Acres Commercial Realty Corp (ACR) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Resource Capital Second Quarter 2007 Earnings Conference Call. My name is [Onica] and I'll be the operator for today.

At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference call is being recorded for replay purposes.

At this time, I would now like to turn the call over to Mr. Jonathan Cohen, President and CEO.

Please proceed, sir.

Thank you and welcome to the Second Quarter 2007 Conference Call for Resource Capital Corp. I am Jonathan Cohen, CEO and President of Resource Capital.

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 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, thank you for joining us.

First, I will review our earnings; second, I will comment on our portfolio and liquidity; and third and finally, I will provide guidance for the remainder of 2007 and 2008.

Now for the earnings. Adjusted net income for the quarter was $10.6 million, 13% increase or $0.43 per share diluted. Net interest income was $13.2 million, an increase of 57% over the same period in 2006. And estimated re-taxable income was $10.5 million or $0.42 per share. We declared a dividend of $0.41 for the quarter.

Over the last few weeks, the debt and real estate markets in the United States and other parts of the world have seen an incredible shift that has caused many companies -- hedge funds, banks and others -- tremendous pain. What is the effect of this on our Company and where does it leave us?

First and foremost, we have stuck to our commitment to match funding. Approximately 89% of our portfolio is match funded, a little less than 10% -- almost 10% term funded and less than 1.9% short-term funded.

This commitment to our business plan will leave us with the opportunity to reinvest as loans pay off, and we should be able to reinvest in assets with much wider spreads, since we own our liabilities typically for five to eight years and they are super cheap -- and this should be a very good thing and can drive long-term growth in our earnings and dividend.

Our discipline and commitment have left us with adequate liquidity and very good prospects.

Second, our portfolio and credit continues to perform extremely well. In our core businesses of commercial real estate and corpoarate bank loans, which represent 93% of our allocated equity, but even more of our stated book value, we continue to see a good environment and good performance in our credit through the end of July. All of our loans are performing.

Even in our ABS portfolio, where we continue to mark our book value due to GAAP to a level below our economic exposure, our bond, our pain -- and we have had very little impact from recent rating agency downgrades in this sector -- we are actually proud of this performance given the horrific performance of the later vintages of ABS bonds. We did however feel that it was appropriate to recognize an impairment on two bonds for a total of $787,000 -- not much on a $400 million portfolio.

Excluding the unrealized mark beyond our investment -- remember, we have a maximum loss of $27 million -- our book value would have been $12.59 per share. As we speak, our stock is trading at 65% of book value after reflecting the impact of writing off that entire portfolio. These are indeed strange times.

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 our second quarter demonstrate accomplishment in that regard.

We are proud of the following accomplishments. We originated over $389 million of total assets in the quarter end of June 30, 2007, including gross originations of approximately $313 million of commercial real estate loans, including future funding obligations.

During the quarter, we closed two CDOs. On May 30, 2007, we closed Apidos Cinco CDO Ltd. -- a CLO that will provide long-term financing for a $350 million portfolio of bank loans. The notes issued by Apidos Cinco CDO bear interest at a weighted average interest rate of three-month LIBOR plus 51 basis points.

On June 26, 2007, we closed Resource Real Estate Funding CDO 2007-1, Ltd. -- better known as RREF CDO-2, a CDO that will provide long-term financing for a $500 million portfolio of commercial real estate loans and commercial mortgage-backed securities. The notes issued by RREF CDO-2 bear interest at a weighted average interest rate of LIBOR plus 61 basis points.

We have shifted our origination capacity in commercial real estate loans from 90% B-notes and mezzanine and 10% whole loans to 72% whole loans and 28% mezz and other.

This mix and our continued dedication to growing our ability to self-originate has proven to be very valuable as we continue to see the fees surrounding origination, extension and [exit] come to our bottom line. This will become even more meaningful as we continue to shift the portfolio in whole over the next few years.

