Acres Commercial Realty Corp (ACR) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2009 Resource Capital Corp.'s earnings conference call. My name is Emencia and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct the question-and-answer session towards the end of this conference.

(Operator Instructions)

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

Thank you, and thank you for joining the Resource Capital Corp. conference call for the third 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, 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 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 obligation to update any of these forward-looking statements. And with that, I will turn it back to Jonathan.

Thank you, Purvi. First, a few highlights. For the quarter ended September 30, 2009, RSO reported net operating income of $7.2 million or $0.30 per share diluted as compared to $10.2 million or $0.41 per share diluted for the quarter ended September 30, 2008 a decrease of $3 million.

We announced a dividend of $0.30 per common share for the quarter ended September 30, 2009; $7.5 million in aggregates, paid on October 27, 2009 to stockholders of record as of September 30, 2009. Our economic book value, a non-GAAP measure, was $9.47 per common share as of September 30, 2009; GAAP book value was $6.80 per common share, as of September 30, 2009.

As the real estate market has continued to deteriorate, the borrowers are tiring of working properties where values are diminishing and cap rates are expanding. When will relief come? It is unclear but we do persevere. Our rather conservative stand as a company, no short-term debt, $20 million plus of cash in the bank before paying any cash dividend and our ability to buy bank loans in CMBS AAAs at a significant discount and count as par for our over collateralization test had allowed us to wait this storm out while continuing to pay a significant, and I mean significant, cash dividend.

Since the crisis began July 2007 by most accounts, we have paid over $90 million of dividends bought over $27 million of our debt back at a weighted average price less than $0.21 and we invested into assets at prices we never thought we would see. Meanwhile, we borrow at a floating rate basis for the most part and lend at a floating rate basis for the most part.

This has allowed us to keep our net interest income fairly flat and permitted us to wait for rising LIBOR, which will eventually come, which will allow our net interest income to grow. Our leveraged loan assets improve moving from in approximate $79 weighted average price at June 30, 2009 to $87 at September 30, 2009 and above that now.

We continue to see price appreciation this quarter as the portfolio has moved to an approximate value of $800 million as of the end of July. This improvement, and even higher after that, this improvement has led to our ability to maintain our over-collateralization tests on our CLOs, as well as upgrade quality of our loan book. This in turn helps us to keep the cash flow machine going. Gretchen Bergstresser, our leader in the bank loan space, continues to amaze us with their determination and credit trading acumen. Thank you, Gretchen.

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 14.5 million back of our bonds for $1.8 million, seek for new opportunities to lend as capital is available and to continue to opportunistically invest in CMBS AAAs either directly or through the TALF program where we believe returns will be near 20%, at least.

We have been working hard on deploying cash within the real estate CDOs at steep discounts and thereby building over-collateralization. Purchases during quarter three 2009 of $34.5 million of CMBS face value for a weighted average price of $58.42 for a net discount of $14.3 million, as well as trying to sell assets that we think have downsized to them, hence the $1.8 million increase in the specific reserve this quarter and $2.4 million increase in the general reserve for commercial real estate this quarter.

We currently have nearly $17 million in cash and our real estate CDOs, and can use these funds to build over-collateralization or par and make good investments. Most importantly, we continued the cash flow nicely closing $10.3 million before management fees this quarter, and see no end to the stability. Obviously, the real estate market has gotten worse; this is forcing use to work harder, but it is also allowing us to deleverage through discount bond purchases.

Given the economic environment, we determine that we should take an additional provision of $1.8 million, which I mentioned 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, bringing total reserves against this loan to approximately $11 million.

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 to get into any loan 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.

During the quarter, given the massive recovery in bank loan pricing, we decreased our bank loan allowances by $247,000. We did sell 10 bank loan positions for a loss of $1.7 million in an effort to manage rating agency downgrades in our three CLOs.

With consideration to these actions and the benefit of our repurchase of commercial real estate CDO notes, we reported GAAP net income for the quarter ended September 30, 2009 of $0.47 per share and net operating income of a positive $0.30 per share.

We continue to benefit from our lack of short-term liabilities, a decent and growing cash position and liquidity, our match-funded assets and liabilities, and our good underwriting and 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 Relation. As I have stated, we will persevere here and we are dedicated to managing through this period of difficulty and getting to the value of the assets.

