Acres Commercial Realty Corp (ACR) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Third Quarter 2006 Resource Capital Corp Earnings Conference Call. This call -- my name is Lauren and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

As a reminder, this call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Jonathan Cohen, CEO of Resource Capital.

Thank you and thank you for joining us for Resource Capital Corporation's Third Quarter Earnings Conference Call. Before I begin I would like to read the Safe Harbor statement. When used in this conference call the words believe, anticipates, expects and similar expressions are intended to identify forward-looking statements.

Although the company believes that these forward looking statements are based on reasonable assumptions, such statements are subject to certain risks and uncertainties, which could cause actual results to differ from those -- from these contained in the forward looking statements. These risks and uncertainties are discussed in the company's reports filed with the SEC, including its reports on forms 8-K, 10-Q, and 10-K.

And in particular, item one on the form 10-K report under the title Risk Factors. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The company undertakes no obligation to update any of these forward-looking statements.

Again, this is Jonathan Cohen, CEO and President of Resource Capital Corporation and thank you for joining. The third quarter was a meaningful and exciting quarter for Resource Capital. We achieved four major items. First, we supplemented our existing origination and underwriting capabilities in our commercial real estate debt business by adding a major west coast presence. We continued to build this team having also added a junior underwriter in Los Angeles.

Second, we completed our first commercial real estate CDO and locked in rather cheap liabilities to fund our business for period of up to ten years. Third, we continue to add commercial finance assets, both originated by our leasing and small ticket loan team, as well as by our bank loan investment team. Fourth, we sold our agency RMBS portfolio which allowed us to stabilize our balance sheet and to focus that low returning equity on our more profitable and value added businesses.

We are positioned to take that $53 million of equity and reinvest it at rates that are equivalent to those, at least on our existing commercial real estate portfolio, approximately 15%. This should increase our ability to increase dividends in future quarters. These achievements have started to be recognized by the marketplace and we have enjoyed the start of what we think will be the recognition of a great business and great business model.

Signs that Resource Capital will grow are evident by one, our pipeline in commercial real estate. $440 million as of September 30th and growing. Two, our record closing of $175 million of commercial real estate assets in the third quarter. Three, our continued performance on the commercial finance side of our business. We are looking forward to bearing the fruit of these efforts in the next two or three quarters.

Now, for the financial results. As previously reported on September 28th, 2006, the company sold the remainder of its agency residential mortgage backed securities, RMBS portfolio and terminated the related interest rate swap contract. RCC included in this operation, operating results for the third quarter a net loss of $8.3 million. Including this transaction, the company reported a net loss of 2.4 million or $0.14 per diluted share for the quarter ended September 30th 2006 as compared to net income of 3.8 million or $0.24 per diluted share for the quarter ended September 30th, 2005.

The company also reported estimated REIT taxable income, a non-GAAP financial measure which was $9.2 million, or $0.52 per diluted share for the quarter ended September 30th, 2006 as compared to 4.6 million or $0.22 per share diluted for the quarter, ended September 30th, 2005. Adjusted for the gain on the termination of the swap related to the agency sale, REIT taxable income was 6.6 million, or $0.37 per diluted common share.

Income from ongoing operations excluding the loss in the agency sale was $5.9 million for the quarter ended September 30th 2006 as compared to 3.8 million for the quarter ended September 30th, 2005. An increase of 2.1 million, or 36%. Our dividend. Resource Capital Corporation paid a quarterly dividend of $0.37 per common share for the third quarter of 2006. An increase of $0.01 per common share or 3% from the dividend paid for the second quarter of 2006.

This distribution was paid on October 13th 2006 to all shareholders of record as of September 29th 2006. The asset mix and origination. I'm going to take just a few moments to describe in general the mix of the portfolio. Our commercial real estate portfolio of loans of $440 million is comprised of $76 million in whole loans, 17%, $43 million in A notes, 10%, 162 million of B notes, 37% and 159 million of mezzanine lending loans, 36%. Our portfolio by type; 112 million in hotels, 109 million in multifamily, 99 million in office, 64 million in retail, 13 million in storage, 22 million in mixed use and 21 million in condo conversion.

From a geographic standpoint it looks like our operation, 131 million in the New York area, 120 million in western United States and approximately $100 million in various other locations throughout the United States. $79 million in the southern US and $13 million in Illinois. Our bank loan portfolio of approximately -- and this is our bank loan portfolio of approximately $615 million covers over 30 industries, our top five are in healthcare 10%, diversified 8%, broadcasting and entertainment 7%, building and real estate 7% and chemicals, plastics and rubber 5%.

Now, I will ask Dave Bloom, the Senior Vice President of Real Estate at Resource Capital to walk through some of the commercial real estate transactions originating on the commercial real estate side. I am particularly impressed with our continued ability to work with borrowers of substance and expertise in acquiring and repositioning all different types of assets.

Dave, if you wouldn't mind just walking us through a few sample transactions that we did over the last period of time.

Sure. Thanks Jonathan. I'd like to highlight three recent loans that we originated, and as Jon said are emblematic of the types of deals that we're doing. First is a $7.5 million mezzanine loan secured by four contiguous buildings on the Upper West Side of Manhattan. The buildings are very typical, the brownstones in that part of New York City and consist of retail on the street level with apartments above.

The majority of commercial space in the buildings is leased to national retailers. The term of this loan is ten years and it's priced at 372 basis points over the swap yield. Our first and last dollar loan to value positions in this loan go from 66% to 85% and the borrower group is an established relationship that we have made a loan to previously. Next is a $25 million B note secured by three adjoining office buildings in Midtown Manhattan.

The whole loan was made to a substantial institutional sponsor and is another repeat borrower relationship. The term of the loan is ten years and is priced at 250 basis points over corresponding treasuries. Our position in this loan goes from 66% to 75% on a loan to value basis. This loan has well located New York office buildings as collateral and provides diverse and predictable cash flows from a varied tenant roster.

Finally, we've originated, during the process of closing at $61.6 million whole loan, but a secured by a cross-collateralized pool of ten apartment buildings in San Francisco. This loan provides acquisition financing for one of the largest owners of multifamily properties in San Francisco, and will serve as a 30 month bridge facility while the borrower implements a plan to improve the units and roll rents to current market levels. This was a structured finance opportunity originated out of our relatively new Los Angeles office. And in addition to pricing at 365 basis points over LIBOR, the loan also features fees, in and out, as well as elements of recourse [the] high net worth [inaudible] of a very established borrower.

In general, our portfolio of closed positions is performing extremely well, and we continue to see a full forward pipeline with strong credit characteristics and both pricing and structure that are inline with our expectations.

Thank you Dave. I'd like to now turn it over to the other Dave, Dave Bryant, CFO of Resource Capital Corp to walk you through the financial highlights.

Thank you, Jonathan. It is my pleasure to be here today to walk you through some financial highlights for the third quarter ending September 30th, 2006. The company increased its book value per common share at September 30th, 2006 by $0.45 per share to 12.91 as compared to 12.46 at December 31st 2005, which is a 3.6% increase.

This is based on total stockholders equity of 230 million on September 30th 2006 and 195.3 million at December 31st 2005. And total shares outstanding of approximately 17.8 million and approximately 15.7 million at September 30th and December 31st respectively. To describe the book valuation a little more thoroughly, we saw substantial improvements of approximately 8 million since June 30th, 2006, in the mark to market of our agency RMBS that is before selling the pool portfolio of $0.45 per share.

This improvement was offset by negative market adjustments of about 3.9 million in cash flow hedges related to our commercial real estate and direct financing and leasing portfolios. As Jon explained, the company sold its entire agency RMBS portfolio on September 27th 2006. The trade settled on October 2nd, 2006. The net realized loss of 8.3 million on the portfolio sale had two components. The amount of the loss on the sale of the securities of 10.9 million was offset by a gain on related hedging activities of 2.6 million.

