Acres Commercial Realty Corp (ACR) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2009 Resource Capital Corp's Earnings Conference Call. My name is Moelia, 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 today's conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. 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 for joining the Resource Capital Corp conference call for the fourth quarter and fiscal year-end, 2009. I am Jonathan Cohen, President and CEO of Resource Capital Corp. Before we 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 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 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 reported 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. And with that, I'll turn it back to Jonathan.

Thank you, Purvi. First, a few highlights. Net operating income for the three months and year ended December 31, 2009, was $9.2 million, or $0.32 per share diluted, and $36.1 million, or $1.42 per share diluted, respectively, as compared to $11 million, or $0.44 per share diluted, and $42.3 million, or $1.71 per share diluted, for the three months in year ended December 31, 2008, respectively.

We announced a dividend of $0.25 per common share for the quarter ended December 31, 2009, or $9.2 million in aggregate paid on January 26, 2010, to stockholders of record as of December 31, 2009. Our economic book value, a non-GAAP measure, was $7.91 per common share as of December 31, 2009. GAAP book value was $6.26 per common share as of December 31, 2009.

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.

We are very pleased with where we ended 2009. Unlike most or all other finance REITs, certainly, our historic competitors and comparables, we not only survived 2009, but delivered good value, in our opinion, to our shareholders. We paid a cash dividend of $1.15 per share, and we also conservatively positioned our balance sheet by first, paying down all our short-term debt, second, raising equity and deleveraging our balance sheet, and third, stockpiling cash, both on an unrestricted basis, as well as within our managed securitizations.

We ended the year with over $228 million of book value, no short-term debt, all five of our securitizations in compliance on all significant terms, free cash of $52 million, good loan term liabilities of $1.5 billion, and a blended rate of 1% -- yes, 1%, and a full team intact to exploit the opportunities generated by the great credit crisis. We see opportunities in commercial real estate, but right now, our focus, mostly, on deleveraging and buying ourselves ultimate gains as values eventually return in our portfolio.

Now let's discuss our buyback program and deleveraging. We bought over $55.5 million of notes in 2009, at a blended discount to par of 80%, in other words, for $0.20 on the dollar, including the repurchasing in the fourth quarter, with the use of this -- of some of the net proceeds from our $43 million offering in December. Subsequent to the offering, we bought $33.5 million of bonds at a 74% discount to par, or $0.26 on the dollar.

In the first quarter, in addition, we have already purchased an additional $20 million of bonds, bringing it to $53.5 million after the offering and are seeking to add another $40 million to $60 million before our next call. While the offering and the impairment -- while the stock offering and the impairment of CMBS and loan loss reserves did diminish book value somewhat through dilute -- mostly through dilution, we are now poised to grow book value, as well as to deliver the $1.00 dividend per share that we had projected for 2010.

We have over $60 million of discount that we will accrete into book value over the next few years, due to the purchase of discounted and distressed, at the time, CMBS, mostly AAA, and bank loans. This figure, by the way, is not included in our economic book value.

In addition, as the corporate loan world continues to heal, we may determine that we are over reserve for losses on our bank loan portfolio, where we feel we have been very conservative. Our leveraged loan assets, or bank loan assets, improved markedly, moving from an approximately $79 weighted average price at June 30, 2009, to $90 at December 31, 2009.

We continue to see price appreciation this quarter, as the portfolios move to an approximate value of $800 million. This improvement has led to our ability to increase our cushion to our overcollateralization test, as well as upgrade tremendously, in my opinion, the quality of our loan book. This, in turn, helps us keep the cash flow machine going.

As for real estate, the market is truly one for the history books. We are seeing the cycle play out, while in 2009, we saw borrowers that were tired and very downbeat, we now see borrowers who see some -- yes, I say, some light at the end of the tunnel, and if lenders are willing to work with them, want to hold on to their property. They no longer seem to think that they are catching a falling knife. Properties are still hard to value, but shorter term operating properties, like hotel and multifamily, seem to us, at least, as -- to be starting to stabilize.

