Acres Commercial Realty Corp (ACR) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter and fiscal year end 2007 Resource Capital Corp earnings call. My name is Tanya and I will be your coordinator for today.

(OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Mr. Jonathan Cohen, President and CEO. Please proceed.

Thank you and thank you for joining the Resource Capital Corporation's conference call for the fourth quarter and fiscal year ending December 31, 2007. I am Jonathan Cohen, President and CEO of Resource Capital Corp. Before I begin, I would like to ask Purvi Kamdar, our Director of Investor Relations, to read the safe harbor statement.

During this conference call, the words believe, anticipate, expect and similar expressions are intended to identify forward-looking statements. Although our company believes that these forward-looking statements are based on reasonably 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 those reports on forms 8-K, 10-Q, 10-K and in particular, item one in 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. Again, the Company undertakes no obligation to update any of these forward-looking statements. And with that, I'll turn it back to Jonathan.

Thank you, Purvi. First, a few highlights. For the quarter ended December 31, 2007, Resource Capital Corp reported adjusted net income of $10.7 million or $0.43 per share diluted. For the year ended December 31, 2007, RCC reported adjusted net income of $42.7 million or at $1.72 per share diluted. For the quarter ended December 31, 2007, Resource Capital reported REIT taxable income of $11.4 million or $0.46 per share diluted. For the year ended December 31, 2007, Resource Capital reported REIT taxable income of $42.4 million or $1.71 per share diluted.

Credit quality across our commercial real estate portfolio and our commercial finance portfolio remains strong. We declared and paid a dividend of $0.41 for the fourth quarter. In addition, earlier this week we declared our dividend for the quarter ending March 31, 2008 of $0.41 payable on April 20, 2008. We reiterate our guidance for 2008 at $1.64 per share of dividends or $0.41 per quarter. Our economic book value, a non-GAAP measure, was $12.25 per share as of December 31, 2007. Our GAAP book value, our actual GAAP book value, per common share was $10.82 as of December 31, 2007.

During this quarter, we did make general and specific reserves against our assets. We are comfortable with our balance sheet as most assets are match-funded. We have recourse at the Company level to under $10 million of short-term repurchase agreements secured by face value of over $27 million of assets and have over $20 million in cash and availability on our corporate credit lines. With those highlights out of the way, I will now introduce my colleagues and then proceed to dive deeper into the Company, its performance and the drivers for a successful 2008.

With me today are David Bloom, Senior Vice President in Charge of Real Estate Lending, and David Bryant, our Chief Financial Officer, and of course, Purvi Kamdar, our Director of Investor Relations. For those of us in the real estate business, these truly are excruciatingly difficult times. The world has changed substantially, not only in perception but in reality. The crisis that began with sub-prime mortgages has spread to all parts of fixed-income world and all parts of the real estate business.

It has been quite an experience, but I'm glad to report that all of our commercial real estate loans are performing. This is the super-majority of our equity allocation. Our credit quality in our commercial financial business also remains strong. And I'm speaking about the bank loan business. As of today, all but one loan that we currently own in our commercial finance business is performing. That loan represents a total of $1.7 million of investment out of $931 million as of December 31, 2007. And we have reserves substantially against it this quarter -- tremendous performance.

I thought I would take this time to walk you through the factors that we believe are helping and hurting us at this point. On the positive side, we continue to have strong credit performance. We continue to use our match-funding vehicles to finance our business. We continue to replace loans that pay off with new investments, which we bought at very attractive discounts and have very attractive discount margins. For instance, since September 30, 2007, we have had per-payment of our bank loan portfolio with over 7% of our portfolio pre-paying. This has allowed us to purchase new loans at a substantial discount and with an average Moody's Credit Rating of approximately Ba3, resulting a yield improvement of about 150 basis points and a tremendous weighted average rating factor improvement.

As for our commercial real estate business, we have and we will continue to benefit from the effect of LIBOR floors, which are built into many of our commercial real estate loans. This has enabled us to benefit from falling LIBOR rates and allowed us to significantly increase our net interest spread from our commercial real estate CDOs. Our weighted average LIBOR floor is 4.75% and we have this in well in excess of $400 million of loans. We also benefit from the floating nature of our trust-preferred securities. As LIBOR declines, so do our payments.

