Acres Commercial Realty Corp (ACR) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2009 Resource Capital Corp. Earnings Conference Call. My name is Josh and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference.

(Operator Instructions)

I'd now like to turn the presentation over to our host for today's call, the President and CEO of Resource Capital Corp, Jonathan Cohen. You may proceed.

Thank you. Thank you for joining Resource Capital Corp. conference call for the second quarter of 2009. 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. When used in this conference call, the words believe, anticipate, expect, 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 expressed in the Company's reports filed with the SEC, including its reports on Form 8-K, 10-Q, and 10-K, and in particular, Item 1 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 the date hereof. The Company undertakes no obligations 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 June 30, 2009, RSO reported net operating income of $9.5 million, or $0.39 per share, as compared to $10.3 million, or $0.42 per share, for the quarter ended June 30, 2008, a decrease of $760,000, or 7%.

We announced a dividend of $0.30 per common share for the quarter ended June 30, 2009, $7.5 million in the aggregate, paid on July 28, 2009 to stockholders of record as of June 19, 2009. Our economic book value, a non-GAAP measure, was $9.25 as of June 30, 2009 and our GAAP book value was $6.66 per common share as of June 30, 2009.

The quarter reflects the reality of the world -- our continuing conservative stance as well as a worsening real estate market, an improving bank loan market, and the slowing of the worsening of our national economy. Not only have we continued to sell assets that we think have diminished in value, hence our decision to book a reserve this quarter of substance as well as losses on disposed bank loans.

Though we also continue to delever, both through repayments -- a total of $114.6 million this quarter -- the sale of assets as well as the purchase of our own debt at a steep discount. We purchased a bond from our first commercial real estate CDO at a price of $0.08, 8% of par, resulting in a gain of $6.9 million and further deleveraging our portfolio. This opportunity only presented itself due to the liquidation of a financial vehicle and the lack of buyers in the marketplace who could fully understand the value of this security in real time.

Our leverage loan assets outperformed, moving from a $70 weighted average price to $80. We continue to see price appreciation after the quarter through July and into August as the portfolio has moved to an approximate $83 to $85 price as of the end of July. This improvement has led to our ability to enhance our overcollateralization tests as well as upgrade the quality of our loan book. This in turn helps us keep the cash flow machine going.

On the commercial real estate side, we are seeing incredible opportunity and so you can expect to continue seeing us use free capital to buy back our bonds. We bought back the $7.5 million for $600,000 as well as buy our stock at the right prices. We bought 700,000 shares after the quarter, in July, at approximately $3.20, as well as looking for new opportunities to lend as capital is available.

We've been working hard on deploying cash within the real estate CDOs at steep discounts and thereby building overcollateralization as well as trying to sell assets that we think have downside to them, hence the $9.1 million reserve for commercial real estate this quarter. We have over $38 million in our real estate CDOs in cash and can use these funds to build overcollateralization or par.

Most importantly, we continue to cash flow nicely -- over $9.5 million this quarter -- and see no end to this ability. Obviously, the real estate market has gotten much worse. This is forcing us to work even harder. This is also allowing us to deleverage through discount bond purchases.

Given the economic environment, we determined that we should take a substantial provision of $9.1 million on a specific multi-family portfolio loan in our commercial real estate portfolio, where we are looking to sell off the properties within the loan. As for the syndicated bank loans, as we have done each quarter, we looked at the companies that we have lent to and took reserves against any loans that we felt the borrower 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 using this methodology. As a result, we increased our bank loan allowances by $10.3 million. We also sold three bank loan positions for a loss of $1.5 million in an effort to manage rating agency downgrades in our three CLOs. In completing these actions, we reported a GAAP net loss for the quarter and at June 30, 2009 of $0.21 per share and a net operating income of positive $0.39 per common share.

We continue to benefit from our lack of short-term liabilities, decent cash position and liquidity, our match-funded assets and liabilities, and our good underwriting in asset management. We continue to do whatever we can to generate cash, buy assets at a discount, and upgrade our credit profile.

With those highlights out of the way, I will now introduce my colleagues. With me today are David Bloom, Senior Vice President in Charge of Real Estate; and David Bryant, our Chief Financial Officer; as well as Purvi Kamdar, our Director of Investor Relations.