While the property in CMBS markets do seem to be improving, we did take impairments and reserves totaling $23 million. We took a $7.9 million reserve against a residual of a portfolio in San Francisco that has been substantially liquidated and added $5.6 million to our general reserves. We also took impairments on CMBS bonds that were bought in 2007 and had ratings below investment grade and are in payment default at this time. Now I will ask Dave Bloom to comment on the real estate side of our business.

Thanks very much, Jonathan. RCC's commercial markets portfolio has a current committed balance of approximately $725 million across a granular pool of 43 separate loans. Our portfolio of commercial mortgage positions is in components as follows -- 64% whole loans, 25% mezzanine loans, and 11% B notes. The collateral base underlying the portfolio continues to be spread across the major asset categories in geographically diverse markets, with a portfolio breakdown of 26% multifamily, 24% office, 31% hotel, 12% retail, and 7% other, such as flex, office, industrial, or self-storage.

As of December 31, we continue to one $7 million multifamily loan, comprised of three buildings that is involved in a contested foreclosure process. However, in recent weeks, we have reached a settlement with the borrower that will give us title to two buildings and a payoff on the third for $2.5 million. The settlement is currently being documented, and we remain confident about the ultimate recovery of principal in this situation, because even the distressed valuation of the assets exceeds our outstanding loan balance.

In addition to the one loan in foreclosure, as of January, we have a $10.5 million mezzanine loan that went into default and has not paid principal and interest when due. We have access to current appraisals for the property securing the loan, which show our loan basis to be well below the value of the properties. We are in discussions with the borrower, other mezzanine participants, and a special servicer to resolve the situation, and all parties are aligned in the efforts to bring the loan current.

With the exception of the loans I have highlighted, our portfolio of commercial real estate loans continues to be current. Despite the low level of delinquencies in our portfolio, we remain extremely concerned about market fundamentals in general, as commercial real estate tends to lag behind other sectors of the economy, and the impact of the weak economy on our portfolio may yet to have been fully realized.

As you have repeatedly heard from me on previous calls, during this period of 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 property, and in addition, we have borrowers who have completed business plans, but have come under pressure and since lost tenants.

In order to effectuate the lease up or repositioning of 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 other structural enhancements to the loans.

In the instances where we see -- 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 broader economic conditions.

In instances where borrowers don't need extension or future advance hurdles, but are able to demonstrate that their asset specific plans remain viable, we continue to do what we can to make accommodations that allow the borrowers to pursue the 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 equity infusion to the property by the borrower.

As I've mentioned, relief from extension hurdles or covenants are accompanied by structural enhancements to the loans, such as elements of recourse for tighter cash management protocols, as well as increased spread and additional -- or increased extension and exit fees. 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 loan, which, in the majority of the cases, is a sale.

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 continue to benefit from a deep bench of experienced real estate professionals, as we push forward through continued choppy markets.

Despite tough market conditions, we're working through issues well in advance, and we are doing the best job we can in actively and aggressively 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-added plans. When property business plans are complete, many borrowers are likely to sell at a market price rather than hold out for the last possible dollar. The real estate debt markets are beginning to thaw, and we have seen both sale and financing activity picking up.

Since many of the asset specific business plans have been implemented by our borrowers, and their plans for value creation have been realized, as transaction volumes continue to pick up, we anticipate payoffs across the portfolio. With that, I'll turn it back to Jonathan to rejoin for 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 $800 million of bank loans encompassing over 30 industries. Our top industries are health care, diversified, broadcasting and entertainment, chemicals, and printing and publishing. As of the end of December, our average loan asset yield was 2.64% over LIBOR, and our liabilities are costing us 47 basis points. We have been able to buy loans at a substantial discount over the last several months, although this discount is slowly going away. 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 fourth quarter 2009 was $9.7 million, or $0.34 per common share. Our Board declared a dividend for the fourth quarter, including the December, 2009, offering shares, of $0.25 per common share, for a total of $9.2 million. This brings our full-year results to $31.5 million of REIT taxable income, or $1.23 on the weighted average number of common shares outstanding. We paid all of our REIT income in cash dividends.