On the negative side, those same LIBOR declines hurt our net interest margin on our floating rates because most our loans are floating rate, a majority. But this should help our borrowers stay current. Our originations repayments have declined and therefore fees associated with them have also declined. We believe, however, that when you look at our company as a whole and our portfolios and asset independently, we are able to generate enough REIT taxable income to continue to support our current dividend payout. As I said before, we reiterate our guidance of $1.64 or $0.41 per quarter.

We are actively managing our portfolios to make sure that credit remains strong and that we are maximizing our ability to reinvest into this highly discounted marketplace. Now I will ask Dave Bloom to walk through our commercial real estate portfolio.

Thanks very much, Jonathan. Our commercial mortgage portfolio has a current committed balance of approximately $917 million across a well-diversified pool of 52 separate loans. Our portfolios of commercial mortgage possessions breaks down into components as follows -- 66% whole loans, 24% mezzanine loans and 10% B-notes. As Jonathan mentioned in his earlier remarks, commercial real estate credit markets continue the pull-back and repricing that began in the third quarter of 2007. And at RCC we are taking an extremely measured approach to new commercial mortgage originations. During the fourth quarter and through today in the current quarter, we've originated approximately $82 million of new loans, 100% of which were self-originated whole loans, and we have made future advances on existing loan positions of approximately $20 million.

Our collateral base continues to be diversified across the major asset categories in geographically diverse markets with a current portfolio breakdown as followed -- 30% multi-family, 22% office, 24% hotel, 17% retail and 7% other such as industrial and self-storage. In general, our portfolio of closed commercial mortgage positions is performing extremely well with many of the properties in the portfolio well above our pro forma underwriting and ahead of schedule. I'm pleased to again report that our commercial mortgage portfolio continues to be fully current with no defaults.

RCC is a portfolio lender for primarily transitional assets. We self-originate new whole loans that generally provide acquit ion financing to well-capitalized and experienced sponsors for the execution of value-added transactions tied to very specific asset plans. Our focus has always been on underwriting and structuring loans with strong credit characteristics and sound real estate fundamentals for experienced sponsors. During this period of lower transition volumes, our real estate debt team remains extremely busy. There are 14 real estate debt professionals that are dedicated to the RCC commercial mortgage platform.

In addition to a loan asset management team of four, there are ten professionals dedicated to originating, underwriting and structuring RCC's commercial mortgage investments. While the origination and asset management teams always work very closely, during this period the primary focus of the entire commercial mortgage group is on the asset management function. We have direct lines of communication with our borrowers and have taken this recent opportunity to bolster our routine asset management functions, which include monthly re-underwriting of property cash flows, monitoring the progress of capital expenditures, leasing and other upgrade plans.

Over the past several months, each of the senior members of the RCC commercial mortgage team have had numerous in-person meetings with borrowers and multiple property tours, which have validated original loan underwritings and confirm the strength of the markets in which we have investments. The benefit of an open line of communication with borrowers is the ability to spot trends ahead of problems before they have a significant impact on collateral value. We will continue to talk to our borrowers and monitor the progress of the properties and at some point issues may arise on a loan-by-loan basis.

We are impressed, though, with the performance of the portfolio and are pleased to see that the specific asset plans are progressing and the borrowers' value creation plans are being realized. Across the portfolio, leases are being signed in office buildings, rents are increasing in multi-family properties, occupancy and average daily rate numbers at hotels are rising and so on. In addition, we're still hearing from borrowers about unsolicited offers on properties and other situations that will result in payoffs of loans ahead of the underwritten holding periods.

Having fully built out our direct origination capabilities and established our platform, we are uniquely positioned to take advance 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. We will benefit from loan repayments as we reinvest higher-yielding assets into our long-term locked-in financing vehicles. With that, I'll turn it back to Jonathan and rejoin you for Q&A at the end of the call.

