Tiptree Financial's (TIPT) CEO Jonathan Ilany on Q2 2016 Results - Earnings Call Transcript

| About: Tiptree Financial (TIPT)

Tiptree Financial Inc. (NASDAQ:TIPT)

Q2 2016 Earnings Conference Call

August 09, 2016, 10:00 AM ET

Executives

Jonathan Ilany - CEO

Sandra Bell - CFO

Michael Barnes - Executive Chairman

Analysts

Operator

Greetings and welcome to the Tiptree Financial Incorporated Second Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. A 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, Ms. Sandra Bell, Chief Financial Officer of Tiptree. Thank you. You may begin.

Sandra Bell

Good morning. Welcome to our second quarter 2016 earnings call. I am joined today by our Executive Chairman, Michael Barnes. We have 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.

Our remarks today are qualified in their entirety by the disclaimers on page one of the presentation. Prior to turning the call over to Michael I just want to highlight a few of the key points.

The presentation supplements our SEC filings and its provided 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. We also use non-GAAP measures which we believe provide additional information useful to investors. As these measures are not GAAP, they should not be used as a substitute for our GAAP disclosures. The appendix provides a reconciliation of each of these non-GAAP measures to their GAAP equivalent.

Having reviewed these disclaimers, let me turn the call over to Michael.

Michael Barnes

Thanks, Sandra. Good morning, everyone and thank you for joining us today. For the quarter, we continue to see positive trend across our businesses.

On a consolidated basis, total revenues grew 32% year-over-year to $134 million, while contributing $7 million of net income and $17.4 million of adjusted EBITDA from continuing operation. Both of these operating metrics were up significantly versus comparable periods in 2015.

We continue to execute against our strategic priorities. On Page 3 we summarize some of our key achievements for the second quarter. Fortegra continues to build positive momentum with another strong quarter. Insurance on warrantee net return premiums grew to $96 million for the first half, up 23% versus last year.

Pretax income and adjusted EBITDA were $8.1 million and $11.4 million respectively, continuing the positive earnings trends from Q1. With A.M. Best upgrade with Fortegra’s CEO, Rick Kahlbaugh and his team expect to see steady growth through expanding product origination and adding client.

In addition, we are focused on investing the excess premium flow to enhance the investment return. With our specialty finance segment, the mortgage business bounced back originating $432 million of volume up 30% over the first quarter. A stable housing market and low interest rate were key drivers for the increase as re-financings and the home selling season supported origination.

Care, our senior housing business, contributed $15 million of revenues while expanding NOI margin as actions taken to improve property occupancy levels and stabilized cost are flowing through the bottom-line.

The senior housing pipeline remains strong and we anticipate continued growth through new acquisitions and NOI improvements at existing properties.

We recently closed our third managed property acquisition of the year on August 1, for $29 million. Our Telos asset management business continues to produce steady cash flow as we receive nearly $12 million of cash from management fees and distribution on our subordinated note holding year-to-date.

We saw positive results from our principle investment with $7.5 million of revenue in the second quarter, primarily driven by our credit opportunities fund and investments in non-performing mortgages. These investments have been a big driver of our year-over-year increase in profits as both investments were seeded in second quarter 2015.

From a capital allocation perspective, we had a busy quarter reinvesting in our core businesses as well as redeploying capital to increase shareholder value.

For the core business, we invested approximately $11 million in NPL bringing the total portfolio to $62 million. We allocated $26 million of capital from a Telos 7 warehouse for the launch of our 7 Telos.

The largest transaction of the quarter was a block purchase of $5.6 million shares of Tiptree for $36.4 million. This transaction was completed at a 29% discount to book, accretive to both book value and earnings per share.

On the bottom of the page, we highlight book value for Class A share, which increased by 9.7% from $8.96 at year end to $9.83 as of June 30.

Growth in book value was a result of strong earnings, our share buyback program and a larger block purchase. On a pro forma basis, we estimate an additional $0.05 of earnings per class A share assuming that the repurchase had occurred on January 1.

With that, I will hand it back to Sandra who will discuss the financial results.

Sandra Bell

Thank you, Michael. As Michael mentioned our second quarter results were up across the Board with all our segment contributing. On a per share basis, earnings per Class A share both overall and from continuing operations was $0.17 per share.

Earnings per Class A share from continuing operations were up $0.20 from the prior year while overall net income per Class A share decreased over the prior year due to $21 million or $0.50 per share of discontinued operations in the second quarter of 2015, of the amount, $16.3 million related to the gain on the sale of PFG.

While total stockholder’s equity is down on absolute terms since yearend, primarily as a result of the block purchase that we executed the end of June, book value per Class A share grew $0.87 or 9.7% as a result of both earnings performance and the block purchase below book.

Just a quick accounting note, the shares we bought back through the block purchase are held at subsidiary, but are treated as treasury shares under GAAP. These shares are being reserved for future uses, which range from potential acquisition currency to compensation.

On Page 5, we've laid out the components of our first half 2016 operating performance, which mirrors the second quarter trend.

In short, each of our segments were also up double-digits, the revenue, pre-tax income and adjusted EBITDA from continuing operations.

In total, revenue has grown $75.5 million, pre-tax income from continuing operation was up $23.4 million and adjusted EBITDA from continuing operations increased by $20.8 million versus the first half of 2015.

The high level themes are similar to the second quarter results, Fortegra's profits have increased driven by growth in written premiums, net revenues, investment income and margin expansion stemming from disciplined cost management.

Our senior housing performance is up as NOI margins have improved at existing properties and acquisitions have increased our overall revenues and pre-tax earnings.