As I have said in the previous three quarters, now, again we are determined to make a meaningful cash dividend this quarter. In the past 12 months we've distributed $1.30 per share and since 2005, our inception, we have distributed $6.47 per share. We expect this trend of high payouts to continue.

We continue to see relative out performance within our real estate portfolio and our bank loan portfolio. This being said, the challenges increased as values have decline and borrowers tire. We do believe that a huge opportunity looms for Resource Capital, and those able be 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 flowing assets, is very, very attractive. Now that we have deleveraged -- effectively deleveraged and have no short-term obligations, we are poised to take all repayments when they come and either invest in new loans, buy our bonds back and or make new investments, the attractive investments. 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, Jonathan. RCC's commercial mortgage portfolio has a current committed balance of approximately $776 million across the pool of 44 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 based underlying the portfolio continues to be diversified across the major asset categories, in geographically diverse markets, with the portfolio breakdown of 29% multifamily, 23% office, 29% hotel, 13% retail, and 6%; others such as industrial, self-storage, and flex office.

As of September 30th, our portfolio of commercial real estate loans continues to be current with the exception of one loan that I've mentioned on the last two calls. A $7 million multifamily loan that is in the foreclosure process. We remain confident about the ultimate recovery of principle in this situation because even a distressed valuation of the asset exceeds our outstanding loan balance.

Despite the single delinquency in our commercial mortgage 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 the lower transaction volumes our primary efforts have been focused on asset management activities.

We continue to have borrowers who are delayed in the business plans for their properties. In order to effectuate the repositioning of assets and the completion of borrowers plans we are working with borrowers and making modifications to their loans to carry them through this period. In exchange for modifications we've received structural enhancements to the loans such as, fresh equity contributions, elements of recourse and additional exit fees, as well as pay downs of principal in certain situations.

Senior members of the RCC Commercial Mortgage team continue with multiple in-person meetings with borrowers and property tours. These routine meetings with borrowers provide us with ample opportunities to get out in front of any issues that might be burdening the loan position prior to it impacting the loan. In situations where we have seen borrowers missing targets, we remain proactive in our approach and continue to work with borrowers to understand and address issues facing their asset plans.

We remain willing to work with borrowers who continue to demonstrate our commitment to their properties, and our need of assistance as a result of delays or other property issues brought on by the downturn in market conditions. The majority of our home-loans were structured with LIBOR floors which 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 a significant impact on current cash flow from portfolio properties. In these instances, we are also requiring structural enhancements to the loans such as increased fees to make up for any interest margin that we are foregoing in the short-term.

We continue to do what we can to make accommodations in situations where borrowers don't meet extension for future events hurdles. Where we see evidence of a borrower's continued commitment to the completion of their properties, specific business plans, we have provided relief from extension hurdles or other covenants.

In situations where we've provided covenant relief, we have also sought structural enhancements such as tighter cash management protocols or elements of recourse as well as increased spread and additional or increased exit fees.

In addition to the delays in completion of property-specific business plans, the lack of a functioning debt capital market for commercial real estate is leaving some borrowers without take-out financing for deals where their value creation plans have been realized. In cases where property-specific business plans are complete, but there is no financing available to the borrower at loan maturity, we are granting extensions to bridge borrowers through this market disruption.

Just as with modifications, in exchange for extensions we are receiving additional fees, principal paydowns and an array of structural enhancements to the loans. An example of this is the deal that we extended just last month. The loan is secured by six triple net leased credit tenant properties, and has a debt service coverage of approximately 1.6 times.

In exchange for three additional years of term, we received a three-point fee which equals $511,000 and we are also extinguished the future funding component, received a principal paydown as well as increased the spread on the loan.

We have 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 plan through and reach a capital event that will pay off our loans, which in the majority of cases, is through a sale.

We continue to face an unprecedented and extremely difficult market, but we have a deep bench of experienced real estate professionals working full time on the portfolio, and we remain fully engaged. Despite tough market conditions, we are working through identified issues as early as possible and are doing the best job we can in managing our portfolio.

The real estate debt markets remain at a standstill, 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 heal and transaction volumes increase, we anticipate payoffs across the portfolio. With that, I will turn it back to Jonathon and rejoin during the Q&A part of the call.

Thanks, Steve. Steve in the resource team in Los Angeles, New York and Philadelphia has done a truly great job in a very, very tough market. So I thank them as well. I will now give you some statistics on our corporate bank loan portfolio. We have $937 million of bank loans encompassing over 30 industries.

