Acres Commercial Realty Corp (ACR) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter and year ended December 31, 2008 Resource Capital Corp. Earnings Conference Call. My name is Clarissa and I will be your coordinator for today. At this time, all participants are in a listen-only mode.

(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 for joining the Resource Capital Corp. conference call for the fourth quarter of fiscal year ended 2008. I am Jonathan Cohen, President and CEO of Resource Capital. Before I begin, I would like to ask Purvi Kamdar, our Director of Investor Relations, to read the Safe Harbor statement.

Thank you, John. When used in this conference call, the words "believed," "anticipate," "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 those 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.

With that, I'll turn it back to Jonathan.

Thank you, Purvi. First, for a few highlights. For the quarter ended December 31, 2008, RCC reported adjusted net income, a non-GAAP measure that excludes the effect of certain non-cash charges and non-operating capital transactions of $11.1 million or $0.44 per share. For the fourth quarter and year ended December 31, 2008 estimated re-taxable income, a non-GAAP measure, was $8.3 million or $0.33 per share diluted and $39.3 million or $1.57 per share diluted respectively as compared to $11.4 million or $0.46 per share diluted and $42.4 million or $1.71 per share diluted for the fourth quarter and year ended December 31, 2007.

We declared and paid a dividend of $0.39 per common share or $9.9 million for the quarter ended December 31, 2008. RCC declared and paid dividends of $1.60 per common share for total dividends paid of $40.7 million or 103% of estimated re-taxable income for the year ended December 31, 2008.

Our economic book value, a non-GAAP measure, was $10.22 per common share as of December 31, 2008. Our GAAP book value was $8.04 per common share as of December 31, 2008. Given the financial environment, we determined that we should take a substantial provision against loan losses in our corporate bank loan portfolio.

As for the bank loans, we looked at the companies that we have lent to and took reserves against any loan that we felt was secured by a company that may have liquidity issues within three to six months. We then applied a very conservative recovery rate for the loan. We reviewed our entire portfolio while doing this calculation. In doing so, we reported a GAAP net loss of $0.29 per share, including non-cash charges for loan and lease losses of $18.3 million.

We continued to benefit from our lack of short-term liabilities, decent cash position and liquidity. Our match funded assets and liabilities were in my opinion excellent underwriting in asset management. Of course, this is a terrible environment. But we are doing whatever we can to protect our cash flow and our $8.00 GAAP book value.

As of December 31, 2008, we have recourse at the company level to less than $40,000 of short-term repurchase agreements that are guaranteed by the Company. And these are secured by over $4 million of assets. This is down from $180,000 as of September 30, 2008, and we have over $10 million in cash.

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 2009. With me today are Dave Bloom, Senior Vice President in charge of Real Estate lending; and David Bryant, our Chief Financial Officer; and of course, Purvi Kamdar.

The economic environment worsened substantially during the last six months. We have found ourselves working very diligently to make certain that we protect our loans and build cash. Since we have virtually no recourse to any liabilities and no short-term maturities, we have the luxury of working to build cash from de-leveraging, maintaining our tasks for our CDOs and CLOs, and focusing on value.

Our portfolios consist mostly of home loans and mortgages, and therefore we are able to directly work with the borrowers to help them through any issues that may arise. Of course, we are on high alert on every loan we hold, but so far so good. We continue to see relative stability within our real estate portfolio. This view was recently affirmed by Fitch on both of our CDOs, which finance our commercial real estate portfolio, even using a different model on loss assumptions we have been affirmed across all classes.

We consider this affirmation which we mentioned previously of our credit quality to be significant external validation of the quality of our commercial real estate portfolio. Transaction volumes in the commercial real estate and commercial finance area were extremely low during the quarter. We focused our time on credit analysis and re-underwriting, decreasing short-term recourse liabilities to next to nothing and setting the Company up to continue to produce a solid dividend.

At the same time, we prepared ourselves for the next few quarters with no rebound or any market increases in any of the credit markets. Our overall adjusted net income and re-taxable income statistics as mentioned earlier were somewhat satisfying given the environment and the fact that we have de-leveraged the portfolio over time. 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. We believe the real estate markets and lending in those markets will not come back to life anytime soon and at least until 2010. The exception is for multi-family properties and some credit-oriented commercial properties, where we haven't seen some payoffs. These are where we are seeing some repayments in the future as well.