At December 31, 2009, Resource Capital's investment portfolio was financed with approximately $1.5 billion of the 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. We ended the period with $228.8 million in book equity. RCC's borrowings of $1.5 billion had a weighted average interest rate of 1.02% at December 31, a reflection of extremely low LIBOR in today's market.

After paying off our three year term facility in full during 2009 and consistent with our stated philosophy of maximizing match funding, our investment portfolio is now completely match funded by long-term borrowings. Thus, we have no short-term debt.

Of note, we continue to pass all of our critical interest coverage and overcollateralization tests in our two real estate CDOs and three bank loan CLOs. Each of the structures continued to perform and generated stable cash flow to RCC in 2009. The commercial real estate CDOs produced over $33.7 million, and bank loan CLOs generated over $20.5 million of cash flow in 2009, respectively, to the REIT.

Of note, as of February 28, we have in excess of $80 million in investable cash, comprised of $32 million and $48 million in our bank loan and real estate deals, respectively. This cash is available for reinvestment in our CLOs and CDOs to build collateral and strengthen our positions in each structure. As an example, during the year ended December 31, we bought investment grade CMBS of $51.7 million at par, for a weighted average price of $52.56. The resulting discount of $24.5 million improved the collateralization in our real estate CDOs, and these CMBS purchases provided a cash and cash yield of approximately 10.7%.

We consider leverage ratio from two positions. As Jon noted earlier, economic book value, after adjusting for unrealized losses in our CMBS portfolio and unrealized losses in our cash flow hedges, is $7.91 per common share at December 31. Our leverage, based on our economic book value, is 5.3 times. When we consider our TRuPS issuances, which have a remaining term of 27 years, as equity, we see our leverage drop to 4.4 times.

Focusing on real estate, we began the year at 3.4 times levered on our CRE CDOs, and after giving effect to the debt repurchases of 2009, we ended the year 2.3 times levered. After taking into account the 2010 bonds purchased, as noted in Jon's remarks, we see our real estate leverage drop down to 2.1 times in the first quarter of 2010. We're well on our way to reducing the real estate leverage to the 1.7 times target, as projected in our December, 2009, offering road show.

Our GAAP book value per common share was $6.26 at December 31, as compared to $6.80 at September 30, 2009. This fourth quarter decrease in GAAP book value of $0.54 was primarily due to the dilution from our common stock offering in the December, 2009, offering of 10 million shares, offset by improvements in mark to market adjustments reflected in other comprehensive income and undistributed net income.

To wit, the new stock dilution cost us approximately $0.78 per share. Improvements and other comprehensive income were $0.16 per share, and net income, less the dividend, was another $0.08 a share improvement, to arrive at the net change of $0.54 per share.

At December 31, 2009, our equity is allocated as follows -- commercial real estate loans and CMBS, 76.5%, commercial bank loans, 23.2%, and direct financing leases and notes of 0.3%. Diving into the detail, here is a recap of our sources and uses of funds for 2009. We sourced and used approximately $300 million for the 12 months ended December 31.

Our major categories of sources include repayments on and disposal of our releasing portfolio, $100.4 million, net loan repayments of $57 million, gains on extinguishment of debt, $44.5 million, stock offering proceeds, $43.4 million, net operating income of $36.1 million, dividend reinvestment plan proceeds of $9 million, working capital of $6.6 million, and margin collateral returned of $3.1 million, for total sources of $300.1 million.

Our major uses during the 12 months were payments on and transfer of our secured term facility related to our leasing portfolio of $95.7 million, a net reduction in our borrowings of $71.6 million, increase to unrestricted cash of $37.4 million, dividends paid of $31.8 million, CDO reinvestments of $27.9 million, purchase of new CMBS, $15.3 million, asset impairments of $13.4 million, repurchase of common stock early in 2009 of $5 million, and investment in our real estate joint venture of $2 million, for total uses of $300.1 million.

With that, my prepared remarks are completed, and I turn the call back to Jon Cohen.