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

Thanks, Jonathan. Our commercial mortgage portfolio has a current committed balance of approximately $942 million across a well-diversified pool of 55 separate loans.

During the second quarter, 75% of our loans were directly originated whole loans. Our portfolio of commercial mortgage positions breaks down in components as follows -- 60% whole loans, 25% mezzanine loans, and 15% B-notes.

Our loans are newly originated transactions that predominantly provide acquisition financing for well-capitalized and experienced sponsors. We're a property-specific, sponsor-driven lender and each deal that we do backs the specific business plan that we've analyzed, stressed and verified. Once the loan is closed, we have a dedicated loan asset management team of four professionals that maintains regular contact with the borrowers and re-underwrites properties on a monthly basis.

We're very pleased with the performance of the property securing our loan positions and can report that we have a default-free portfolio.

Our collateral base continues to be diversified across major asset categories in geographically diverse markets, with a portfolio breakdown as follows -- 25% multi-family, 28% hotel, 24% office, 15% retail, and 8% other, such as industrial and self-storage.

With the pullback by CMBS lenders, we are seeing record levels of transaction prospects. We continue to see very strong credit characteristics in deals, and the retreat of Wall Street and other lenders creates opportunities for us to originate loans at wider spreads.

We continue to be active in all of our markets and we will use this window to make loans at appropriate levels for the current environment.

Our commercial mortgage originations in total to date are $1.25 billion, and net payoffs to date have been $308 million, with $126 million of these payoffs having occurred in the second quarter.

We are taking a measured approach to new originations until such time that market pricing firms and we believe that we will benefit from loan repayments as we reinvest higher yielding assets into our locked-in financing vehicles. Our nationwide direct origination platform continues to be the driver of our business model. As has been 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.

Our directly originated whole loans provide a considerable boost to ROA, and we continue to see increased returns from our commercial mortgage portfolio as existing subordinate net debt positions are repaid and more self-originated whole loans are added.

Having built our direct origination capabilities and fully established our platform, we are uniquely positioned to take advantage of select opportunities for well-structured transactions at premium spreads in today's market and to match our production levels with our existing financing facilities.

In general, our portfolio of closed commercial mortgage positions is performing extremely well, and we look forward to prudently returning to our previous origination levels as markets correct.

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

Thank you, Dave.

On the commercial corporate side of our business, we continue to see a good credit performance and have now issued three match-funded vehicles -- including the one we have just closed -- which allow us to actively invest in the commercial bank loan market with extremely cheap liabilities.

Portfolio statistics are as follows. We have $938 million of bank loans encompassing over 30 industries. Our top five are diversified, 9.7%; health care, 9.2%; printing and publishing, 7.8%; chemicals, plastics and rubber, 5.9%; broadcasting, 5.8%; and retail stores, 5.4%. All of our loans are performing.

As of the end of our quarter, our average loan assets yielded 2.19% over LIBOR and our liabilities are costing us 47 basis points over LIBOR.

We are looking forward to getting through this challenging environment and onto better environments, and look forward to continuing to build our Company.

Now, I will ask Dave Bryant, our CFO, to review our financial highlights.

Thank you, Jonathan.

I'll now briefly cover some financial highlights through the quarter ended June 30, 2007.

Our Board declared a dividend of $0.41 per common share for a total distribution of $10.3 million for the quarter ended June 30. Our estimated re-taxable income for the second quarter was approximately $10.5 million or $0.42 per common share. We increased our dividend by $0.02, or 5.1%, over the dividend of $0.39 for the first quarter of 2007.

As we continue to be fueled by our follow-on offering, RCC's assets increased during the period ended June 30 by $583 million, or approximately 33%, to $2.4 billion from $1.8 billion at December 31, 2006.

This growth is primarily the result of our investing in a new CLO, Apidos Cinco, for $350 million, a net growth of approximately $236 million in commercial real estate loans and CMBS. This commercial real estate loan growth culminated in our second real estate CDO for $500 million at the end of the quarter.