Our top industries are healthcare, 12.6% diversified to 8.9%, broadcasting and entertainment 7.8%, printing and publishing 6.6% and chemicals 5.7%. As of the end of September, our average loan asset yields 2.59% 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. Now, I will ask Dave Bryant, our Chief Financial Officer, to walk us through the financials.

Thank you, Jonathan. Our estimated REIT taxable income for the third quarter of 2009 was $3.5 million or $0.14 per common share. Our REIT income for the third quarter was negatively impacted by adjustments of over $3 million from our foreign REIT subsidiaries.

This adjustment is primarily the result of realized losses toward sales of bank loans for credit reasons. In our Apidos CLOs that are now being recognized for tax purposes. This brings our year-to-date REIT income results to $14.9 million or $0.61 per common share, with a cash dividend of $0.90 per common share. Excuse me.

At September 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 debentures, related to our two TruPS issuances in 2006. At September 30th, we had a near 54,000 in other repurchase agreement debt after we completely paid off our three-year term facility. We ended the period with $169.4 million in book equity.

RCC's borrowings of $1.6 billion had a weighted average interest rate of 1.07% at September 30th, a reflection of extremely low LIBOR in today's market. After recently paying off our three year term facility and the nominal 54,000 in other repurchase agreement debt in full and consistent with our stated philosophy of maximizing match-funding, our investment portfolio is now virtually 100% match-funded by long-term borrowings.

Of note we continue to pass the critical interest coverage and over-collateralization tests in our two real estate CDOs and three bank loans CLOs. Each of these structures continue to perform and generate stable cash flow to RCC year-to-date in 2009. Of note, we currently have in excess of $50 million in investable cash comprised of approximately $33 million and approximately $17 million in our bank loans of real estate deals respectively.

We continue to use this cash available for reinvestment in our CLOs and CDOs to build collateral and strengthen our positions in each structure. As an example, during the third quarter ended September 30, 2009, we bought investment grade CMBS of $34.5 million at par for a weighted average price of approximately 58. This net discount of $14.3 million improved the collateralization in our real estate CDOs and these CMBS purchases provided a cash and cash yield of approximately 10%

We consider leverage ratio from two positions. As John alluded earlier, our economic book value after adjusting for unrealized losses in our CMBS portfolio and unrealized losses from our cash flow hedges is 947 per common share at September 30th. Our leverage based on our economic book value is 6.6 times. When we consider our TruPS issuances, which have a remaining term of 27 years as equity, we see our leverage drop to 5.3 times.

Our GAAP book value per common share was $6.80 at September 30th as compared to $6.66 at June 30th 2009. This third quarter increase in GAAP book value of $0.14 is primarily due to an improvement in the value of mark-to-market CMBS of $1.8 million, a gain on the extinguishment of debt related to our real estate CDO notes of $12.7 million offset by additional provisions for losses of $4.6 million on our loan and lease portfolio, combined with trading losses of $1.7 million and asset impairments of $895,000, and a decrease in the value of our cash flow of hedges of $3.8 million.

At September 30th our equity is allocated as follows; commercial real estate loans in CMBS 72%; commercial bank loans 27% and direct financing leases and notes of 1%. Focusing for a moment on liquidity, here is a recap of our sources and uses of funds year-to-date in 2009. We sourced and used approximately $200.9 during the nine months ended September 30th.

Our major categories of sources include repayments on and disposal of our leasing portfolio $101.8 million; loan repayments $49.9 million; net operating income of $26.9 million; cash on hand of $15.8 million; dividend reinvestment plan proceeds of $2.9 million; margin collateral returned of $2.3 million; and working capital of $1.3 million, for total sources of $200.9 million.

Our major uses during the nine months were payments on and transfer of our secured term facility $95.7 million, a net reduction in our borrowings of $38.9 million; dividends paid of $22.6 million, losses on investments $18.4 million; purchase of CMBS $11.4 million; CDO reinvestments of $8.9 million, and finally, the repurchase of common stock of $5 million, for total uses of $200.9 million. With that, my formal remarks are completed and I will turn the call back to Jonathan Cohen.

Thanks, Dave. Again, as I said last quarter, management's recommendation is that unlike other REITs in our sector, 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 subject to the Board's approval. Our liquidity has increased and we 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.

(Operator Instructions)

And you have no questions at this time.

Okay. Well, thank you very much and we look forward to reporting next quarter. Thank you.

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