Thank you, Dave. I will now give you some statistics on our corporate bank loan portfolio. We have $931 million of bank loans encompassing over 30 industries. Our top ten industries are -- healthcare, 11.5%; diversified, 11%; printing and publishing, 6.6%; broadcasting and entertainment, 5.6%; and chemicals, 5.4%. As of the end of February, our average loan asset yields almost 2.27% over LIBOR and our liabilities are cautioned as 47 basis points over LIBOR. We've been able to buy loans at a substantial discount over the last few months and continue to see widening here on the asset side and from a discount margin as well. And you might notice, by the way, in our press release we tried to add a lot more information on a more detailed basis on our commercial real estate and other loans. Now I will ask Dave Bryant, our CFO, to walk us through the financials.

Thank you, Jonathan. Our financial outlooks for fiscal year end December 31, 2007. Our estimated REIT taxable income for the year was $42.5 million or $1.71 per common share. For the quarter end December 31, our board-declared dividends were $0.41 per common share for a total of $10.4 million. For the year end December 31, 2007, our board declared total dividends of $1.62 per common share for a total distribution of $40.7 million, which equates to a payout ratio of approximately 96% of our 2007 estimated REIT income. The dividends distributed in 2007 are an increase of $0.13 over 2006 or approximately 9%.

RCC's assets increased during the 2007 year by $272 million or approximately 15% to $2.1 billion from $1.8 billion at December 2006. This growth is primarily the result of our acquisition of bank loans of $314 million and the net growth of $246 million in commercial or real estate loans and CMBS This is offset by the deconsolidated variable interest and the [iscus 2] and it's related ABS- RMBS portfolios.

At year end, RCC's investment portfolio was financed with approximately $1.8 billion of total indebtedness and included the following -- $1.5 billion of CDO senior notes; $96.7 million in a three-year, nonrecourse commercial real estate purchase facility; $91.7 million outstanding other secured-term facility; and $19.7 million in other repo agreements. We have also $51.5 million from our unsecured junior subordinated adventures related to our two TRUPS issuances in 2006. We ended the period with $271.6 million in book equity. RCC's borrowings of approximately $1.8 billion had a weighted-average interest rate of 5.73% at December 31, 2007.

It is worth noting that we have since delivered our repurchase facilities. Our nonrecourse commercial real estate facility is currently $66.2 million outstanding with approximately $116.5 million in collateral placed against that facility for an advance rate of approximately 57%. We've also paid down our other repurchase agreements that primarily finance our CMBS portfolio to $9.2 million, which is collateralized by securities and one real estate loan with a total fair value of all that collateral of $27.1 million.

We consider leverage ratios from two positions. As Jon noted earlier, our economic book value after adjusting for unrealized losses in our CMBS portfolio and unrealized losses from our cash flow edges is $12.25 per common share at year end. Our leverage, based on our economic book value is 5.7 times. When we consider our two TRUPS issuances, which have a remaining term of 28 years as equity, we see our leverage drop to 4.8 times. Our GAAP book value per common share was $10.82 at year end as compared to $6.97 at September 30, 2007.

It is important to note that the stated book value of $10.82 does not include an fair value adjustment that would have resulted from the adoption FAS 159. This fourth quarter increase in GAAP book value of $3.85 is primarily due to the consolidation of the VIE and its related asset portfolio. On December 31, 2007, our equity is allocated as follows -- commercial real estate loans and CMBS, 75%; commercial bank loans, 24%; and direct financing leases and notes of 1%.

And finally, liquidity. At March 5, 2008, RCC's liquidity consists of three primary sources. First, cash and cash equivalents made up of $11.7 million, $6.9 million of restricted cash in margin call accounts, and $3.4 million in restricted cash related to our leasing portfolio. Second, capital available for reinvestment in our five CDOs of $75 million, which is made up of $45 million in restricted cash and $30.1 million of availability to fund future commitments on our commercial real estate loans. And last, financing available under existing borrowing facilities of $14.8 million, comprised of $5.6 million available from our 3-year nonrecourse secure facility, $9.2 million of unused capacity under our revolving credit facility. With that, my formal remarks are completed and I'll turn the call back to Jonathan Cohen.