At June 30, 2007, RCC's investment portfolio was financed with approximately $2.1 billion of total indebtedness and included the following -- $1.9 billion of CDO senior notes, $44.1 million of secured-term commercial real estate financing, $5 million of a commercial real estate credit facility, and $34 million of repurchase agreement debt -- which by the way has been reduced to $27 million as of today -- and $80.9 million outstanding under a term facility.

We also have $51.5 million from our unsecured junior subordinated debentures related to our two TruPS issuances in 2006. We ended the period with $290.6 million in book equity. RCC's borrowings of approximately $2.1 billion had a weighted average interest rate of 6.02% at June 30, 2007.

We consider leverage ratio from two positions. On a book basis, our leverage is approximately 7.1 times. When we consider our TruPS issuances, which have a remaining term of approximately 29 years, as equity, we see our leverage drop to 5.9 times.

Our book value per common share was $11.57 at June 30, 2007 as compared to $11.82 at March 31, a decrease of $0.25, or 2.1%.

As noted previously, the Company's book value was substantially impacted by the 2007 decline in the valuation of its ABS-RMBS portfolio, which is financed through the [Iscus-2] CDO. Under FIN 46R, RCC consolidates the assets and liabilities of that CDO.

The total decline in market value through June 30, 2007, of $52.6 million exceeds RCC's maximum exposure, as Jonathan noted, of $27 million by $25.6 million. When we consider the limited recourse nature of our investment and adjust shareholders' equity to reflect our maximum exposure on an economic basis, our book value is $12.59 per common share at June 30, 2007.

Equity allocation. At June 30, 2007 our equity is allocated as follows. Commercial real estate loans, 71%; commercial bank loans, 21%; ABS-RMBS, 7%; and CMBS, direct financing leases and notes of 1% each.

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

Thank you.

Of course, we are being very cautious in this environment. And therefore, we will limit our originations to great opportunities, which we think there will be many of, and of course, to re-investment. We will also look to buy back stock as comfort and confidence is achieved.

We expect our dividend in 2007 to end up in the range of $1.62 to $1.65 and we expect 2008 will be $1.68. Right now, that would mean, on the current stock prices of yesterday, a 20% to 21% yield on our current stock price.

Thank you very much, and I think we will open the floor to questions now.

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Andrew Wessel with JPMorgan.

Please proceed.

Hi guys. Good morning.

Good morning, Andrew.

I have a question on just the environment and what's your -- what's kind of what you are hearing from banks in general about the commercial real estate CDO market? Specifically is there a little bit better tone or feeling about the future aspect of it as opposed to, like, the ABS CDO sector?

Absolutely. We were in talks with a major bank up to a few -- a week ago or three days ago, and they are just waiting it out and anxious to get back in the business and get going.

Great.

And then the other question about that '08 dividend number. Obviously sounds pretty strong. Is that -- so that is just based on the assumption of current portfolio plus ramping any other -- ?

It is based on a few assumptions, Andrew. It is based on the fact that we think that as we -- as things on our term line pay down or are repaid, which are expected in the next three months, or things in our CDO pay down or -- which are expected -- amortized in our bank loan portfolio -- the yields are literally 150 -- 100, 200, 300 basis points wider.

We own our liabilities and it doesn't take a lot repayment over a small portfolio that we have to really make a tremendous effect.

Great. All right. Thank you very much.

Thank you.

Your next question comes from the line of Bob Napoli with Piper Jaffray.

Please proceed.

Thank you. Good morning.

Hi, Bob. How are you doing?

All right. How about yourself?

Okay.

The question on the ABS-RMBS portfolio that you guys hold, I mean it is -- how is it performing? I missed the front end of the call. There must be a lot more people on the call than there normally is, I would guess, but -- so it took longer to get in. But can you tell me how that's performing?

And given that that is an older paper, over what -- shouldn't that, the asset be -- over what time frame do you expect that asset to liquidate?

