Acres Commercial Realty Corp (ACR) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Resource Capital Corp. Earnings Conference Call. My name is Nykita and it will be my pleasure to assist you today.

At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session towards the end of today's conference.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes. I would now like to introduce your host for today's call, Jonathan Cohen, President and CEO. Please proceed.

Thank you for joining the Resource Capital Corp. Conference Call for the second quarter of fiscal 2008. 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.

Thank you, Jonathan. 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 of the date hereof. The Company undertakes no obligation to update any of those forward-looking statements.

And with that, I'll turn it back to Jonathan.

Thank you, Purvi. First, a few highlights. For the quarter ended June 30, 2008, RCC, Resource Capital, reported adjusted net income, a non-GAAP measure that excludes the effect of certain non-cash charges and non-operating transactions, of $9.3 million, or $0.37 per share diluted.

For the quarter ended June 30, 2008, RCC reported REIT taxable income of $9.4 million or $0.38 per share diluted, as compared to $10.5 million or $0.42 per share diluted, for the quarter ended June 30, 2007, a decrease of $1.1 million or 10%.

Although we are unhappy about having a loss for the quarter, with the exception of a defaulted loan that we disclosed in the first quarter, which we believe had little value and we fully reserved for this quarter, we continue to see generally solid credit performance from our real estate portfolio. Of course, in this environment, we are tremendously focused on all of our credits.

On the commercial lending side, credits also remained -- generally remained solid, but we have added to our general reserves and sold out of some names to protect our principal and build par within our vehicles.

Our portfolio income, which funds virtually all of our dividends, seems to us to be very much intact. We declared and paid a dividend of $0.41 for the first quarter and are adjusting our guidance for the next two quarters to a range of $0.37 to $0.39 per quarter.

The span of our guidance is due to uncertainty about exit fees and participations. For instance, we achieved adjusted net income of $0.37 this quarter without any exit fees or other fees of substance.

This is atypical for our business. We believe that the general portfolio remains in good shape, and we are hopeful to start to see some widening on the asset side of the equation. This range of dividends implies a 23% to 23.6% yield on the current stock price, which seems to us to be quite substantial.

Our economic book value, a non-GAAP measure, was $11.34 per common share as of June 30, 2008. Our GAAP book value per common share was $9.90 as of June 30, 2008. The difference between GAAP and economic book value is mostly comprised of swap and hedging marks and negative marks on our CMBS.

You may notice that our GAAP book value is within 1% of last quarter's book value, even after reserving for losses and writing off the one real estate loan.

During this quarter, we did make additional general and specific reserves against our assets. We are comfortable with our balance sheet, as most assets are match funded. As of August, we have recourse at the company level to only $880,000 of short-term repurchase agreements that are guaranteed by the Company, secured by face value of $4 million of assets.

This is down substantially from $7.6 million last quarter, and we have over $17.1 million in cash and availability on our corporate credit line. This is after paying our most recent dividend of $10.4 million.

With those highlights out of the way, I will now introduce my colleagues and then proceed to dive deeper into the Company and its performance. With me 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.

As a Company we remained very, very focused during this quarter. Conditions remained difficult with the housing market continuing its decline, with retailers hurt by weakness in consumer spending, high oil prices, and with the general malaise of the economy.

Transaction volumes in the commercial real estate and commercial finance area were extremely, extremely low. We focused our time on credit analysis and re-underwriting, decreasing short-term recourse liabilities, and setting the Company up to continue to produce a very solid dividend.

At the same time, we prepared ourselves for the next few quarters with no rebound or market increases in the credit market. Our overall adjusted net income and REIT taxable income statistics, as mentioned above, were somewhat satisfying given the environment, and we believe that these types of numbers will continue to be realized for the foreseeable future.

I would like to reiterate that our portfolio continues to perform solidly, and we have seen some prepayments start to happen after June 30. We believe that we have a few more quarters to allow the real estate finance markets to fire up again before we see our borrowers become a bit overly anxious.