Thank you very much, and at this point we'll open the telephone call for questions.

(OPERATOR INSTRUCTIONS)

Our first question comes from the line of Andrew Wessel with JP Morgan. Please proceed.

Hey, guys, good morning.

Good morning, Andrew.

I just had a couple of questions. First, you talked about FAS 159 and how it would obviously change book value. Are you considering adopting FAS 159 for 2008?

We began an assessment, Andrew, of the impact of FAS 159 and it is a fair-value option, of course, on assets and liabilities and its impact on RCC and while we could benefit on a one-time basis from the adjustment, particularly on our liabilities. It's not likely that we will adopt to do that.

Andrew, just let me add something. We've done the analysis, obviously, if we did it our stated book value or whatever after January 1 would pop up significantly to a number that would be eye-popping, but we feel like we don't need to do that and it adds complication.

Fair enough. And then on borrowings, I didn't write those numbers down quickly enough. Can you break down under liabilities what's in CDOs and CLOs and then what's in repo and secured credit again?

At December 31st?

Yes, please.

$1.5 billion of CDO senior notes, $96.7 million in the three-year commercial real estate facility, $91.7 million in the equipment leasing facility and $19.7 million in other repo agreements, $51.5 million in the TRUPS issuances.

Right. So only really -- I guess of back debt, that only $19.7 million is on repo. I guess that's (inaudible) marketing could be recourse on a daily basis?

Right, exactly, and that's down at approximately $9 million as of now and that's secured by $27 million of securities.

Even on a GAAP, that's mind-blowing. So even if the market wants to write-off $9 million and assume that that comes out of GAAP book, it still shows the devaluation in the stock price might be a little out of control. Also, another question about the dividends. I know before there's been a $1.68 dividend target for this year based purely on reinvesting in your already placed CDOs and CLOs. Are you still targeting that?

In this market, given the repayments means, et cetera, we're just reiterating $1.64, which is $0.41 per quarter. And we see, basically the LIBOR floor is helping us. The increase in fees from our loans, the decrease in equity comp and the increase in spread from our reinvested portfolio, because remember, we're investing specifically in loans -- bank loans, for instance -- where we are seeing a constant -- although smaller -- prepayment rate. But you're buying bank loans at $0.88 on the dollar and borrowing money in the CLO at 47 basis points.

Right. Great. And then the last question here. Just looking at it from a valuation perspective, can you help us think -- ? The only way I see that that dividend could be cut is if you start taking on losses immensely greater than what you've currently reserved for and that eats into your return on the equity invested in all these levered loans and everything else. Is there anything else that I'm

No. I think you're right and this quarter we took general reserves and perused our portfolios and put some general reserves away and otherwise, I think you're right.

Okay. Great. Thank you very much.

Our next question comes from the line of Bob Napoli with Piper Jaffray. Please proceed.

Good morning.

Hi, Bob.

This day and age of very tight liquidity and crazy credit markets, since you do have your funding, it seems, very well and what you have today locked down and certainly you could use more funding for growth. But your stock is trading so far below book value and you have a 23% dividend yield, I know it seems maybe the best investments are -- . You do have a stock buyback out there. It seems like you should be using that a little bit and it certainly seems to be a more attractive use of capital than making new loans, although new loans are probably pretty attractive today, too, but probably can't compare to buying back some of your

We actually agree with you. But obviously, these are very trying times for real estate companies around the world and our belief is although we did buy stock under the permission that the board gave us, we feel like liquidity at the Company is key and any impact that we would have with the little liquidity that we could use on buying stock would be not that meaningful. And therefore, I think in the near future -- meaning the next few months -- we're probably not going to be actively buying stock back. But we have permission and as things brighten, which we think they will for us, we'll reconsider that and hopefully have a chance to take advantage of it.

As far as adding new assets, the liquidity that you have I would imagine that you'd want to probably hoard it, but essentially, are you going to be trading assets or should we expect your balance sheet to shrink from here or should we expect -- ?

