Our results of operations are affected by a variety of factors including, but not limited to, general economic conditions, consumer confidence, wage growth, business confidence, increased investment, GDP growth, home affordability, market volatility, interest rates and spreads, aging U.S. population demographics, and the following current trends and market conditions specific to our businesses.
We expect increased volatility in the prices of leveraged loans and the valuation of CLO subordinated notes to continue throughout 2016.
Management uses EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. The Company believes that consolidated EBITDA and Adjusted EBITDA on a consolidated basis and for each segment provide supplemental information useful to investors as it is frequently used by the financial community to analyze performance period to period, to analyze a company’s ability to service its debt and to facilitate comparison among companies. The Company believes segment EBITDA and Adjusted EBITDA provides additional supplemental information to compare results among our segments. Beginning in 2016 the Company Adjusted EBITDA will also be used in determining incentive compensation for the Company’s executive officers. EBITDA and Adjusted EBITDA are not a measurement of financial performance or liquidity under GAAP; therefore, EBITDA and Adjusted EBITDA should not be considered as an alternative or substitute for GAAP.
over the prior year operating results. The primary drivers of the improvement in year-over-year results was a reduction in total operating expenses, primarily in payroll and other operating expenses, partially offset by a reductions in revenues driven by competition in the warranty segment.
Professional fees and other expenses were $31.3 million for the year ended December 31, 2015, down substantially, also as a result of cost reduction efforts. Other expenses are primarily comprised of acquisition, advertising and event costs, bank and credit card processing fees, technology expenses, filing and licensing fees, premium taxes and office rent costs.
Depreciation and amortization expense of $29.7 million for the year ended December 31, 2015 related primarily to the amortization of the intangible assets acquired. The most significant of these expenses is the amortization of the fair value attributed to the insurance policies and contracts acquired, which had a value of $36.5 million as of the acquisition date and has a steep amortization curve. Amortization of this intangible asset was approximately $19.3 million for the year ended December 31, 2015.
Care’s expenses for 2015 were $55.7 million, compared with $26.1 million for 2014, an increase of $29.6 million or 113%. Care’s expenses are comprised of interest expenses on Care’s borrowings, payroll expenses (including employees of the managers in each of Care’s Managed Properties), professional fees, depreciation and amortization of properties and leases acquired and
Corporate and Other segment - operating results for the year ended December 31, 2015 and December 31, 2014
As of December 31, 2015, the fair value of the Company’s NPL portfolio was $38.3 million (of which $9.5 million was attributable to loans purchased in the fourth quarter of 2015). The mortgage loans were purchased at a discount to their unpaid principal balances and the estimated value of the underlying real estate. The goal of the strategy is to earn a return on the investment through a restructuring and subsequent reselling of the mortgage at a gain or through foreclosure on the property and selling the property at a gain. The Company began investing in NPLs in the second quarter of 2015 and expects to continue to report minimal income through the first half of 2016, until realizations on sales of loans and/or real estate properties begin to occur in the second half of the year as costs and expenses are typically recognized at the beginning of the overall investment period while profits are realized later. For the year ended December 31, 2015, the Company reported a slight gain of $120 thousand, with gains and early realizations offsetting expenses related to establishing the strategy and purchasing the portfolio.
Corporate interest expense was $5.6 million in the year ended December 31, 2015, compared to $4.7 million in the year ended December 31, 2014. This interest expense is primarily interest on borrowings under the Company’s credit agreement with Fortress. Further details of the Company’s borrowings under the Fortress credit agreement are provided in Note 17-Debt, in the accompanying consolidated financial statements.
Balance Sheet Information - as of December 31, 2015 compared to the year ended December 31, 2014
For 2015, significant acquisition related costs represents costs in connection with Care’s acquisition of the Royal Portfolio and Greenfield II Portfolio properties included taxes of $504 thousand, legal costs of $644 thousand and $431 thousand of other property acquisition expenses as well as $280 thousand related to the Reliance acquisition. For 2014, significant non-recurring costs for continuing operations included $6.1 million associated with the Fortegra transaction.
The Company’s principal sources of liquidity are its holdings of unrestricted cash, cash equivalents and other liquid investments and distributions from operating subsidiaries and principal investments, including subordinated notes of CLOs. The Company intends to use its cash resources to continue to grow its businesses. Tiptree may seek additional sources of cash to fund acquisitions or investments. These additional sources of cash may take the form of debt or equity and may be at the parent, subsidiary or asset level.
Cash provided by continuing operations (excluding VIEs) was $16.7 million for the year ended December 31, 2014. The primary sources of cash were: increased borrowings at Siena to fund loan growth, borrowings on mortgage warehouse lines related to the acquisition of Luxury, and repayment of the Telos 5 warehouse, net of new borrowings to fund the Telos 6 warehouse.