The economic environment has been very difficult and during the second quarter got worse for commercial real estate, and I mean much worse. Nonetheless, we are dedicated to managing through this period of difficulty in getting to the value of the assets. As I have said in the previous two quarters, again we are determined to make a meaningful cash dividend this quarter. In the past 12 months, we have distributed over $1.38 per share and since 2005, our inception, we have distributed over $6.17 per share. We expect this trend of high payouts to continue.

We continue to see relative outperformance within our real estate portfolio and our bank loan portfolio. That being said, the challenges increase as values decline and borrowers tire. We do believe that a huge opportunity looms for Resource Capital and those able to focus on the core abilities of their platform.

With the demise of commercial banks and CMBS, our business, that of whole loan lending for cash flow assets, is very attractive. Now that we have effectively deleveraged and have no short-term obligations, we are poised to take all repayments when they come and reinvest in the new loans at incredibly attractive spreads. We believe we can achieve equity-like returns and do so with safety. Now I will ask Dave Bloom to walk through our commercial real estate portfolio.

Thanks very much, Jonathan. RCC's commercial mortgage portfolio has a current committed balance of approximately $796 million across a diverse and granular pool of 46 separate loans. Our portfolio of commercial mortgage positions is in components as follows -- 65% whole loans; 25% 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 31% multi-family, 22% office, 28% hotel, 13% retail, and 6% other, such as industrial, self storage, and flex office.

As of June 30, there is one $7 million multi-family loan that is currently in the foreclosure process. We remain confident about the ultimate recovery of principal in this situation because even a distressed valuation of the asset exceeds our outstanding loan balance.

In addition to the one loan in foreclosure, we have a $10.6 million loan that has been in technical default since July. The loan has coverage in excess of 1.3 times and we are working with the borrower and servicers to resolve the issue as soon as possible.

With the exception of the loans that I've highlighted, our portfolio of commercial real estate loans continues to be current. Despite the current low level of delinquencies in the portfolio, we remain extremely concerned about market fundamentals in general and the impact of the weak economy on our portfolio.

As you've repeatedly heard from me in previous calls, during this period of lower transaction volumes, our primary efforts have been focused on asset management activities. While we have not had payment defaults which have resulted in non-performing loan situations, we have borrowers who are delayed in the business plans for their properties.

In order to effectuate the lease up or repositioning of the assets, we have worked with borrowers and made modifications to their loans to carry them through this period. In exchange for modifications, we are receiving principal pay-downs, fresh equity contributions, additional exit fees, and structural enhancements to the loans.

In the instances where we have seen borrowers missing targets, we have been proactive in our approach and have worked with borrowers to understand and address issues facing their asset plans. We remain willing to work with borrowers who continue to demonstrate a commitment to their properties and are in need of assistance as a result of delays or other property issues brought on by the broader economic conditions.

In instances where borrowers don't meet extension or future advance hurdles, but are able to demonstrate that their asset-specific business plans remain viable, we continue to do what we can to make accommodations that allow the borrowers to pursue completion of their business plans. That said, we require evidence of a borrower's continued commitment and the best evidence in this regard is a fresh infusion of equity to the property by the borrower.

As I've mentioned, relief from extension hurdles or covenants are accompanied by structural enhancements to loans such as elements of recourse or tighter cash management protocols as well as increased spread and additional or increased extension and exit fees.

We've modified a number of loans across the portfolio and in every instance our goal was to work with the borrower to provide adequate time to see their business plans through and reach a capital event that will pay off their loan, which in the majority of the cases is through a sale. In certain situations where we have modified loans, we have been able to work with borrowers to provide for immediate sale of portions of their portfolios, the proceeds of which go to pay down their loans and as such, cut our exposure.

An example of this is in a portfolio of 16 multi-family properties across two loans positions to the same sponsor. Some of the properties were ready for sale at or close to the allocated loan balance, so we worked with the borrower who listed 12 of his 16 properties for sale. The borrower had a desire to hold four properties and we will provide longer-term financing for these buildings. To date, of the 12 properties listed, two have closed and six additional properties are under contract at reasonable prices.