We believe that 2008 is going to continue to be very difficult for refinancing real estate other than multifamily. We anticipate gradually easing in liquidity and the ability for refinancing starting in early 2009. We've seen new loans getting done in the commercial side of our business, albeit with no real size or frequency.

Although we worry about these volumes on both sides, we again remind people that we were very, very cautious in our approach to our business and virtually avoided true development loans, condo conversions, land, and other types of riskier lending strategies.

After 2005 and early 2006, we also began to originate our own loans, and those loans have significant credit enhancements through structured protections, and we have a good amount of ability to work with borrowers.

We believe the underlying real estate that we finance is very solid, and much of our portfolio is concentrated in markets that we believe are sound, even in this environment.

Although this quarter saw generally good credit, we did have some issues of which we addressed through either a specific reserve or adding to a general reserve. As the market shut down aggressively during February and then March, we saw very little ability to get paid down on our overall portfolio and reinvest at higher spreads.

We were able to do that on $164,000 of paydowns in the real estate portfolio and $25.5 million in the bank loan portfolio. We had hoped six months ago on a call for up to $80 million per quarter, and, therefore, we fell tremendously short. We are more hopeful now that we will see a greater rate of repayment going forward.

Now, I will ask Dave Bloom to walk through our commercial real estate portfolio.

Thanks, Jonathan. RCC's commercial mortgage portfolio has a current committed balance of approximately $911 million across a diverse and granular pool of 51 separate loans. Our portfolio of commercial mortgage positions remains in components as follows -- 66% whole loans, 24% mezzanine loans, and 10% B-notes.

Our collateral base is diversified across the major asset categories in geographically different markets, with a portfolio breakdown of 30% multifamily, 22% office, 24% hotel, 17% retail, and 7% other, such as flex office, industrial, and self-storage.

Credit across the portfolio remains strong, with the majority of the properties performing well above our pro forma underwriting and ahead of schedule. With the exception of the small mezzanine loan default that we disclosed last quarter, our commercial mortgage portfolio continues to be current with no defaults.

With regard to the one defaulted loan position that we are writing off in its entirety this quarter, it is of interest to note that this loan was not a victim of the credit crisis, but rather a combination of factors that were not within the sponsor's control, which combined to significantly erode the value of the underlying collateral.

The defaulted loan had a book value of $11.6 million and was secured by the equity interests of two regional malls. From a value perspective, one of the two malls was substantially larger and represented about 75% of the collateral value and a large majority of the free cash flow supporting the loan.

I briefly touched on some of the facts that led to the defaulted loan on our last quarterly call, but to refresh those details, as a result of a merger of two anchors at the larger of the two malls, one anchor closed and, therefore, co-tenancy provisions for other anchors and inlines alike were triggered.

As tenants opted to terminate leases, cash flow at the property fell and expenses increased as net reimbursements dropped. Another anchor at the mall is in the process of closing, and the bankruptcies of both Linens 'n Things and Steve & Barry's have impacted the property.

If not the perfect storm of a good property gone bad with the sudden and severe vacancy issue, the borrower is experiencing stress in a multibillion dollar limited service hotel loan, and rather than redevelop the mall properties, has opted to deliver a deed in lieu of foreclosure.

RCC has an extensive real estate infrastructure and we are fully prepared to exercise any and all remedies in the event of defaulted loans and to work out, operate, or own any property securing one of our debt positions.

In addition, we are also amenable to working with borrowers who continue to support their properties. That said, the mall portfolio loan presented a situation where the benefits of our continued involvement were greatly outweighed by the risks and liabilities.

While not in our nature, after months of fruitless discussions with a disengaged borrower and third-party servicers, we opted to walk away and recognize our loss.