I think over time it might shrink a little bit, but primarily off of our term facilities as we don't reinvest because it doesn't make that much sense there, we would want to take the capital out and then buyback stock. But I would say that in our CLOs and CDOs of CRE we have constant prepayments. We've been alerted now on the real estate side of a few prepayments. We have constant, although lower, prepayments than normal in both areas, but also in the bank loan portfolio. And it's just amazing what you can do when you're borrowing money at 47 basis points or 80 basis points over LIBOR and you can put the money out at [$400, $500, $800, $1,000] over for better quality loans.

What level of new investment would you expect to make in the first quarter?

Well, for instance, in our bank loans we try to -- I don't have an actual number, but I would say it's probably looking forward from this day we probably know of $20 million, $30 million, $40 million or maybe a little bit more on a commercial real estate side coming up. And then we also know of -- if you just take the numbers I gave you -- it's about 3% to 4% per quarter on our $931 million of loans. But all of that really makes a difference when you're trading something that's paying you LIBOR plus [$227] for something that is on a discount margin paying you LIBOR plus [$800].

[$800] probably is on high side? What can you put new money to work -- ?

I think that on the whole loan side, if we didn't do originations, it's probably LIBOR plus $400, $450, but I think that if we were buying loans and some distressed players that are perfectly good loans it's probably much higher than that on the commercial real estate side. And then on the CLO side with things trading in the [90s] or high [80s], if you use four years as a term the discount margin probably would be [$500, $600] over.

Okay.

Which is very, very attractive. We've been able to buy loans where before we were buying loans in the B-1 area, B-2 area. We're now in the double B minus area.

Okay. I agree with Andrew that the only way you have significant decline in your dividend is through credit, so on that and you went through some of the announcements in your portfolio, but you did take a $6 million provision this quarter. And looking at the fair market value marks on the bank loans, you had an increase in your mark there and I guess I'd like to understand a little bit more about the --

Sure.

-- the level, the provision and the marks and the bank loans, in particular I think the CMBS is pretty explainable, I understand

On the bank loan side, we had about $900,000 on a $931 million portfolio of two loans, one of which we sold and one which is in default which is a small loan. But we specifically reserved against that and then we took a general provision of a little under $1.9 million.

Okay.

And then on the leasing side we took a couple of $100,000 against a couple little leases and that was on the commercial finance side.

What about the fair market value marks on bank loans?

That's in our press release.

It's explained in the press release?

Yes, isn't it?

No, the numbers --

Okay. Yes, it's in the press -- isn't that it?

The number is, but I'm just looking for a little more color on it, that's all.

Generally, it's a big portfolio and we have a watch list -- I went over the watch list about a week ago -- and many of the names on the watch list appear to have stabilized a little bit, but we're cautiously watching names on the watch list and we thought this was a fair provision to make sure that we have a general provision and over time we may increase that. But right now, we feel comfortable there.

Thanks. And the last question, as far as the ability to get new funding, obviously, you must be talking to financing sources weekly, daily, huddling while looking. What are you hearing and what types of other financing programs are you working on?

To move assets, a lot of the bigger banks are willing to give you some term and low rates and to buy them at the right prices, but there's nothing that's really that attractive to us. And I think that we're still a couple of months away from people saying, look, I've got to move assets, I want to do business and I'm willing to finance these things for you or look, prices are so good that I'm willing to finance good real estate finance people. So we're not seeing much that we like yet.

Okay, thank you.

Thanks, Bob.

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

Thanks. I was wondering if you could talk about the upcoming scheduled maturities and which of those maturities would have extension options?

Probably that's a little too detailed for this call, but we'd be happy to go through that with you. In the commercial real estate side, they constantly roll and pretty much all of our loans were at two-plus, two to three-year loans with three one-year extensions. So we're naturally going to see the rate of those loans go up as they extend, although as I said we've had guys come to us and say, hey, we're selling our multi-family apartment building to a big company. Hey, we're trying to please you. You have to help me out here. LIBOR floor is killing me. I can get a loan from Wells Fargo or somebody. So there's things happening there, but on the state of maturities typically there's a lot of extensions that are built-in that they can pay for. The weighted average maturity of the portfolio on the commercial real estate side is two and a half years.