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

Thanks very much, John. RCCs commercial mortgage portfolio has a current, committed balance of approximately $825 million across a diverse and granular pool of 46 separate loan positions. Our portfolio of commercial mortgages is in components as follows -- 66% whole loans, 24% mezzanine loans, and 10% B notes. The collateral base underlying the portfolio continues to be diversified across the major asset categories in geographically diverse markets with a portfolio breakdown of 32% multi-family, 21% office, 27% hotel, 14% retail, and 6% other such as flexed office, industrial, and self-storage.

Our commercial mortgage portfolio continues to be current with no defaults. However, we do have concerns about market fundamentals in general and the deterioration of the broader economy having an impact on our portfolio. As you have repeatedly heard from me in previous calls, during this period of lower transaction volumes, our primary efforts have focused on asset management activities. We continue to be in regular, direct communication with our borrowers and have bolstered routine asset management functions which include monthly re-underwriting of property cash flows, monitoring the progress of capital expenditures, leasing and other upgrade plans, as well as stressing loan exit scenarios based on current property values.

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 plans. To be clear, we are current on all of our loans and we are willing to work with borrowers who demonstrate a commitment to their properties and are in need of assistance based upon underlying property issues that we can identify.

While we have not had any payment defaults which have resulted in non-performing loan situations, we have had borrowers who are delayed the lease up or repositioning of assets and we have made modifications to their loans to carry them through this period. In exchange for modifications, we are receiving additional exit fees and other structural enhancement to the loans.

In one instance, we had a borrower that didn't qualify for a loan extension because the required hurdle of a 1.5 debt service coverage ratio on a trailing 12-month basis. The borrower had been delayed with certain property improvements and did satisfy the coverage requirement for a trailing six-month period. In this situation, we worked with the borrower and granted him the extension while also adding additional extension periods to the loan in exchange for extension fees, increased spread, and increased exit fees.

In another circumstance, we made a loan for the repositioning of a well located in-fill neighborhood shopping center that had a vacant anchor space when we made the loan. The borrower secured leases for the vacant anchor space from two very strong tenants, but required additional capital to prepare the space for occupancy. In this instance, the borrower put fresh equity into the deal and we matched it with the balance of the money required to get the new tenants into the property. We also added additional extension options subject to debt service hurdles as well as additional exit fees.

Credit across the portfolio remains generally stable and we are pleased with the overall performance of the properties securing our loans. But these are truly unprecedented times, so we are extremely watchful of each and every one of our positions. While recent LIBOR fluctuations have had an unsettling effect on any number of investment portfolios, well over half of our commercial loan portfolio consists of self-originated whole loans and benefit significantly from LIBOR floors of approximately 4.5% that we structured into the loans at origination.

Our current LIBOR floors are almost 400 basis points above where LIBOR closed yesterday. The fact that we have structured our loans with floors gives us additional room to maneuver in situations where borrowers are under pressure. We have the ability to lower the floor, while keeping the spread the same, which can have a significant impact on current cash flow from portfolio properties. In these instances, we are also requiring significant structural enhancements to the loan as well as increased exit fees.

The senior members of the RCC commercial mortgage team have continued with multiple in-person meetings with borrowers and property tours, which allow us ample opportunities to get out in front of anything that might be burdening a loan position. We continue to face a unique and very challenging market, but we remain fully engaged and benefit from a deep bench of experienced real estate professionals as we navigate forward through stretches of uncharted territory. Despite tough market conditions, we are identifying potential issues early and working through them well in advance of their impact to any of our loan positions.

The real estate debt markets remain frozen, but many of the asset specific business plans have been implemented by our borrowers and their plans for value creation have been realized. As the credit markets thaw, we would anticipate pay-offs across our portfolio.

With that, I will turn it back to John and rejoin you for the Q&A at the end of the call. Thank you.

Thanks, Dave. I want to reiterate that we are true believers in our stock and have bought back shares of our Company as recently as last quarter. But before I go into that, I would like to just step back and talk about our corporate bank loan portfolio, which I know some people would like to have more information on. I will give you some statistics on the bank loan portfolio.