Of particular note in this instance is the fact that the defaulted loan was a relatively high LTV mezzanine position behind a ten-year securitized first mortgage. And while it dated back to 2005 with very strong cash flow characteristics of approximately 1.18 when we closed, the recovery of our investment was subordinate to the first mortgage, which will be significantly impaired in this case as well.

The higher LTV position carried with it a hefty coupon of [then] treasuries plus 7.65, or close to 13%, but we have long since exited the mezzanine only arena due to the inherent risks to recovery in work out situations such as this.

As we look across the balance of our commercial mortgage portfolio, we are pleased with the credit fundamentals of the underlying properties. In addition, we feel more secure because the majority of our loans are self-originated whole loans.

And while we do still have some B-note and mezzanine loan positions, we are very comfortable with the value and relative security across our sub debt portfolio, which has a weighted average LTV of 73% as compared to the defaulted mezzanine loan, which had an LTV ratio of 87%. When factoring in our whole loan positions, the weighted average LTV ratio of the entire commercial mortgage portfolio is 72%.

As I've discussed in previous calls, during this previous -- during this period of lower transaction volumes, our primary efforts have focused on asset management activities. We've repeatedly utilized our direct lines of communications with borrowers, and have taken the 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.

Monthly asset management reviews and risk ratings continue to evidence strength in our portfolio. And we continue to see significant progress towards borrowers' plans for value creation at the individual property and portfolio levels.

In the few instances where we have seen borrowers falling short of targets, we have been proactive in our approach and have worked with borrowers to understand and address issues facing their asset blends.

To be clear, we are current on all of our loans and have not had to enter workout discussions in any of our positions. That said, in two instances we have made minor modifications to loans in exchange for significant additional structural enhancements and fees.

The lack of liquidity in the market is an issue for shorter-term bridge loans, but we are not in any sad situations with bullet maturities looming. To the contrary, despite a lack of liquidity for mega-transactions, we are still seeing a tremendous amount of activity across our portfolio. And we anticipate a number of loans paying off well ahead of schedule, starting today with the repayment of a $14 million loan that includes an exit fee and continuing through year-end.

The majority of our borrowers are IRR driven investors who look to sell properties when they are done with their value-add plans. With business plans complete at the property level, our borrowers are likely to sell rather than hold out for the last dollar, and there are numerous cash buyers still very active in the markets where we have concentrated our lending efforts.

We remain 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. We will certainly 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 Jon and rejoin you for Q&A at the end of the call. Thanks.

Thanks, Dave. I will now give you some statistics on our corporate bank loan portfolio. We have $951 million of bank loans encompassing over 30 industries. Our top industries are healthcare, diversified, printing and publishing, chemicals, and broadcasting and entertainment.

As of the end of June, our average loan asset yields 2.28% over LIBOR, and our liabilities are costing us 47 basis points over LIBOR. We've been able to buy loans at a substantial discount over the last several months and continue to see widening on the asset side.

Now, I will ask Dave Bryant, our CFO, to walk us through the financials.

Thank you, Jonathan. I'll now cover our financial highlights for the quarter ended June 30.

Our estimated REIT taxable income for the quarter ended June 30 was $9.4 million or $0.38 per common share. For the second quarter in 2008, our Board declared a dividend of $0.41 per common share for a total of $10.4 million. This brings our year-to-date results to $21.5 million of REIT taxable income or $0.86 per common share, with an associated dividend of $0.82 per share for a payout ratio of approximately 95%.

At June 30, RCC's investment portfolio was financed with approximately $1.7 billion of total indebtedness and included $1.5 billion of CDO senior notes, $85.8 million outstanding under a secured term facility, $64.2 million in a three-year non-recourse commercial real estate repurchase facility and $4.6 million in other repurchase agreements.

We also have $51.5 million sourced from our unsecured junior subordinated debentures related to our two TruPS issuances in 2006. We ended the period with $250.3 million in book equity.

