ZAIS Financial (ZFC) is set to expand its footprint in the mortgage market, per a pair of recent regulatory filings with the Securities and Exchange Commission. The real estate investment trust appears to be looking to fill the gap of falling originations and a weak secondary market by ramping up its efforts in both areas.
On August 5, the REIT disclosed that it has entered into an agreement to purchase GMFS, a privately owned mortgage company that operates primarily in the southern U.S, for $61 million in cash.
GMFS was founded in 1999 and is headquartered in Baton Rouge, Louisiana. As a licensed mortgage banker in 29 states, the company originates residential mortgage loans and holds the servicing rights on its loans.
In 2013, GMFS originated approximately $1.4 billion in mortgage loans, generating net income of approximately $14.7 million. As of December 31, 2013, GMFS held a portfolio of mortgage servicing rights of approximately $2.2 billion in unpaid principal balance.
GMFS currently originates loans that are eligible to be purchased, guaranteed or insured by Fannie Mae, Freddie Mac, Federal Housing Administration,U.S. Department of Veterans Affairs and U.S. Department of Agriculture through retail, correspondent and broker channels. GMFS also originates and sells reverse mortgage loans as part of its existing operations.
According to ZAIS Financial’s filing with the SEC, the purchase price will consist of cash payable at closing, estimated at approximately $61 million, two contingent $1 million deferred premium payments payable in cash over two years, plus potential additional consideration based on future loan production and profits which will be payable over a four-year period if certain conditions are met.
The cash payable at closing will include the actual market value of GMFS’s MSR portfolio, which was $30.1 million on June 30. In addition to the value of the MSR portfolio, the purchase price will reflect the actual value of GMFS's net tangible assets at closing. “(ZAIS) intends to fund the closing payment from existing cash and the sale of non-agency RMBS holdings,” the REIT said in its filing.
"We are delighted to announce this acquisition as a transformational next step in our evolution as a mortgage operating company,” ZAIS Financial CEO Michael Szymanski said.
“GMFS already has a solid mortgage banking franchise with significant retail operations that have continued to outperform in the current loan origination environment,” Szymanski continued. “The acquisition provides us with the opportunity to advance two of our core strategic objectives: first, to directly source newly originated mortgage loans while controlling the origination process, and second, to diversify revenue streams to include origination activities and mortgage servicing rights investment income. At the same time, GMFS is well positioned to substantially benefit from our investment capital and resources."
The merger is expected to close during the fourth quarter of 2014 and ZAIS reports that it expects GMFS to operate under its existing name and under the leadership of the current management team once the merger is finalized.
According to a release from the REIT, it believes the acquisition will have the following benefits:
- Addition of an origination platform to ZAIS Financial's sourcing capabilities, allowing access to new credit investment opportunities while controlling the origination process
- Enhancement and growth of the GMFS origination platform through better access to capital and an expanded product offering
- Acquisition of a Fannie Mae and Freddie Mac seller/servicer and HUD/FHA approved mortgagee, opening the opportunity for ZAIS Financial to invest in MSRs through retention and secondary market transactions
- Insight provided by GMFS's seasoned management team into new product offerings, control of the origination process, and opportunities for future growth and expansion
- Expected accretive earnings impact of the transaction commencing in 2015
ZAIS filed an additional 8-K with the SEC on Friday, in which it detailed that it had entered into a master repurchase agreement with Credit Suisse First Boston Mortgage Capital to fund $100 million in additional purchases of residential whole loans.
Under the agreement, “ZAIS may sell, and later repurchase, a trust certificate representing ownership interests in a trust holding residential mortgage loans in aggregate principal amount of up to $100 million, of which the entire $100 million is committed. The loan repo facility will be used to fund purchases of residential mortgage loans. The loan repo facility is committed for a period of 364 days and the obligations of ZAIS are fully guaranteed by the company.”
Szymanksi said that the deal allows for the company to continue its expansion. "We are pleased to have expanded our whole loan financing capacity which enables us to further advance our residential mortgage loan strategy,” he said.