In addition, in a number of situations where we have modified loans, we have reduced or eliminated altogether certain future funding obligations. To date, we have reduced our future funding obligations by approximately $12.4 million, which is a 54% decrease in these obligations.

The fact that we have structured the majority of our loans with LIBOR floors gives us additional room to maneuver in situations where borrowers are under pressure. We have the ability to lower the floor while maintaining or even increasing the spread, which can have 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 fees to make up for any interest margin that we are foregoing in the short-term.

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 remain fully engaged and continue to benefit from a deep bench of experienced real estate professionals as we navigate forward through continued stretches of uncharted territory. Despite tough market conditions, we are working through issues well in advance and we are doing the best job we can in managing our portfolio.

As I've noted before, the majority of our borrowers are IRR-driven investors who look to sell properties when they are done with their value-add plans. When property business plans are complete, many borrowers are likely to sell rather than hold out for the last hour and there are still active cash buyers in the markets where we have concentrated our lending efforts.

While the real estate debt markets remain frozen, many of the asset-specific business plans have been implemented by our borrowers and the plans for value creation have been realized. As the credit markets thaw, we would anticipate pay-offs across our portfolio. With that, I'll turn it back to Jonathan and rejoin you for the Q&A at the end of the call.

Thanks, Dave. I will now give you some statistics on our corporate bank loan portfolio. We have $948 million of bank loans encompassing over 30 industries. Our top industries are healthcare, 12%; diversified, 8.8%; broadcasting and entertainment, 6.6%; printing and publishing, 5.9%; and chemicals, 5.7%.

As of the end of June, our average loan asset yields 2.52% 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 continue to see opportunity on the asset side. Now I will ask Dave Bryant, our CFO, to walk us through our financials.

Thank you, Jonathan. Our estimated REIT taxable income for the second quarter of 2009 was $5.3 million, or $0.21 per common share. For the second quarter in 2009, our Board declared a dividend of $0.30 per common share, or a total or $7.5 million. This brings our year-to-date results to $11.4 million or REIT taxable income, or $0.46 per common share, with an associated dividend of $0.60 per common share for a payout ratio of approximately 130%.

At June 30, 2009, RCC's investment portfolio was financed with approximately $1.6 billion of total indebtedness. That included $1.5 billion of CDO senior notes and $51.5 million sourced from our unsecured junior subordinated debenture related to our two TruPS issuances in 2006. We now have only $3.3 million in a three year non-recourse commercial real estate repurchase facility and a mere $54,000 in other repurchase agreements. We ended the period with $165.9 million in book equity. RCC's borrowings of $1.6 billion had a weighted average interest rate of 1.43% at June 30, 2009, a reflection of very low LIBOR in today's market.

After disposing of our equipment leasing portfolio and its associated term facility at par, and consistent with our stated philosophy of maximizing match funding, our investment portfolio is virtually 100% match funded by long-term borrowings. Our non-recourse commercial real estate repurchase facility has $3.3 million outstanding, down substantially from $16.0 million at March 31, 2009.

This facility has approximately $24.6 million in collateral pledged against the facility for a very conservative advance rate of approximately 13%. This facility is also currently scheduled to amortize and be paid off in full by March 31st of next year.

Of note, we continue to pass the critical interest coverage and overcollateralization tests in our two real estate CDOs and three bank loan CLOs. Each of these structures continue to perform and generate stable cash flow to RCC year-to-date in 2009.

We currently have an excess of $38 million in investable cash, comprised of $22 million and $16 million in our bank loans and real estate deals, respectively. And we continue to use this cash, as John noted, for reinvestment in our CLOs and CDOs to build collateral and strengthen our position in each structure.

We consider our 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 $9.25 per common share at June 30th. Our leverage based on economic book value is 6.9 times. When we consider our TruPS issuances, which have a remaining term of approximately 28 years as equity, we see our leverage drop to 5.5 times.

Our GAAP book value per common share was $6.66 at June 30th, as compared to $6.81 at March 31, 2009. This second quarter decrease in GAAP book value of $0.15 is primarily due to the additional provisions for losses of approximately $20 million on our loan and lease portfolio, combined with trading losses on our bank loan portfolio, and a decrease in the value of mark-to-market CMBS of $2.4 million, offset by an improvement in the value of our cash flow hedges of approximately $11 million and the gain on the extinguishment of debt related to our CRE CDO note of $6.9 million during the June quarter.