Well, I mean, just remember, although we consolidate the assets, which is causing us to have a negative mark beyond our economic exposure, we actually own $27 million of subordinate equity in that CDO.

So the CDO I think is callable in a year, year-and-a-half. The question is whether marks on these assets will return to normality or whether or not they will just remain very, very low and off market. I mean, there's basically no market for ABS bonds at this point.

And a lot of the -- most of it is 2004 and early to mid 2005. It is performing extremely well. There have been very few downgrades and where there have been they haven't been significant.

And we look to the whole portfolio of $400 million under GAAP and did so with our -- very thoroughly, and that's where we came up with the $787,000, which -- basically those bonds are still performing, even those two bonds that we took an impairment on. But we could see out that if things continue and you stretch them through 2010 or 2008, that the principal would have an impairment. So we felt that it was responsible to do so.

Otherwise in general, it is performing pretty well and I think the only thing I can say is that it is -- the fact that it has been prepaid mostly through the '06 vintage, which now as we know is notoriously bad with higher mortgages and higher home prices, I think is benefitting this. But we always -- what we have been trying to do is take the -- to take the position on these calls that even though our book value is $11.56 -- what is it?

$11.57.

$11.57 -- that even if we wiped out all of that ABS portfolio, our book value would be $12.59. We don't believe that we will wipe out that whole portfolio. We believe that there is value and we are getting -- just to give you an example, once again -- and we said this last quarter -- we got another $1.5 million off that portfolio.

So it seems to me that it would be silly to say that it is worthless if you are getting $1.5 million per quarter pretty steadily off that portfolio and after a full review have very little in terms of impairment.

Okay. Thank you.

On your current -- on the current market, you said, Jonathan, that margins -- that spreads are up, that you are able to put on new assets at a couple of hundred basis points and if you can put --

Yes. No, no. On the -- let me clarify that. If you look at CMBS, for instance, something that was 150 over six months ago is 400 over -- on a BBB minus fixed rate deal. The floating rate deal, they're probably 30 to 50, 100 basis points wider on the same asset (inaudible).

On CRE whole loans, they really haven't moved that much but maybe 50 basis points. But you are also getting things like recourse, guarantees, guys who want to close deals and willing to step up and really stand behind their real estate properties.

Okay. And what percentage of your funding right now is in committed funding facilities?

As I said -- I said this earlier in it -- and almost 98%.

Okay, 98%.

More than 98%.

Okay. So now, when you are doing new deals, I guess, how -- and you're essentially going to replace runoff, is what it sounds like-- ?

We have existing cash and availability of cash (inaudible) $50 million because remember, we did an offering in December. We actually suffered the opposite. We weren't strong enough probably in the last two quarters as it was competitive to get loans, so we were getting repaid all the time and we were very sorry that we were getting repaid because it was hard to put a portfolio together.

So we actually were getting a lot of cash back. And you don't see in the quarter, although we originated $320 million-ish of commercial real estate loans in collateral and future fundings, we really only booked another $160 million of loans.

Okay.

So it leaves us with -- we have things that are prepaying. We've got some cash. We have got other things. And so as opportunities come down, we've got committed term facilities that we paid for -- dearly, I might add -- in anticipation of crises like this. And that's turning out to be a pretty good investment.

We then have the ability to replace that. And just to give you a sense on the -- most of the market, we get amortization in the bank loan market, we get payoffs in the commercial real estate market. And these come all the time, and over two or three quarters you can replace $100 million, $200 million, whatever it is. And if that's 100 basis points wider, we can all start to do the math -- we don't have that many shares outstanding.

And last question, would there be -- what would be your book value today, I guess, if you -- I don't know if you can put any color on what would happened, what would have changed your book value per share?

I don't really know. It went down pretty much from June. It went down from March 31 to June 30, not as much as one would have expected because the duration of the bonds, which are quite old and performing pretty well, is also going down.

Okay.