We have $946 million of bank loans encompassing over 30 industries. Our top industries are healthcare, diversified, chemicals, printing and publishing, and broadcasting and entertainment. As of the end of December, our average loan asset yields 2.38% over LIBOR, and our liabilities are costing us 47 basis points over LIBOR. We have been able to buy loans at a substantial discount over the last several quarters and continued to see lots of opportunity. This in essence helps us build back par within our collateralized loan obligations.

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

Thank you, Jonathan. I will now cover some financial highlights for the year ended December 31, 2008. Our estimated re-taxable income for the fourth quarter was $8.3 million or $0.33 per common share. For the fourth quarter in 2008, our Board declared a dividend of $0.39 per share for a total of $9.9 million. This brings our year-to-date results to $39.3 million of re-taxable income or $1.57 per common share, with an associated dividend of $1.60 for a pay-out ratio of approximately 103%.

At December 31, 2008, RCC's investment portfolio was financed with approximately $1.7 billion of total indebtedness and included $1.5 billion of CDO senior notes, $95.7 million outstanding under a secured term facility, and $17 million in a three-year non-recourse commercial real estate repurchase facility, and a nominal $90,000 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 $203.9 million in book equity. RCC's borrowings of $1.7 billion had a weighted average interest rate of 2.57% at December 31, 2008. Our investment portfolio is 91% match funded by long-term borrowings and 9% from term borrowings with a weighted average remaining life of 15 months with some extension options beyond that timeframe.

Of note, we continue to pass the critical interest coverage and over-collateralization tests in our two real estate CDOs and our three bank loan CLOs. Each of these structures continues to perform and generate stable cash flow to Resource Capital year-to-date in 2009 as expected. Our non-recourse commercial real estate repurchase facility has $17 million outstanding with approximately $42.9 million in collateral pledged against that facility for a modest advance rate of approximately 39%.

We consider leverage ratio from two positions. As John noted our economic book value after adjusting for unrealized losses in our CMBS portfolio and unrealized losses from our cash flow hedges is $10.22 per common share at December 31, 2008. Our leverage based on our economic book value is 6.6 times. When we consider our Trups issuances, which have a remaining term of approximately 28 years as equity, we see our leverage drop to 5.3 times.

Our GAAP book value per common share was $8.04 at December 31, 2008 as compared to $9.45 at September 30, 2008. This fourth quarter decrease in GAAP book value of $1.41 is primarily due to the mark-to-market on our cash flow hedges that resulted in an $18.6 million decline as compared to September 30 and additional provisions for losses of $18.3 million on our loan and lease portfolio. At December 31, our equity is allocated as follows -- Commercial real estate loans and CMBS, 72%; commercial bank loans, 25%; and direct financing, leases and notes of 3%.

Given the market focus on liquidity, I will now provide a summary of our sources and uses of funds for 2008. We sourced and used approximately $185.1 million during the 12 months ended December 31. Our major categories of sources include from cash available for reinvestment, $59.7 million; from the net change in our investment portfolio, $63.3 million; from the sale of the CMBS position, $10 million; from working capital, $8.8 million; and from adjusted net income, $43.3 million, for total sources of $185.1 million.

Our major uses during the 12 months were -- For a net reduction in our borrowings of $95.1 million, for distributions of $40.7 million, for settlement on CRV loans and future fundings of $31.1 million and for net acquisition of leases of $9 million. We also funded margin calls of $0.6 million and the remaining amount increased our cash balance by $8.6 million. This yields total uses of $185.1 million.

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

Thanks, Dave. Again, I want to reiterate that we are true believers in our stock and we did buy back shares last quarter. We believe that the value is substantial here in the portfolio and our job is to go after it and make sure that we realize it for our shareholders. Management's recommendation is that -- going forward, unlike other rates which have paid out stock as part of their dividends, our intention is to pay in cash at least in the near future. Of course, this is subject to the Board's approval. We have fine liquidity and will continue to build cash, which will of course enable us to come through with our promises and position ourselves defensively to protect our book value over $8 and our cash flow.

And with that, I will ask the operator to open it up for any questions that anybody might have.

(Operator Instructions)

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