Five Oaks Investment Corp. Reports First Quarter 2016 Financial Results

NEW YORK, May 10, 2016

First Quarter and Subsequent Events Summary

• Realized a negative economic return on our common stock of 13.4% after accounting for dividends of $0.18, primarily resulting from realized and unrealized losses on credit sensitive assets, as well as hedge losses (principally unrealized) exceeding unrealized gains on our Agency RMBS.⁽²⁾
  
  
• Reflecting our continued concern with market volatility in general and credit market conditions in particular, we reduced our Non-Agency RMBS exposure from $121.5 million at December 31, 2015 to $84.4 million at March 31, 2016. Realized losses on these sales contributed to our negative results for the quarter.
  
  
• On February 12, 2016, the Federal Housing Finance Authority (FHFA) adopted a final rule revising its regulations governing Federal Home Loan Bank (FHLB) membership. The rule required that our wholly owned captive insurance subsidiary wind down its transactions and terminate its membership with FHLB-Indianapolis on or before February 19, 2017. We have repaid all of the $49.7 million of advances that were outstanding at December 31, 2015, via the use of regular repurchase agreements, and have redeemed $2,391,000 of the $2,403,000 of our FHLB stock outstanding at December 31, 2015.
  
  
• On April 25, 2016, effected a re-securitization of certain first loss Multi-Family MBS securities backed by Freddie Mac K Certificates with a certificate principal balance of approximately $32.1 million, permitting the repayment of all related repurchase agreement financing. Additionally, on April 21, 2016, sold first loss securities from another Freddie Mac K Series transaction with a certificate principal balance of approximately $79.7 million, plus related interest only securities, permitting the repayment of all related repurchase agreement financing

(1)  Core Earnings is a non-GAAP measure that we define as GAAP net income, excluding impairment losses, realized and unrealized gains or losses on the aggregate portfolio and certain non-recurring upfront costs related to securitization transactions. As defined, Core Earnings includes interest income or expense and premium income or loss on derivative instruments.

(2)  Economic return is a non-GAAP measure that we define as the sum of the change in net book value per common share and dividends declared on our common stock during the period over the beginning net book value per common share.

Management Observations

David Carroll, Five Oaks' Chairman and CEO commented: "Wider credit spreads on our investments combined with higher hedging costs in a period of volatile interest rates were the primary drivers of our disappointing negative economic return on book value for the quarter. The volatility that affected markets in the second half of 2015 spiked noticeably in the first quarter of this year, as rising global economic and commodity price concerns accentuated pressures on risk assets, including credit sensitive mortgage assets. Through mid-February, a wide range of fixed income markets experienced a particularly marked decline, exacerbated by what we view as a systemic reduction in market liquidity resulting from new capital and liquidity regulations that are being applied to banks and large bank dealer counterparties. Conditions began to improve towards the end of the quarter although we believe volatility in both interest rates and credit spreads are in a period of secular elevation. 

We maintained a more defensive investment approach, further reducing our Non-Agency RMBS positions to $84.4 million at quarter end, down over 70% since the end of 2014. Consistent with our increased emphasis on liquidity, after quarter end we also completed two re-securitizations of Multi-Family MBS first-loss positions, which allowed us to reduce our short term tri-party repo funding by effectively "terming-out" senior liabilities, while retaining upside potential on the underlying assets, and increasing our cash position. These transactions also reduced by approximately 50% our exposure to cash margin calls on our Multi-Family MBS portfolio.