Thanks, Dave. Just one correction before we go on, in -- when I was speaking about the corporate bank loan portfolio, I just want to give actual statistics. I said $800 million. I meant -- we have about $827 million of market value, $896 million of amortized cost. So I just want to clarify that. And again, thanks to the two Daves and Purvi.

And as I said last quarter, management's recommendation is that, unlike other REITs, which have paid out stock as part of their dividend, we pay our dividend in cash. We are committed to earning and paying the $1.00 dividend, as projected, in 2010. And with that, I think that -- we -- we're going to continue to build cash, position ourselves defensively to protect our book value, but also to try to grow our book value through deleveraging and certainly, try to maintain and grow our cash flow.

I want to thank everybody for participating in the call, and now I will open the call to any questions.

(Operator Instructions). Your first question comes from the line of Steve Delaney with JMP Securities.

Good morning, everyone.

Hi, Steve. How are you?

Fine, thanks. So -- had a question about the cash position, which ties into your last remark, Jonathan. It -- you were at $52 million at the end of the year, and of course, the dividend that you paid -- the $0.25 would take a little over $9 million off of that. So that leaves us at $43 million, post dividend. And in the release you're indicating that as of February 28, you were carrying $29 million of cash.

So I -- just curious, is there anything you could say about -- let's just talk about -- for now, the difference between the $43 million and the $29 million, of about $14 million. I mean, should we -- can we assume that you have been able to continue to find CDO debt to acquire, as you did in the fourth quarter when you invested a little over $8 million?

Yes -- well, as I said, we have been able to find bonds in the first quarter as well, which I said we bought $20 million of bonds already.

I apologize. I must have been distracted. I missed that.

Yes. So we bought $20 million, and we're targeting $40 million to $60 million before the next call.

Okay. And the $20 million was actually your cost basis or the face?

No, that's the face, and I'm being kind of subtly ambiguous here, because I'm still buying in that class, and I really kind of don't want to talk about it.

Understand. I'm just saying --

But you can see we're very, very pleased. And I just also want to mention that the bonds that we've been buying, for the most part, are off the capital structure, from AAA down to A, for the most part. So we feel like we're getting a nice position in the top of the capital stack.

Okay, great. So -- and thanks for clarifying that. So your ultimate goal then -- $20 million, and you think you have -- what -- another $40 million to go, you said?

Well, we've bought today $55 million, including the $20 million that we bought this quarter.

Yes.

Is that right, Dave? Yes.

The $20 million is on top of the $55 million.

Yes.

Yes.

But no -- it's $33 million plus $20 million after the --

It was $33 million in the quarter.

Yes.

$55 million total for 2009.

Yes, but we bought another $20 million after that.

On top of that. Right.

So it's about $53 million, $54 million. We have about another, I'd say, $60 million that we're targeting before the next -- $40 million to $60 million before the next call.

Got it.

And then, we'll continue. We think we'll bring that up another $20 million, $30 million. But we want to take our time and be smart about it. We have a broader strategy around managing our securitized vehicles that we're pretty excited about, but it takes a little bit more patience.

Okay. All right. Well, thanks. I appreciate you clarifying that. And then, for --

Yes. Thanks, Steve.

For David Bloom, I had one question. I just want to reconcile -- I'm -- David, you gave us a summary of two impaired or problem commercial real estate assets -- the two loans totaling $17.5 million. And I'm looking at the table on the loan loss reserve on page 12 of the press release, and it's showing total impaired loans and leases of approximately $90 million. Can you tell me about -- of that $90 million, how much of that is CRE loans versus bank loans? I'm -- I guess I'm just trying to reconcile your $17.5 million that you cited.

Well, I -- this is Jon. I just want to clarify -- or maybe Dave can clarify it.

Oh, sure.

The $7 million is something that defaulted quarters ago that we're now reconcile -- we're now coming to conclusion on a negotiated settlement there.

Okay.

Where we'll actually get back, probably, all the $7 million.

Right.

