IPO Preview: Five Oaks Investment

| About: Five Oaks (OAKS)

Based in New York, NY, Five Oaks Investment (NYSE:OAKS) scheduled an $86 million IPO with a market capitalization of $111 at a price range mid-point of $15 for Friday, March 22, 2013.

Eight IPOs are scheduled for the week of March 18th. The full IPO calendar is available here.

S-11A filed March 13, 2013.

Manager, Joint Managers: Barclays/ Credit Suisse/ UBS Investment Bank/ Keefe, Bruyette & Woods (A Stifel Company)
Co Managers: Ladenburg Thalmann/ Mitsubishi UFJ Securities/ Aegis Capital/ National Securities Corporation

SUMMARY
A residential mortgage-backed securities (RMBS) REIT.

OBSERVATION
All recent mortgage REITs have traded down the first day.

VALUATION

Market

Price to

% sold

Cap ($mm)

Book Value

in IPO

Five Oaks REIT

$111

1.0

77%

Click to enlarge

Glossary

CONCLUSION
Pass on the OAKS IPO.

BUSINESS
A residential mortgage-backed securities REIT.

Five Oaks Investment Corp. is a recently organized Maryland corporation focused on investing in, financing and managing a leveraged portfolio of agency and non-agency residential mortgage-backed securities, residential mortgage loans and other mortgage-related investments.

OAKS is externally managed and advised by Oak Circle Capital Partners LLC, the Manager.

The Manager is majority owned by its employees (including all of OAKS's officers), with a minority stake held by XL Global, Inc., a subsidiary of XL Group plc (XL). XL Group plc, through its wholly owned subsidiaries, is a global insurance and reinsurance company, and actively invests in alternative investment funds, private investment funds and investment management companies.

CURRENT PORTFOLIO
As of December 31, 2012, OAKS's portfolio consisted of Agency RMBS and Non-Agency RMBS with an aggregate fair value of $81.0 million, a weighted average yield of 3.64% and a net weighted average borrowing cost of 0.59% as reported in accordance with GAAP.

These metrics do not include Non-Agency RMBS underlying our Linked Transactions. On a non-GAAP combined basis (which reflects the inclusion of the Non-Agency RMBS underlying our Linked Transactions combined with our GAAP-reported RMBS), our portfolio as of December 31, 2012 had an aggregate fair value of $103.6 million, a weighted average yield of 4.84% and a net weighted average borrowing cost of 0.85% (taking into account the associated repurchase financing).

Leveraged
As of December 31, 2012, OAKS borrowed 2.0 times its stockholders' equity (calculated in accordance with GAAP) and 2.4 times after including repurchase agreements underlying OAKS's Linked Transactions (calculated on a non-GAAP basis).

RISKS
OAKS's Manager has had experience operating a REIT only since May 2012, and may not be able to successfully manage the business as a REIT. OAKS only began operations in May 2012.

SEASONED MGT TEAM
The senior members of the Manager's team have an average of more than 20 years of industry experience, including working together for the past ten years.

The Manager's Chief Executive Officer and President, David Carroll, and Chief Investment Officer, Kian Fui (Paul) Chong, have been managing OAKS's assets since our inception and will have primary responsibility for overseeing the management of our assets going forward. Mr. Carroll has more than 30 years experience in trading,

SPONSOR
XL Group plc , through its wholly-owned subsidiaries, is a global insurance and reinsurance company with total assets of $45.4 billion and a market capitalization of $7.5 billion as of December 31, 2012, and has actively invested in alternative investment funds, private investment funds and investment management companies.

WARRANTS
XL Investments, an indirect wholly-owned subsidiary of XL Group plc, purchased $25.0 million of OAKS's shares in a private placement in May 2012, and OAKS agreed to also issue to XL Investments warrants to purchase two shares of common stock for each share of common stock owned by XL Investments.

The warrants were issued on September 29, 2012 and each warrant entitles the holder to purchase, commencing 120 days following completion of this offering until September 29, 2019, two shares of common stock at an exercise price equal to 105% of the initial public offering price in this offering.

As part of its investment in May 2012, XL Investments also agreed to make an additional investment in us of up to $25.0 million, subject to certain conditions and over a period of time

DIVIDEND POLICY
OAKS has been paying monthly dividends at an annual rate of $1.59 since October, 2012, on 1,656,250 shares of pre-IPO stock.

However: "Any future distributions that we make will be at the discretion of our board of directors and will depend upon, among other things, our actual results of operations."

USE OF PROCEEDS
OAKS expects to net $84 million from its IPO. Proceeds are allocated as follows:

30-50% Agency RMBS (or $25.2 million to $42.0 million of our net proceeds),

15-35% Legacy Non-Agency RMBS (or $12.6 million to $29.4 million of our net proceeds), and

15-35% New Issue Non-Agency RMBS (or $12.6 million to $29.4 million of our net proceeds).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: This OAKS IPO report is based on a reading and analysis of OAKS's S-11 filing which can be found here and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.