I guess what I'm trying to get at is, so you don't have many loans that would be coming due that don't have any other options in the current market?

No.

And then, on the provision. Is there any expectation as to when some of those losses might actually be recognized as that will then impact taxable income? And I assume that's factored into -- ?

We don't know. Only the one little bank loan that we sold, which was a smart thing to do, which we realized in that quarter. But otherwise, I'm just looking around the room -- .

That would be factored into your expectations of the $1.64 dividend, based on obviously what you provision for?

Yes.

Great, thank you.

Our next question comes from the line of Jeremy Banker with Citi. Please proceed.

Hi, how are you doing?

Good.

Just wondering if you could give some color on, keep drilling it down on this credit market story, and what do you think is going to turn these markets around? What's it going to take, particularly on the corporate credit side?

I wish I knew right now. We're just focused on our individual portfolios, as David Bloom said. Working with borrowers, keeping on top of them, constantly reviewing everything and trying to take action where we can. I think we'll leave the more global stuff to the big-whigs at the big banks and the analysts there. From our perspective, we're locked up with our liabilities and we'll continue just to do business as is and generate good income for our shareholders. But certainly, it's not any better than it was when we talked last.

Sure, fair enough. Are any of your loans, are they breaching loan covenants or charging penalties on interest?

No.

Okay. And lastly, is there any effect -- ? I believe last quarter we talked about cash flow still coming out of that ABS-CDO that was deconsolidated this quarter. Are you still receiving cash flow from that

Yes, as of March we are still receiving cash flow.

And can you say how much that is?

March was about $379,000 and we're predicting about $1 million -- . If you look at it per quarter it's $0.03 net owed instead of per quarter and that's factored into our

And you still are comfortable on your cash flow triggers related to downgrade?

Yes, because what's happening with the CDO is that you're getting a lot of repayments from -- remember, this is a CDO -- and a lot of '03, '04 and '05. So as they are downgraded, the bonds there are getting prepaid because they're hitting their triggers and therefore, it's actually better to be prepaid and that gives you back OC. And so we're comfortable for now, but obviously it's a moving situation, but we're not that worried about it from a dividend perspective and it's factored into our thinking.

Great, thanks.

Our next question comes from the line of Lee Cooperman with Omega Advisers. Please proceed.

Hi, good morning. One of my questions was raised but I'll repeat it. But first, someone should take the time to congratulate you guys on doing a very fine job. It's been a treacherous environment and notwithstanding the price of the stock, which is terrible, you've produced the fundamental results and that's the most important thing. I congratulate you in a very difficult environment.

Thank you.

You're welcome. Second - you're welcome -- the gentleman a couple of questions ago, on the repurchase, I would second that recognizing we're in a very treacherous environment, but the way I would encourage you to look at this is you've got a portfolio, I think you said of over 50 loans. You feel pretty well diversified. And I don't know whether you can make good -- you used the term -- eye-popping in regards to the FASB-159-effect, which is a little illusionary. But a [1082] -- I think it was -- GAAP book value with a 23.3% dividend yield, I would encourage you to look very hard at the advisability of making new loans as opposed to buying into the 50 loans you already have on the books by prudently --

No.

-- shrinking the cap. And I know you're aware of that, but I just second that. Third question, I just wondered, many companies like yourself have lending platforms that are probably more elaborate than the environments can allow for in terms of activity given how the market's been freezing up. Do you see much opportunity for consolidation industry where one can derive more efficiency by getting more business on existing platforms, so either somebody that we could buy or more likely somebody that would want to buy us given our evaluation?

I mean, certainly all the stocks that I follow are trading at heavy discounts for people who can get to the underlying nature of the loans and understand the cheapness of the liabilities, meaning that you can also purchase a liability that's owned more of an underlying assets. I'm surprised that there haven't been more consolidation.

It's going to happen, but again, congratulations. You're doing a very good job in a different environment.

Thanks, Lee.

(OPERATOR INSTRUCTIONS)

We have no other questions at this time.

Okay. Thank you very much and we look forward to speaking with you next quarter.

This concludes the presentation. You may now disconnect and have a great day.