Improvement in volumes and margins in the mortgage business with the acquisition of Reliance and growth in CMS loan portfolio drove positive results in specialty finance and principal investments are up substantially primarily driven by realized and unrealized gains as well as earnings on the credit opportunities fund and NPLs which have helped to offset increased corporate cost.

With that, we will now transition to a more detailed analysis of each segments performance and outlook. Page 7 highlights four metrics that we use to measure our insurance and insurance services segments. As adjusted revenue, as adjusted net revenues, adjusted EBITDA and net written premiums.

The adjusted revenue measures are non-GAAP measures because they removed the purchase accounting adjustments from their comparable GAAP metrics. We use these metrics to analyze the relative performance of the business year-over-year.

For the quarter, adjusted EBITDA was $11.4 million up 24% from the prior year as adjusted net revenues were up approximately $1 million or 3% as a result of improvements in investing income.

Operating expenses were down $1.4 million due to the continued cost discipline. For the first half, we saw year-over-year improvement in net revenues from credit protection and specialty products slightly offset by ongoing competitive pressures in the mobile protection product.

Net written premiums a volume metric and leading indicator of future revenues increased by 23% with all three product lines gaining momentum over the first half, this is particularly encouraging as warranty net written premiums reverse trend and were up almost 27%.

For the second half of the year, while we expect earnings growth to be supported by expansion in product revenue and investment income, the pace of growth may be tempered relative to that in this quarter and in the first half.

Moving to our specialty finance segment on Page 8, pre-tax income was $2.3 million for the second quarter, a $1.7 million increase over 2015. This was driven by the addition of Reliance and its mix of FHLBA products which also led to a 229 basis point increase in mortgage margins.

Single family mortgage originations for the overall market were up 47% versus the first quarter of 2016 which was driven by favorable market conditions, and lower interest rate but were flat versus the second quarter of 2015.

For the first half, pre-tax income is up 30% as a result of increased originations which was slightly offset by additional personnel and marketing expenses.

We invested in additional loan office headcount which was up approximately 20% from last year with the strategy to gain additional market share and volume in the second half of 2016 and beyond. CMS our middle market lending platform also added to the improved performance with average earning assets up 25%.

Turning to the real estate segment on the following page, we continue to see improvement as a result of additional acquisitions and improving margins on existing properties.

Pre-tax income improved by 41% in the quarter versus the same period in 2015 and was up 18.5% year-to-date despite added depreciation for new acquisitions. Adjusted EBITDA for the quarter was $2.3 million up 15% from last year driven by NOI increases of 21%.

The acquisitions over the last 18 months were primarily managed properties where we partner with existing operators to focus on the facilities that are undergoing 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 24.2% to 26%.

As the newer facilities ramp up and stabilize we expect our results to continue to improve. In addition to growing organically, we are continuing to invest and we expect to acquire additional properties in the second half of 2016.

For asset management on Page 10, the second quarter of -- for the second quarter of 2016 pre-tax income was up nearly $1 million year-over-year primarily attributable to the normalization of our incentive compensation accruals versus 2015.

We expect to see modest increases in fee revenue in subsequent quarters as a result of the Telos 7 issuance and are continuing to pursue opportunities to increase AUM for this segment. Turning to the corporate and other segment on Page 11, our second quarter pre-tax income was up $7.4 million from the prior year.

Key drivers include improvements in our CLO equity performance of $5.1 million over the second quarter of 2015 as a result of increased distributions and recovery of prior unrealized credit marks on our subordinated notes in Telos 5 and 6.

Earnings of $3.2 million from interest income on our credit investment and sales of our remaining warehouse parts, $1.3 million from our NPL investments as we begin to see the impact of early realizations and loan modifications, all of which was offset by increases in payroll of $0.3 million as we have increased our staffing and augmenting our SEC reporting expertise in the finance and accounting team. And increases an external cost of $3 million related to audit fees and additional SOX expenses.

For the first half performance in our corporate segment was a big contributor with increases in adjusted EBITDA at $11.8 million driven by returns on principle investments added in the second half of 2015.

Costs are up year-every-year although we feel our infrastructures vastly improved and approximately $2 million of the cost increased was associated with material weakness remediation that should not repeat going forward.

Now I will pass it back to Michael for a wrap.

Michael Barnes

So to summarize Tiptree’s results for the quarter and the first half. We are pleased with our first half our performance given the significant improvement in all of our performance measures release the continuing operations versus the prior year.

Our focus for our core business is to support growth of repeatable earning, and we are optimistic that we will continue to see growth in our core businesses through the remainder of this year.

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 in addition to CLOs, we're leveraging our strong performance and credit opportunities to assess the potential for raising additional capital in other fund vehicles for managed accounts.

Our specialty finance sector had a strong second quarter. We are investing in the expansion of the existing business by increasing our loan officers which should yield improved production in the future.

Our corporate and other sector pretax earnings were positive as the improved performance of our principal investment more than offset the growth at our company’s administrative expenses.

And importantly for the second half of the year, we are focused on driving additional progress on this year's objective of exiting non-core underperforming asset we allocating that capital to existing core businesses and further building out our infrastructure.

And now we're happy to take your question.

Question-and-Answer Session

Operator

Thank you. The floor is now open for question [Operator Instructions].

Thank you. At this time I'd like to turn the floor back over to Ms. Bell for any closing comments.

Sandra Bell

Thank you, Donna. And thanks to everyone for joining us today. If you have any questions please feel free to reach out to me directly. We look forward to speaking with you again after the third quarter results are in. This concludes our conference call.

Operator

Ladies and gentlemen thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time. And have a wonderful day.

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