At June 30, 2009, our equity is allocated as follows -- commercial real estate loans and CMBS, 72%; commercial bank loans, 27%; and direct financing leases and notes, 1%. Focusing on liquidity, I'll give a recap of our sources and uses of funds year-to-date 2009. We sourced and used approximately $160.4 million during the six months ended June 30. Our major categories of sources include repayments and disposal of our leasing portfolio, $101.2 million; from loan repayments of $35.5 million; net operating income of $19.7 million; and from cash on hand of approximately $4 million -- for total sources of $160.4 million.

Our major uses during the six months were for payments or on the transfer of our secured term facility, $95.7 million; a net reduction in our other borrowings of $21.1 million; losses on investments are $16 million; distributions of $15.1 million; CDO reinvestments of $0.7 million; repurchase of common stock $2.8 million; and working capital of $9 million -- for total uses of $160.4 million.

As an update to our liquidity disclosure as of July 31st in the press release yesterday, or August 3rd, we received an additional $3 million related to the sale and disposition of our leasing portfolio, bringing our unrestricted cash on hand from $7 million to $10 million as of today. With that, my formal remarks are completed and I turn the call back to Jonathan Cohen.

Thanks, Dave. Again, as I said last quarter, management's recommendation that unlike other REITs in our space which have paid out stock as part of their dividend, our intention is to pay dividends in cash at least in the near future. Of course, this is all subject to the Board's approval. We have decent liquidity, as Dave mentioned, $10 million now, probably close to $20 million before we pay our dividend next quarter, which is almost $0.80 or $0.90 per share of free cash, and we'll continue to build cash and position ourselves defensively to protect our book value and our cash flow. Thanks for participating in our call. Now I will open the call for any questions, if there are any. Thank you.

(Operator Instructions)

And our first question comes from the line of Gabe Poggi from FBR Capital Markets. Gabe, you may proceed.

Good morning, guys, how are you doing?

Good, Gabe, how are you?

Doing okay. Two quick questions. One on the dividend. Just in terms of the trend of your REIT taxable income, is that trending kind of below what you've paid out the last few quarters? Is there a way for you to make that difference up if you kept that or does it eventually have to trend more in line with that 25-ish lower run rate for REIT taxable?

And then second, I was hoping if you could just provide a little more color on your loan portfolio, where you're seeing strengths kind of categorically, industrially, sectorally, if you will, where you're seeing strength versus some other pockets. I know that the loan markets had a huge run over the course of the second quarter and still to date, but where you feel really comfortable versus other areas.

Well, I answer the first question first -- the dividend, REIT taxable income. The reason our REIT taxable income is lower, and Dave Bryant will pop in if I'm getting this incorrect, is because we actually have been repositioning our bank loan portfolio.

So we've been actually actively selling loans -- just to tell you an example, when we sell a loan at 80 and buy a loan at 80, because we think it's a better credit and it may enhance our credit standards in our CLO, so all of the loans, even though we buying and selling at the same price and repositioning the portfolio, the actual sale of the loan becomes a taxable loss for REIT taxable income.

So once we're done doing that, which I think as things calm down and loan world becomes more normalized in the next quarter or two, you should see that go away and REIT taxable income, that will look a little bit more like NOI.

Got you. That's hugely helpful. Thanks.

As far as the strength in the loan markets, in the bank loan market, we're seeing strength across-the-board on a ratings basis from the CCC area that was as low as 20, 30, back up to 50, 60, 70 or even 80, for better names that are going to see their way through this financial debacle, all the way up to the B and BB names.

And I think Gretchen Bergstresser and the Apidos team have done an incredible job of certainly -- relatively to the world, they've outperformed almost everybody in terms of every metric and I think that they're going where they believe are the top quality names and positioning the portfolio to go back to par.

(Operator Instructions)

And at this time, we are showing no further questions available. Mr. Cohen, you may proceed.

Thank you very much. We appreciate your support through this very difficult time. We're looking forward to easier times and continuing to perform at this level. Thank you.

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