As of December 31, 2015, Tiptree owns, directly or indirectly, approximately 81% of the assets of Operating Company with the remaining 19% held by non-controlling shareholders through their interests in Tiptree Financial Partners, L.P. (TFP). The limited partners of TFP (other than Tiptree itself) have the ability to exchange TFP partnership units for Tiptree Class A common stock at a rate of 2.798 shares of Class A common stock per partnership unit. The percentage of TFP (and therefore Operating Company) owned by Tiptree may increase in the future to the extent TFP’s limited partners choose to exchange their limited partnership units of TFP for Class A common stock of Tiptree.
ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, describes the framework for measuring fair value, and addresses fair value measurement disclosures. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
in active markets, and inputs other than quoted prices that are observable for the asset or liability. The types of financial assets and liabilities carried at level 2 are valued based on one or more of the following:
The Company also issues restricted stock units as compensation to employees. At grant date the difference between the fair market value and the cost basis of the shares is recorded as a reduction to retained earnings or an increase to additional paid-in capital, as applicable. The expense is amortized over the vesting period of the awards or upon achieving certain performance targets.
In accordance with ASU 2014-13, the Company elected to measure both the financial assets and the financial liabilities of its CLOs in its consolidated financial statements using the more observable of the fair value of the financial assets or the fair value of the financial liabilities. The liabilities of consolidated CLOs primarily consist of notes payable which are measured using the fair value of the financial assets. Upon adoption of ASU 2014-13, the notes were measured as (i) the sum of the fair value of the financial assets and the carrying value of any nonfinancial assets held temporarily, less (ii) the sum of the fair value of any beneficial interests retained by the Company (other than those that represent compensation for services) and the Company’s carrying value of any beneficial interests that represent compensation for services.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which makes targeted improvements to the recognition, measurement, presentation and disclosure of certain financial instruments. ASU 2016-01 focuses primarily on the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for certain financial instruments. Among its provisions for public business entities, ASU 2016-01 eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost, requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires the separate presentation in other comprehensive income of the change in fair value of a liability due to instrument-specific credit risk for a liability for which the reporting entity has elected the fair value option, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) and clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. ASU 2016-1 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted for a limited number of provisions. The Company is currently evaluating the effect on its financial statements.
Specialty Finance is comprised of Siena Capital Finance LLC (Siena), which commenced operations in April 2013, and our mortgage businesses which consists of Luxury, which was acquired in January 2014 and Reliance which was acquired in July
Asset Management operations is primarily comprised of Telos Asset Management’s (TLAM) management of CLOs and Muni Capital Management’s (MCM) management of Non-Profit Preferred Funding Trust I (NPPF I). Both TLAM and MCM are subsidiaries of Tiptree Asset Management Company, LLC (TAMCO), an SEC-registered investment advisor owned by the Company. NPPF I is a structured tax-exempt pass-through entity that holds tax-exempt bonds for the benefit of unaffiliated investors.
Available for sale securities are generally classified within either Level 1 or Level 2 of the fair value hierarchy and are based on prices provided by an independent pricing service and a third party investment manager who provide a single price or quote per security.
We determine the purchase price for NPLs at the time of acquisition and for each subsequent valuation by using a discounted cash flow valuation model and considering alternate loan resolution probabilities, including modification, liquidation, or conversion to REO. Observable inputs to the model include loan amounts, payment history, and property types. Our NPLs are on nonaccrual status at the time of purchase as it is probable that principal or interest is not fully collectible. The following table sets forth quantitative information about the significant unobservable inputs used to measure the fair value of our NPLs as of December 31, 2015 (the Company did not invest in NPLs in the prior year period):
Due from Brokers, Dealers, and Trustees and Due to Brokers, Dealers and Trustees: The carrying amounts of these assets and liabilities approximate their fair value due to their relatively liquid or short-term nature. Categorized as Level 2 of the fair value hierarchy.
The Company is exposed to interest rate risk when there is an unfavorable change in the value of investments as a result of adverse movements in the market interest rates. The Company enters into interest rate swaps (IRS) to protect against such adverse movements in interest rates. The Company is required to post collateral for the benefit of the counterparty. This is included in other assets in the Consolidated Balance Sheet.
For the year ended December 31, 2015, the pretax loss recognized in AOCI on the derivative-effective portion was $54, with a pretax loss reclassified from AOCI into income-effective portion of $274. The amount estimated to be reclassified to earnings from AOCI during the next 12 months is $24. These net losses reclassified into earnings are primarily expected to increase net interest expense related to the respective hedged item.
As of December 31, 2015, Luxury has three separate warehouse lines of credit in place with a combined maximum borrowing amount of $90,500. The credit agreements pay a floating rate of LIBOR plus 2.75% (with a minimum LIBOR of 3.00%). Luxury’s three credit agreements contain customary financial covenants that require, among other items, minimum amounts of tangible net worth, profitability, maximum indebtedness ratios, and minimum liquid assets. As of December 31, 2015, Luxury believes it was in compliance with financial covenants.
As of December 31, 2015, the Company terminated the financial and accounting services and legal and compliance services of the TSA.
The Company’s provision (benefit) for income taxes is reflected as a component of (loss) from continuing operations and consists of the following: