Acres Commercial Realty Corp (ACR) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2007 Resource Capital Corporation Earnings Conference Call.

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Mr. Jonathan Cohen, President, Chief Executive Officer of Resources Capital. Please proceed.

Thank you and welcome to the First Quarter 2007 Conference Call for Resource Capital Corp. I am Jonathan Cohen, CEO and President of Resource Capital and before I begin I will take a moment to read the Safe Harbor statement.

When used in this conference call the words believes, 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 materially from these contained in the forward looking statements.

These risks and uncertainties are discussed in the company's report filed with the SEC including its reports on forms 8K, 10Q, and 10K. And in particular, item one on the form 10K 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, thanks for joining us. Now for the earnings.

Net income for the quarter was $9.4 million, or $0.38 per share diluted, an increase of 4.9% over - above last quarter even with the addition of 1.1 million shares, which primarily came from the shoe being exercised on the December transaction, as well as warrants being exercised.

Net interest income was $13.2 million, an increase of 61% over the same period in 2006. And estimated re-taxable income was $9.7 million or $0.39 per share. We declared a dividend of $0.39 for the quarter.

We started 2007 with a stated mission, to grow our commercial real estate and commercial bank loan platforms meaningfully and I believe the results of the first quarter demonstrates accomplishment in that regard.

We are very proud of the following accomplishments -- we originated over $486 million of total assets in the quarter ended March 31, 2007, including a gross origination of approximately $228 million of commercial real estate loans including future funding obligations.

This is quite an achievement for our company. We feel confident that we will originate at least $450 million, if not $500 million of new real estate loans including these obligations by the end of the June 30th quarter.

After the quarter on April 17th, we priced [Apodo Cinqo], a $350 million CLO, which will match fund additional commercial bank loan assets, we invested in at a tremendously low weighted average rate of LIBOR plus 51. These are long-term liabilities and we're going to enjoy them.

We commenced our CMBS platform with the hiring of [Joan Sapensley] from Teachers and [Eureko Wy] from JPMorgan. We did so at the right time as before starting to invest meaningfully we saw a spread widening in that asset class allowing us to buy into a much wider market.

This bodes well for our future return on equity in that business. As spreads have widened in CMBS we will be able to take advantage of those new spreads in new match funded vehicles.

We shifted our origination capacity in commercial real estate loans from 90% B notes in Mezzanine and 10% whole loans to over 65% whole loans and 35% mezz and other.

This mix and our continued dedication to growing out this ability to self originate has proven to be good as we continue to see the fees surrounding origination extension and exit come to the bottom line. This will become meaningful as we shift the portfolio in whole over the next few quarters.

We have set ourselves up to increase our dividends meaningfully over each of the next three quarters.

Odds for credit in the commercial real estate and commercial finance portfolios, we have seen a continuation of excellent credit and have no issues in either of these portfolios.

We are proud of these results and have adequate liquidity to continue to invent and increase net interest income, re-taxable income, and net income.

Now, I will ask Dave Bloom, Senior Vice President of Resource Capital Corp and President of Resource Real Estate Funding to review our commercial real estate portfolio and pipeline and then I will come back to review the other portfolios and assets.

Thanks very much, Jonathan. Our commercial mortgage portfolio has a current committed balance of approximately $790 million across a diverse and granular pool of 48 separate loans.

The forward pipeline remains very strong with additional loans totaling approximately $165 million in the process of due diligence and closing and many additional transactions in earlier stages of underwriting and structuring.

Our $955 million of closed and in process commercial mortgage positions break down in components as follows -- 53% whole loans, 22% B notes, and 25% mezzanine loans.

For the current quarter we are projecting $200 million to $250 million of new originations. We continue to see very strong credit characteristics in our deals and maintain a full forward origination pipeline on average of between $200 million and $250 million per quarter.

Our collateral base continues to be diversified across the major asset categories with a portfolio breakdown as follows -- 22% multi-family, 27% in office, 23% hotel, 18% retail, and 10% other, such as industrial, flex office, and self-storage.

Our strong focus on directly originated loans continues to drive a shift in our mix of collateral. The projected originations for the current quarter are indicative of this mix shift with approximately 66% of this quarter's production consisting of self originated whole loans.

We anticipate future originations to conform to the stratification seen in our current quarter and continue to project between 60% and 75% of our new collateral being directly originated whole loan.

Our direct origination platform operates on a nationwide basis and is of significant note to our business model. As I've noted before, our self-originated whole loans are typically structured with origination and exit fees and the borrower is responsible for all costs associated with the transaction.

In addition, many of our whole loans are structured to provide elements of borrower recourse and other credit enhancements.

In general, our whole loans provide a considerable boost to ROE and will continue to see increased returns from our commercial mortgage portfolio as existing subordinate depositions are repaid and more self originated whole loans are added.

Another benefit of our direct origination platform is the deep relationships we are able to maintain with borrowers.

In addition to several repeat borrowers we have seen larger loan opportunities from our relationship borrower base.

Since we are sensitive to both borrower and asset type concentration issues, we have a network of loan buyers that we go to in order to limit single loan exposure. In the last quarter we sold participations in three self originated whole loans totaling approximately $65 million in the aggregate.

The ability to participate out positions in our loans allows us to keep servicing borrowers while maintaining a granular portfolio with appropriate concentration levels.

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

With that, I'll turn it back to Jonathan, rejoin you for Q&A at the end of the call. Thanks.

Thank you, Dave. On the commercial corporate side of our business we continue to see a benign credit environment and have now issued three match funded vehicles including the one we just prices Apodo Cinqo, which allows us to actively invest in the commercial bank loan market with extremely cheap liabilities.

Portfolio statistics are as follows -- we have $871 million of bank loans encompassing over 30 industries. Our top five are healthcare 10.2%, diversified 8.3%, printing and publishing 6.7%, chemicals, plastics, and rubber 6.2%, broadcasting 5.9%, and utilities 4.9%.

All of our loans are not only performing, but we have a positive mark on the portfolio. As of the end of the quarter our average loan asset yields 2.28% and our liabilities are costing us 46 basis points over LIBOR.

On our leasing portfolio and small business loan portfolio, all of our assets are performing and the average yield is 8.57 fixed and our liabilities are costing us 6.33. Again, no issues in either of these portfolios.

I would like to now commend on our ABS portfolio. We have a total of $27 million of maximum exposure to this portfolio. It is our only residential mortgage exposure in the REIT.

The ABS portfolio was marked down substantially through our other comprehensive income, in fact, it was marked down beyond our maximum investment exposure.

Unfortunately, in this situation, GAAP and the economics of this situation are not aligned. Therefore our GAAP book value is not equal to our economic book value.

This mark was caused by tremendous widening in the ABS market in general resulting in tremendous illiquidity and risk premium.

Our portfolio continues to perform and threw off approximately $1.4 million in this quarter. Hard to believe it is worth a negative amount. We are monitoring this portfolio with utmost attention and will continue to do so.

We are very excited about where we are going here at Resource Capital Corp in 2007 and look forward to continuing to build - to building our company. We are pleased that we have substantial liquidity and a lot of good investment opportunity.

We are looking forward to continuing to build our commercial real estate and commercial loan businesses, which are at the core of this operation. We were just starting to hit our stride.

Now, I will ask Dave Bryant, our Chief Financial Officer to review our financials.

Thank you, Jonathan. I'll now walk you through some financial highlights for the quarter ended March 31, 2007.

Our board declared a dividend of $0.39 per common share for a total distribution of $9.7 million for the quarter ended March 31. Our estimated re-taxable income for the same three-month period was also approximately $9.7 million, also $0.39 per common share.

We were able to increase our dividend by a penny or 2.6% over the regular dividend of $0.38 for the fourth quarter of 2006 while simultaneously increasing our share base by approximately 38% since the fourth quarter dividend record date.

This increase in our share base is primarily the product of the additional 6.65 million shares from our December follow on offering and related January green shoe exercise and approximately 325,000 net shares issued as a result of warrant exercises.

Fueled by our follow on offering, RCC's assets increased during the quarter ended March 31, 2007 by $325 million, or 18% to $2.1 billion from $1.8 billion at December 31, 2006.

This growth is primarily the result of the accumulation of loans for our next CLO, Apodo Cinqo, and the net growth in commercial real estate loans and securities.

At March 31, 2007 RCC's investment portfolio was financed with approximately $1.8 billion of indebtedness and included the following -- $1.2 billion of CDO senior notes, $254 million of warehouse agreement debt for our third CLO, $209 million of repurchase agreements, $84.5 million outstanding on the return facility.

We also sourced $51.5 million from our unsecured junior subordinated debentures related to our two trups issuances in 2006.

We ended the period with $295.4 million in book equity. RCC's borrowings of approximately $1.8 billion had a weighted average interest rate of 6.06% at March 31st.

We consider our leverage ratio from two positions. On a book basis our leverage is approximately 6.1 times. When we consider our trups issuances, which have a remaining term of - in excess of 29 years as equity, we see our leverage drop to 5.0 times.

We supported our balance sheet, after year-end, with the January closing of the over-allotment option, which was granted in connection with the December offering and exercised by our underwriters for an additional 650,000 shares that generated new proceeds of $10.1 million after the underwriting discount.

In addition, we received warrant exercises for approximately 325,000 shares at $15 per share that yielded proceeds of approximately $4.9 million. Options to exercise warrants for 1,243,000 shares, or potential proceeds of $18.65 million remain outstanding until January 13, 2009.

We ended the period with 24,995,217 common shares outstanding as compared to 23,821,434 at December 31, 2006.

Our book value, per common share, ended the quarter at 1182 as compared to 1333 at December 31st, a decrease of $1.51.

The company's book value was substantially impacted by the year to date, 2007 decline in the valuation of its ABS, RMBS portfolio which was financed through our [Iscus] 2 CDO.

Under FIN 46R, RCC as the primary beneficiary consolidates all of the assets and liabilities of Iscus 2. The total decline in market value through March 31, 2007 of $42.6 million, as reflected in other comprehensive income exceeds RCC's maximum exposure of $27 million by $15.6 million.

When we consider the limited recourse nature of our investment and adjust shareholder's equity to reflect our maximum exposure, on an economic basis, our book value calculates to $12.44 per common share at March 31, 2007.

Our equity allocation. At March 31, 2007 our equity is allocated as follows -- commercial real estate loans, 76%, commercial bank loans 15%, ABS RMBS 7%, and CMBS and direct financing leases and notes of 1% each.

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

Thank you. And just in our final remarks, we feel very confident that we will be able to grow the dividend over the next few quarters and put to use the capital that we raised, not only in December, but also in the March quarter, an extra 1.1 million shares. And we're looking forward to the widening in the market as a great opportunity to invest.

And with that, I think I'll open the floor for questions.

(OPERATOR INSTRUCTIONS) Your first question comes the line of Andrew Wessel with JP Morgan. Please proceed.

Hey guys, good morning.

Morning. I think - I just wanted to look at the sub prime exposure, ask a couple questions there. In terms of the performance of the underlying bonds have you seen any downgrade activity or kind of ratings watch activity in the portfolio? We've had two bonds under - after the quarter ended which are a little bit over $2 million, which were downgraded by one agency, but not by the other two.

Okay, by one. And then also, just so it's straight, it's if you start to experience losses on either of the bonds, that would flow through to obviously an equity head, but any income affect that would affect GAAP earnings but it wouldn't effect re-taxable, is that correct?

Yes, that's right.

So dividend income would be unaffected?

Yes. That's right.

Great. I think that's it. Thank you very much.

Thank you Andrew.

Your next question comes from the line of Don Fandetti with CitiGroup. Please proceed.

Hi, a couple questions on the subprime asset. Jonathan, do you expect a permanent impairment?

No, we expect that over the next - obviously we went into buying these assets where we expect that over the next two years, from six months to two years plus that these things will pay down.

And as they pay down we'll be receiving principal back and that will go through the P&L if there are any losses at that point. But we don't -- at this point we don't expect any kind of permanent impairment.

What would cause you to -- oh, well thank you. What would cause you to have permanent impairment? What type of scenario?

The scenario where we just didn't feel like there reevaluated and then we felt like obviously there wasn't value there, we would have to impair it.

Okay. So you just think the --

Right now all the bonds are paying fully and we have a wonderful CDO, which is also financing those bonds at incredibly low rates.

And so if you got, as we did, like a third party investment bank to mark our equity within the CDO, we not only wouldn't have a negative mark to our maximum exposure.

It would be very positive to our exposure because, as I said, we actually receive $1.5 million of cash flow from it and earnings from it - its performing according to plan.

And how much - I understand the difference between the economic and the GAAP this match here, but how much is in the underlying pool and how bad - what's your maximum book value loss you can take on a GAAP basis?

I mean our max - as Dave said, our maximum book value loss would be adjusted - our book value, if we lost everything.

Yes.

To $12.44.

Oh no. I'm saying in terms of the GAAP. Because if, let's say the spreads widen more on the underlying collateral, that would negatively impact your book right.

Yes, because we only - we mark the assets.

Right. So how many bonds do you have in the pool that could negatively impact your book maybe as a way to ask the question? Do you know what I'm saying?

I mean you lost $43 million, I mean how bad could it get? I'm just trying to get a sense of --

I mean it got very bad during the crisis in February, March. It actually, as of April, it started to come back.

And I - that's sort of a hard question to answer, but it certainly - I mean you have a maximum sort of GAAP OCI exposure of the full amount, but we would never let it get there obviously.

So you're not disclosing the PAAR amount of the underlying securities basically at this point?

The PAAR amount is $400 million.

Okay. And now, does this in anyway impact your ability to leverage the company or any of your ratios for your lines in any way, form or fashion?

No, we're fine and we've got lots of liquidity. As I said, we've raised money in December and more money came in. we're very under levered within all of our other asset classes.

Okay. Great. And just one question if I could on the commercial real estate lending.

Sure.

What is - what do you think about this scenario where you see obviously a lot of opportunity in terms of new investments right now with the shakeout and then it sort of slows down after that? Any thought on that process?

I mean we're so small relatively to the marketplace that the opportunity to go in there while other very well thought of investors were buying BBB minuses at LIBOR swaps plus 85 and now they're at swaps plus 300. We'll take whatever opportunity we can get and it will deeply affect our company.

Okay. I think that's all I have. Thank you.

Okay. Thanks, Don.

Your next question comes from the line of Douglas Harter with Credit Suisse. Please proceed.

Thanks. I was wondering if you could talk about the loans you sold, whether there's any gain on that and whether you think this is going to be something that you're going to continue to see going forward.

There was a gain on that and the reason we sold it was primarily that Dave Bloom indicated that it was a large loan on a borrower that we have a deep relationship with. Where we've lent him money multiple times, he's a San Francisco residential person who renovates apartments.

And we sold off the loan just because it was a portfolio of I believe 18 or 20 different apartment buildings in San Francisco, we felt that single borrower of that size for our company was not in our best interest.

I don't think we'll really see very much of it, although what it demonstrates is our ability not only to originate - so we did make origination fees, we didn't actually make a gain on selling it - but we were able to put it on our books for some of the quarter.

But it does demonstrate our ability not just to originate but also to manage our portfolio to a granular basis.

So, you held a portion of the loan so essentially those origination fees you keep enhance the yield on the portion of the loan that you kept?

Yes, exactly.

So, okay - and then sort of - if you could talk about leverage you were able to get on the new CLO that you - that's closing in May.

I believe we got - we were somewhere around 7%, 8% equity, 8% equity, and so 11 times.

How does that compare to the previous ones you've done.

It's right - it's a very cookie cutter, the same. The difference was that the weighted average spread was probably six basis points, five basis points higher than it was and most of that was caused by the dislocation in the BBB marketplace in CDOs.

So the expected ROE is pretty similar then?

Yes. Although we're starting - just as we said in our press release. We're starting out with a portfolio that's weighted average yield was a little bit lower, but we expected to migrate over the next two quarters to the average where we are with our other portfolios.

Great. Thank you.

Thank you.

Your next question comes from the line of Bruce Silver with Silver Capital. Please proceed.

Hi, good morning.

Hi, Bruce.

I wanted to check the - with the CDO market as your spread's widening a little bit, does that change your cost of capital and is there any changes in your future productions for dividends with that?

No, I mean basically as we have said, we expect to increase the dividends above the 165 range for this year and we do think that we will have a cost of capital increase there, but because its primarily at the bottom part of the structure we don't think its going to be too drastic.

And as New Castle and other people have done in the past, its - if we don't like it we can keep it and under lever that portfolio and get leverage other ways.

Okay, thank you.

Thanks, Bruce.

(OPERATOR INSTRUCTIONS)

Your next question is from the line of Bob Napoli with Piper Jaffrey. Please proceed.

Good morning.

Good morning, Bob.

Couple questions. Where have - within the commercial business, where have you seen spreads widen the most and can you quantify - try to put some quantification on that and has that adjusted your strategy - origination strategy at all?

We - we're just starting to see that in the commercial real estate loan market where things had gotten tight where you might notice that we were primarily whole loans, we probably would have been a buyer of some B notes and other product in the market but it was just too tight for us.

We're seeing that that will probably start widening a bit but it hasn't yet.

The opportunity really is on a CMBS side where the BBB plus down to the BBB minus has widened substantially.

Okay, so are we going to see you buy more of the lower rated traunches than CMBS?

You will, as we announced about three or four months ago, we do have a team that we brought in to do that and they're coming in at the right point and we will be buying but I wouldn't say its going to be super aggressive.

And not a big shift, but you're spreads on the whole - the whole loans were down quarter over quarter.

That's just a matter of the whole loans that booked versus the ones coming up. I think you'll see that go back up in the next quarter.

Okay and on the - okay, and on the sub prime is that - the way I understand - I mean I think - at least I thought that the majority of that was originated in '04 and in the first half of '05 is that -

Yes, that's true and it's factored down considerably and what its being really compared to are the risk premiums and discounts that people are assigning anything in sub prime land now.

I mean have you seen a - those, one thing that surprised me is that maybe - the RMBS that you had on the balance sheet is only down a couple million dollars. Is that off there -- what's underlying?

You haven't added any new sub prime, have you added? I mean the prepayment speeds I would expect on '04, '05 - early '05 vintages would be reasonably high.

They are and we're seeing - and that's to our liking. But we're - its just a matter of marking risk premium and duration and these things have extended a bit because of - or the perception is that they extended bit because of the perception of refinance even on the tail.

Have you seen a - I mean - I just - I don't - who are the major servicers of the assets that you own?

All the big guys.

So it's pretty diverse -

I mean it's a very diverse granular pool.

Okay.

So it has lots of servicers, lots of different originators.

And so theoretically, assuming spreads don't get wider and as you mentioned, they were pretty wide at March 31st, we should start seeing beginning with the June quarter a significant reduction in the negative mark.

That's what we're hoping. We saw that in the early marks that came in in April, we definitely see a positive move in that regard.

Okay. And, with regards to - when is the - I'm sorry, I forget the timing of your next dividend announcement.

June - middle to end of June.

Mid June. That's right. And on the credit side, on the commercial -- with the spread widening, you really haven't seen any change yet in any of the underlying credit metrics in your portfolio?

No, we don't have, other than the ABS portfolio, we very - we have some swaps and a little bit of CMBS but very - everything else is not marked, they're all pretty much loans.

Has this taken some of the pressure off of your ability to maintain margins? The changes in the market. I mean it still seems extremely competitive?

We think as we've said before. We think we'll see some widening and that will be good for us because we have locked in liabilities.

Thank you.

Thanks, Bob.

And there are no further questions at this time. I'd like to turn the call over to Mr. Jonathan Cohen for closing remarks.

Thank you very much and we'll talk to you next quarter.

Thank you for your participation in today's conference, this concludes the presentation and you may now disconnect. Have a good day.