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ZAIS Group Holdings, Inc. (NASDAQ: ZAIS) owns a majority interest in, and is the managing member of, ZGP. ZGP is the sole member of ZAIS Group, an investment advisory and asset management firm focused on specialized credit strategies with approximately $3.444 billion of assets under management as of December 31, 2016. Based in Red Bank, New Jersey with operations in London, ZAIS Group employs professionals across investment management, client relations, information technology, analytics, finance, law, compliance, risk management and operations.
On March 24th 2017, ZAIS reported financial results for three and twelve months ended December 31, 2016. It recorded GAAP net income for the three months ended December 31, 2016 of $5.9 million compared with a GAAP net loss of $(11.8) million for the three months ended December 31, 2015. The increase of $17.7 million in net income was driven by an increase in revenues of $11.7 million, an increase in other income of $2.0 million and a decrease in tax expense of $4.3 million, offset by an increase in expenses of $0.3 million.
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ZAIS produced strong investment performance across its Securitized Credit, Leveraged Finance, and Credit Trading products and platforms. The fourth quarter results, while positive, reflect one material non-recurring item, “receipt of an $8.0 million termination fee as a result of the termination of investment management agreement with ZFC REIT in connection with the merger of ZFC REIT with Sutherland Asset Management Corp. (“SAM”). Management believe that ZAIS is making progress with its fund raising activities as a result of its investment in business development staffing and strong investment performance.
Over the years, ZAIS group has built significant competitive positions in various business segments. The group’s earnings and accrual to capital are expected to benefit from the expected sbuoyancy in the asset management markets over the medium term, given the group’s established market position in related businesses.
However, notwithstanding its longstanding track record along with improvement in most recent performance, ZAIS business risk profile is still crippled by the slow-pace of investment activities and considerable reduction in AUM (from historic averages), though significantly higher than the past run-rate. Therefore, ZAIS return to sustained profitability remains challenging and will depend on its success in attracting and retaining assets under management.
Description & manufacturing set-up:
ZAIS Group, LLC (“ZAIS Group”), based in Red Bank, New Jersey, provides investment advisory and asset management services focusing on specialized credit strategies. ZAIS Group has approximately $3.4 billion of assets under management across both corporate credit and mortgage-related structured credit strategies. It employs professionals across investment management, client relations, information technology, analytics, finance, law, compliance, risk management and operations.
About the promoter & operations:
The investment team at ZAIS Group is led by Christian Zugel (Chief Investment Officer), who founded ZAIS Group in 1997. The promoter has demonstrated ability to build significant competitive positions across businesses.
ZAIS Group offers investors investment opportunities in commingled funds as well as customized managed accounts for larger institutional investors, which are tailored to each client’s investment parameters and risk preferences.
ZAIS Group’s senior team has, on average, over 20 years of industry experience, covering investment management, fixed income trading, research, investment banking and financial services.
Since its inception, ZAIS Group has developed a proprietary, integrated analytics platform as a foundation for its investment process. This platform includes a comprehensive private database of corporate CDO and RMBS structures. A dedicated analytics team and technology specialists also support this platform.
Client base & Product Mix:
Since its inception in 1997, ZAIS Group has built long-term relationships with an international investor base, including public and private pension funds, endowments, foundations, insurance companies, family offices, funds of funds, sovereign wealth funds and investment advisors. ZAIS Group manages assets using a range of strategies and investment vehicles, including hedge funds, hybrid private equity funds, separately managed accounts, structured vehicles such as CLOs and, until October 31, 2016, ZFC REIT. The chart set forth below provides a breakdown of AUM.
Potential risk factors & key stock Influences over the near to medium term:
Negative profitability & sub-due growth: If ZAIS Group is unable to significantly increase its AUM, or develop new sources of revenue, its revenues and operating income will continue to be negatively impacted, and the company will likely continue to incur operating losses. If ZAIS Group is unable to execute development opportunities; it may not be able to implement its growth strategy successfully.
Decline in AUM………… ZAIS Group’s AUM has declined significantly from its peak of $11.707 billion prior to the financial crisis in 2008 to $3.4 billion as of December 31, 2016, largely attributable to the return of investor capital from certain private equity style ZAIS Managed Entities, the termination of certain legacy CLOs managed by ZAIS Group, certain investor redemptions and the challenges of raising significant new assets to replace those assets being returned to investors. While ZAIS Group had historically been profitable until 2015, it incurred net losses in both 2016 and 2015 based on GAAP.
……….leading to continuous losses and poor liquidity: The current recurring revenue base does not cover the current run-rate of compensation, and general and administrative expenses. The Company currently anticipates that its expenses in 2017 will exceed its revenues as they did in 2015 and 2016. If ZAIS Group is unable to significantly increase its AUM and thereby generate additional revenue from management fee income and potentially, incentive income, or develop new sources of revenue, it is likely that it will continue incurring operating losses. In that event, it may need to sell assets to raise cash and/or curtail certain business activities, including foregoing additional investments in newly formed ZAIS Managed Entities.
Difficult market conditions & competitive landscape: Difficult market and political conditions may adversely affect ZAIS Group’s business, including by reducing the value or hampering the performance of the investments made by the ZAIS Managed Entities, each of which could materially and adversely affect ZAIS Group’s business, results of operations and financial condition.
ZAIS Group may not be able to maintain its current fee structure as a result of industry pressure from the ZAIS Managed Entities’ investors to reduce fees, which could have an adverse effect on its profit margins and overall results of operations.
The current interest rate environment negatively impacts ZAIS Group’s business and may continue to do so. An increase in interest rates may have an impact on ZAIS Group’s ability to pursue certain of ZAIS Group’s growth initiatives.
Earnings Review
The Company recorded GAAP net income for the three months ended December 31, 2016 of $5.9 million compared with a GAAP net loss of $(11.8) million for the three months ended December 31, 2015. The increase of $17.7 million in net income was driven by an increase in revenues of $11.7 million, an increase in other income of $2.0 million and a decrease in tax expense of $4.3 million, offset by an increase in expenses of $0.3 million.
The $11.7 million increase in revenues was comprised of a net increase of $7.4 million in management fee income and $4.3 million in incentive income.
For the full year 2016, GAAP net loss was $(3.8) million compared with GAAP net loss of $(23.9) million for the full year of 2015. The year over year decrease in the Company’s net loss of $20.1 million was driven primarily by an $8.4 million increase in revenues, a $1.0 million decrease in expenses, a $10.5 million increase in other income/(loss), and a $0.2 million increase in income tax benefit.
Liquidity & capital resource:
As of December 31, 2016, the Company had cash and cash equivalents of $38.7 million and debt obligations of $1.3 million.
ZAIS Group’s operating cash flow may continue to be insufficient to fund its operating expenses which are currently funded by the proceeds of the Business Combination, reducing the amount of capital available to invest and correspondingly decreasing the amount of revenue potentially generated by the investments.
The Company currently anticipates that this negative working capital trend will continue in 2017, and could limit its ability to expand investments from the proceeds of the Business Combination, thereby decreasing the revenue potentially generated by the capital invested from the Business Combination.
Stock Performance
On Monday, March 27th, 17, ZAIS shares surged by (pre-market) 8.2% to $3.16 on a average volume of 1.51M shares exchanging hands. Market capitalization is $42.19 million. The current RSI is 60.85
In the past 52 weeks, shares of ZAIS have traded as low as $1.29 and as high as $5.74
At $2.92, shares of ZAIS are trading above its 50-day moving average (MA) at $2.27 and above 200-day MA at $2.13.
The present support and resistance levels for the stock are at $2.44 & $3.80 respectively.
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