In other words, the duration is helping you keep your value. It's hard to mark a bond to 50 if it's going to pay off tomorrow morning.

All right. Thank you very much.

Thank you, Bob.

Your next question comes from the line of Don Fandetti with Citigroup.

Please proceed.

Hi, Jonathan.

Hi, Don.

Quick question. You gave some color on your book value. I guess intuitively, it seems like your book would have been down a little bit more on a GAAP basis given the subprime movement in the quarter. Is there -- ?

It might have been, but it's quite artificial in the sense that we could always just realize a $27 million loss and then have a $12.59 book value.

Okay. And then, just want to get your thoughts on the CLO and CDO markets in terms of when do you think they could open back up, et cetera?

Well, CLOs are getting done. It's painful to get them done, but we actually have one -- Resource America -- that is on the road in Japan right now. So there are people marketing and getting things done.

In fact, as early as this morning, a lot of those indexes have rebounded both in Europe from 91 to 97, this morning -- 97.5; in the United States, from 89 -- these are derivative indexes -- from 89 to, I think, it was 96.5 before I walked in here.

Not that that's necessarily very meaningful but, of course, it's [sentiment and] people covering there. And so things are getting done in the CLO market, although sparingly in very -- it is a very tough environment. But I would say that -- my belief is that in the next four to eight months or six months, that market comes back, maybe not as robust as it was before, but for good big managers like we are, I think there's lots of opportunity.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS)

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

Please proceed.

Hi, Jonathan.

Hi, Doug.

I was wondering if you could let me know what -- or let us know -- what percentage of your funding right now has margin call risk?

Probably in total less than 8% or 9% -- 10%, somewhere around there -- even though we are non-recourse to a lot of it.

Okay. I guess if you would just explain that?

We have a term facility that is termed out where it's non-recourse. We have $82 million on it as of today. And it has the right -- like any loan facility, has the right to revalue the collateral. And therefore you are -- even though it is a three-year facility, you are able to and that's why we have $50 million.

Is that revalue of the collateral based on collateral performance or market conditions?

Reasonable commercial market conditions, but it's all whole loans in that portfolio.

Okay. And then -- .

We are not worried. I mean, to see -- we are not worried about that at all.

Okay, great. And then, if you could just sort of walk through your thought process on how you're balancing share repurchase versus maintaining liquidity versus originating new deals in this environment?

I would be hard-pressed -- and my guys know this -- we have all sat around and said, "Well, why would we originate anything, put leverage on it at LIBOR plus 300 or 400 or 500 even if we love the deal and when we could buy our shares at 21% yield?"

Right.

It is not only economic. We all own a lot of stock in Resource Capital, and the math is for every $8, you can add 2% -- 4% -- 3.5% to 4% accretion to income. And I don't know what the accretion is -- the book value, but significant for $8 million.

So we're weighing between -- and I sort of made that comment as we get comfortable we'll certainly be a buyer of the stock in the next 48 hours. As our counsel says we're allowed to do so. But the question is how much, and weighing that against liquidity. Because we want to be here in a strong liquidity position as we feel we are today.

Great, thank you.

Thank you.

(OPERATOR INSTRUCTIONS)

Your next question comes from the line of [Edmond Finder] with [Starfinder Financial].

Please proceed.

Good morning, Jonathan.

Hi, Ed. How are you doing?

I am doing all right. I also had a little trouble getting on the call and I missed the '07, '08 distribution estimates.

In '07, we are -- what I said was that due to liquidity meaning, keeping very strong liquiditym we're going to basically focus on the strongest of opportunities and buybacks. And because of that we are looking to do $1.62 to $1.65 this year, and we expect 2008 to be $1.68, which is a 21% yield on our current stock price.

Thank you, Jonathan.

Thank you.

At this time, there are no additional questions in queue. I would now like to turn the call back over to Mr. Jonathan Cohen for closing remarks.

Thank you very much, and we will talk to you in one quarter.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you and have a good day.