Okay, and the defaulted loan that he talked about -- $10 million is the same thing. They just defaulted, but we're in negotiations, and we're well covered in value. So we don't expect to have a loss from those -- from that $10 million. Is that right, Dave?

That's right.

Yes.

I can give Steve a breakdown --

Sure.

-- of the table in the earnings release. Steve, the total for the bank loans in that number is about $12.7 million.

Okay.

The real estate is made up of two loans, the one $7 million position that Dave spoke about, which is being worked out, and about $66.8 million in a multifamily position that we really reserved heavily for in 2009 and then restructured and modified the loan in early 2010. So it's sort of gone from Dave's mind, because now the balance of that loan is fully supportable by the property cash flow.

Okay, so in looking -- the rest --

And then, the rest of that number is about $2.6 million in our legacy leasing portfolio.

Got it.

(inaudible)

So it's fair to say, of your 43 commercial real estate loans, you've only -- currently, you only have two of those 43 loans classified as impaired and subject to specific reserves. Is that accurate?

Correct. And one of those happened in 2010, for which Dave mentioned he has the appraisal showing us money good.

Exactly. Okay, thanks very much. I appreciate --

And by the way, if you'd like to go -- I mean, because this get very detailed -- if you'd like to go into more detail, just give Dave Bryant or Dave Bloom or myself a call.

Will do. All right, thanks, guys.

Thank you, Steve.

Thanks, Steve.

Thanks, Steve.

(Operator Instructions). Your next question comes from the line of Gabe Poggi with FBR.

Good morning, everyone. How you doing?

Gabe.

Hi, Gabe.

A few questions. I don't know if you guys are willing to talk about this or give a number, but can you provide some semblance of where you think book value may shake out at the end of the quarter, including the $20 million of purchase you guys have already made, and then, additional purchases, you said, by the 1Q '10 conference call?

Do you think that $40 million to $60 million will be in the first quarter or second quarter? Just some more timing, as that $40 million to $60 million purchases? And then, two other follow-ups after that.

Sure, Gabe. I think I'm -- we're probably uncomfortable guessing where book value will be, but we're -- so that's sort of a difficult one. We're not -- we haven't planned to talk about that.

Sure.

Obviously, there's a lot of moving parts. But we're buying these at substantial discounts, and we're pretty excited about where we're finding value here on the $20 million. As far as the $40 million to $60 million, as I said, it's by the next call, which would probably mean that some of it will fall into -- I would say, a good amount will fall into the -- I'm sorry, into the March quarter and some into the April, May timetable.

Okay, that's helpful. How has the purchase process been, obviously, without saying too much, because -- who's listening. But has it been -- have you been able to find what you were looking for?

I would say that since we went out and did a public offering, we probably pushed prices up a little bit, just by doing that, and we probably -- just generally, CMBS has moved up considerably. But we've found things, as you can see from our stated purchases already, which, by the way, were higher up in the capital structure, for the most part.

Right.

That we're finding really, really good value, and we're really excited about it.

Great. And then, one last --

And -- in -- I just want to say that we have strategies around what we're doing and the -- that we think are pretty good strategies, that we're taking our time to find the right bonds. It's not as though I couldn't go out and build book value by buying bonds.

Right. Absolutely. Absolutely understood.

Yes. Okay.

One last question. Can you just give a refresher on -- in the CRE book, loan maturities you have coming this year? I think you had four or five that you guys had already worked to extend. And then, what the 2011 maturities look like?

Dave?

Yes, we do have maturities coming in 2010. We have worked to extend all but one, which we're in the process of now.

Okay.

2011 -- it's a little bit early to start. People are just now --

We got to deal with 2010 first.

Fair enough.

So I'll say that we've got -- we're looking to hit that one more in 2010, as far as the extension goes.

Got you. Okay, thanks. Appreciate it.

Thank you, Gabe.

(Operator Instructions). And at this moment, I'm showing there are no questions in queue.

Well, we just want to thank everybody, both our long-term shareholders, as well as some of the new people who entrusted us with their capital. So thank you, and we will speak with you, I assume, in a few months. Thank you.

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