll see growth and we do believe that we'll begin to see improved performance on the investment income, but I wouldn't expect to see continued growth around 46%. It will be.

[Andrew Cowen:]

No, no I wasn't talking about the growth number as more of just split sort of more of a run rate steady state EBITDA number could be.

[Sandra Bell:]

Yes, it tends to be steady state, its company that has disciplined cost control as well and that will support the steady state.

[Michael Barnes:]

And I think Andrew, now that we've owned for more than a year, you can start to have comparison quarter-by-quarter with regard to this performance.

[Sandra Bell:]

The other piece to answer your question about real estate, I think we've started to add NOI margins and that's basically net operating income which is property level metric over investment and again that metric will start to show you, how we expect improving performance on what I would call it same store sales type of basis.

[Andrew Cowen:]

Do you have any kind of FFO type numbers?

[Sandra Bell:]

We have been providing NOI because of the nature of the business. We have the two components triple net leases and managed properties. We believe NOI is a better metric than FFO for this business.

[Andrew Cowen:]

Okay and then just lastly, you [indiscernible] some nice detail on all the depreciation line items particularly as regard to the [indiscernible] but based on book value I think it’s somewhere around official book value of around $9.16. How much has book value been impacted by that total depreciation? So if you wanted to basically assume that a cleaner book value is, I would imagine somewhat materially higher because you've had such a big depreciation, is there a cumulative effect on book value.

[Michael Barnes:]

Andrew, I'll just comment you've certainly have picked on one of those things that when investing in real estate and also with respect to the purchase of Fortegra, depreciation amortization both last year and as we can continue to make acquisitions in real estate, will always be reflected in the GAAP results that we report and so it's one of those things that certainly depreciation relates to real estate certainly those against GAAP book value, NOI is certainly one of the metrics that we look at in terms of both a valuation metric as well as we increased our overall performance metric. So your point is spot on with respect to depreciation certainly effecting the GAAP reporting of book value and certainly it's our view and that intrinsic value very well exceeds what we would phase reportable GAAP book value in our opinion.

[Andrew Cowen:]

Is there some sort of accumulated depreciation number, we might have a look at and maybe add that back to some sort of official book value.

[Sandra Bell:]

Well I would be happy to Andrew, I don't have that off the top of my head and put that together and offline walk you through, how to build that from our published financial statements.

[Andrew Cowen:]

Okay, it's just one of things I noticed with such a big number that I said well its looks like book value pretty materially understated versus true color intrinsic value, but yes any help on that front would be great.

[Michael Barnes:]

We acknowledge your point.

[Andrew Cowen:]

Okay, thanks.

[Operator:]

[Operator Instructions] ladies and gentlemen, we have no further questions in queue at this time. I would like to turn the floor back over to management for closing comments.

[Sandra Bell:]

Thank you, Adam and thank you everyone for joining our call today. Certainly if you have any questions, pleases feel free to reach out to me directly and I'll be happy to work with you in going through our disclosures. We look forward to speaking with you at our second quarter call and this concludes our first quarter 2016 conference call. Have a nice day.

[Operator:]

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.