The 10.9 million realized loss on the sale of the securities is characterized as a capital loss for tax purposes. This capital loss is deductible only to the extent it has offsetting capital gains. Since we do not expect to use all of this capital loss in 2006, this amount is not deducted in arriving at our estimated REIT taxable income for the quarter and year to date, and the loss does not impact our 90% distribution requirement under the internal revenue code.

On the contrary, the gain on the termination of the associated cash flow hedges, that is those hedges associated with the agency portfolio, is included in REIT taxable income and does impact our 90% distribution requirement under the IRS code. Our board declared a dividend of $0.37 per common share or 6.6 million in the aggregate for the quarter end September 30th 2006. For the nine months ended September 30th we have declared dividends of $1.06 per common share and estimate REIT taxable income of 23.5 million or $1.35 per common share. We do intend to maintain our qualification as a REIT under the IRC by making distributions of at least 90% of our annual REIT taxable income.

At September 30th, 2006, RCC's investment portfolio, net of the agency sale, totaled approximately 1.6 billion. And in addition to the 614.9 million of commercial bank loans, which is about 39% of the portfolio, we had invested 467 million, or about 30% in commercial real estate related investments, 368.8 million or 23% in asset backed securities, 91.9 million or 6% in leasing assets and 42.6 million, or 3% in temporary cash investments.

Also at September 30th, RCC's investment portfolio was financed after giving effect to the agency sale proceeds with approximately 1.4 billion of total indebtedness and included the following. About 1.23 billion of senior CDO notes, 87.1 million outstanding on our term facility, and 53.7 million of REIT purchase agreements. We also sourced 51.5 million from our unsecured junior subordinated debentures related to our two TRUPs issuances, our first in May and second at the end of September 2006.

We ended the period with 230 million in book equity. At September 30th, the approximately 1.4 billion in RCC borrowings had a weighted average interest rate of 5.85% and a weighted average maturity of 15 years. We consider leverage ratio from two standpoints. On a book basis, after applying the proceeds from the agency sale, our leverage is approximately 6.2 times. When we consider our TRUPs issuances, which have a remaining term of nearly 30 years as equity, we see our leverage on a net book basis drop to 4.9 times.

To conclude, on an equity allocation basis, the portfolio described above breaks down as follows; commercial real estate loans 48%, commercial bank loans 20%, ADS 10%, and direct financing leases and notes of 2%. The remaining 20% of our equity at September 30th was tied up in the pending settlement of the agency RMBS portfolio. We have since redeployed that equity by paying down the commercial real estate repurchase agreement debt, and investing in new commercial real estate loans, described by Dave Bloom, after the end of the quarter.

With that, my formal remarks are completed and I'll turn the call back over to Jonathan Cohen.

Thank you, Dave. And with that, I think we'll open the floor to any questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Douglas Carter with Credit Suisse.

Hi Jonathan, I wad wondering if you could talk -- you guys showed a nice acceleration in commercial loan growth in the quarter -- commercial mortgage growth, can you just talk about how you look out for the fourth quarter and into 2007?

I think that the pipeline which I described of $440 million, right now, I think we're estimated to average about $70 million per month in the fourth quarter. Which should look to about 210 million -- 200 to 220 million.

And just for a reference point, do you have what that pipeline was at the end of the second quarter?

I don't have it, but I would imagine it was probably about half.

Okay. And --

That was my gut feel.

And sort of where -- can you just talk about sort of where you're seeing those opportunities, is it through the increased originators or its sort of --?

Yes, the bulk of the -- the bulk, I mean really, the bulk of our pipeline really comes from our origination team, both in the west -- on the west coast as well as in New York and we're starting to see, as Dave Bloom talked about, repeat borrowers - we've actually had two or three guys, companies come back to us and want to do a second loan. So those guys are teeing up new things and its sort of feeding itself. So, most of it I would say is on the self-originated side.

Great. Thank you.

But we -- just to be clear Doug, as I told you in the past. We do like the relative value play of a good D note where we can make some extra spread for not being in any kind of dangerous position.

Great. Thanks.

You're welcome.

[OPERATOR INSTRUCTIONS]

There are no further questions in the queue.

Okay. Thank you, very much. We look forward to joining you again in one quarter.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.