RCC's borrowings of $1.7 billion had a weighted average interest rate of 3.44% at June 30. To date, our non-recourse commercial real estate repurchase facility is slightly higher at $66.6 million, with an approximate $121.5 million in collateral pledged against that facility, for an advance rate of approximately 55%.

Of note, since quarter-end, we have eliminated all but $880,000 of short-term repurchase agreement debt, which is securitized by collateral with a face value of $4 million.

We consider leverage ratio 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 hedges is $11.34 per common share at June 30.

Our leverage based on economic book value is 6.0 times. When we consider our TruPS issuances, which have a remaining term of 28 years, as equity, we see our leverage drop to 5.0 times.

Our GAAP book value per common share was $9.90 at June 30, 2008, as compared to $10.03 at March 31. This second quarter decrease in GAAP book value of approximately $0.13 is primarily due to additional provisions for losses of $15.7 million on our loan and lease portfolio, offset by an improvement of $11.6 million in the mark-to-market of our cash flow hedges.

At June 30, our equity is allocated as follows -- commercial real estate loans and CMBS 73%, commercial bank loans 25%, and direct financing leases and notes of 2%.

Given the market focus on liquidity, which is disclosed in detail in our press release, I'll now provide a summary of sources and uses of funds year-to-date for 2008.

We sourced and used approximately $124.3 million during the six months ended June 30. Our major categories of sources include -- from cash available for reinvestment, $83.4 million; from a loan principal repayment, $11.2 million; from the sale of a CMBS position, $10 million; and from adjusted net income, $19.7 million, for total sources of $124.3 million.

Our major uses during the three months were -- for settlement on CRE loans, commercial real estate loans, and future fundings $41.5 million; for net acquisitions on bank loans $13.1 million; for a net reduction in our borrowings of $40.1 million; for distributions of $20.9 million; for working capital $0.5 million; and the remaining amount to increase our cash balance by $8.2 million, for total uses of $124.3 million.

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

Thanks, Dave. At this time I think we're finished and we'll open the conference call for questions.

(OPERATOR INSTRUCTIONS). Please stand by for your first question. Our first question comes from the line of Douglas Harter of Credit Suisse. Go ahead.

Thanks. I was wondering first if you could talk about where you think you stand on terms of reducing your non-CDO debt, how much more of that you think you have to do and when you think you might have some -- be able to use some of the cash that you have.

That's a very good question, Doug, thank you. We have been in the process over the last couple, few months of basically deleveraging, as you've seen on our recourse line, the $880,000, or virtually nothing. And now the process going forward is to deleverage the recourse -- the non-recourse line that's outside the CDO, which is a little bit over $60 million.

And we're in the process of doing that. As Dave said, we've just gotten a repayment. We've been told that there are a few more coming down the pike, which we're pretty excited about, and I think over the next quarter or two you'll see some deleveraging and also us becoming more active in putting money out and seizing opportunity where others -- in very safe lending environments where others just don't have any options.

Great, thank you. And then on the dividend guidance, can you -- does that incorporate the fact that the loan that you took the provision for this quarter will actually charge off and negatively impact adjusted EPS?

Yes. Well, we didn't have any income from that loan this quarter or, I believe, last quarter --

Correct.

-- So, what you're seeing is not going to change going forward. The negativity to this quarter, and why we're being very cautious on the dividend guidance is because we haven't seen origination fees, exit fees, participations. We haven't really been able to make money other than on our portfolio income basis.

So the easy answer is going forward we never anticipated that or anything else being in our portfolio income, which is producing the super majority of our dividend.

I guess what I was trying to get to is when the loan actually charges off, is that a negative to the adjusted EPS or REIT taxable EPS number or has that negative already been [filtered]?

It's already occurred.

The negatives have already been--

That's in the numbers.

--impacted.

That's in the numbers?

Yes.

All right, thank you.

(OPERATOR INSTRUCTIONS). And there are no additional questions at this time.

Well, thank you very much, and we look forward to speaking with you next quarter.

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