Acres Commercial Realty Corp (ACR) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2010 Resource Capital Corp Earnings Conference Call. My name is Josh, and I will 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, sir.

Thank you. Thank you for joining the Resource Capital Corp conference call for the first quarter 2010. I am Jonathan Cohen, President and CEO of Resource Capital Corp. Before I begin, I would ask -- 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 such -- 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 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 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 ended March 31, 2010 was $10 million or $0.26 per share diluted, as compared to $10.2 million or $0.42 per share diluted for the three months ended March 31, 2009.

We announced a dividend of $0.25 per common share for the quarter ending March 31, 2010, or $10.1 million in aggregate paid on April 27, 2010 to stockholders of record as of March 31, 2010. Our economic book value and non-GAAP measure was $8.30 per share as of March 31, 2010, and our GAAP book value was $5.98 per common share.

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 Lending; David Bryant; our Chief Financial Officer; as well as Purvi Kamdar, our Director of Investor Relations.

The first quarter of 2010 was marked by our continued build-up of cash, over $109 million as of March 31, 2010. Our continued deleveraging, so after adjusting for our cash balances, our net debt to equity ratio is 4.7 times, and our real estate portfolio is under two times leveraged. And, we continued building a significant pipeline of potential new investments. Including $26.6 million of debt we purchased in early April, we have now bought approximately $107.4 million of our debt -- $107 million of our debt.

While we continue to see debt purchase opportunities and believe we will buy another $30 million to $50 million of debt over the next few months, we are also looking forward to investing some of the $109 million in cash that we've accumulated. In fact, our pipeline on the real estate and corporate side has grown significantly, and we believe we can add between $0.12 and $0.20 of net operating income by putting this cash to work, both in terms of buyback of debt as well as with new investments.

We are regularly seeing opportunities to invest unlevered at 8% to 12% rates in -- unlevered at 8% to 12% rates in investments that we originate; with a little leverage, those returns can be significant. Most importantly, we earned our dividend through our $0.26 of net operating income and cash flow. We did this with over $2.50 of cash on our balance sheet and no short-term debt.

Our credit, other than one real estate loan in particular, remains stable. We are seeing tremendous liquidity returning to our borrowers, both on the corporate side where the high-yield markets continue to bloom, and on the real estate side of our business where our borrowers are willing to now invest equity to refinance. The CMBS market has come back for better quality properties, and the mezzanine market is now functioning again.

We are very comfortable with our portfolio and are pleased with our debt purchases throughout 2009 and 2010. Now it is time to add appropriate investments and add to our bottom line. With all this being said, I reiterate our $1.00 cash dividend guidance for 2010.

Now let's discuss our debt purchase program, our deleveraging efforts, and our book value. During 2010, we have purchased approximately $47 million of notes at a blended discount of about 37%. This includes $26.6 million that we bought in April for a gain of $10.5 million, or $0.25 per share.

Most of these notes were originally rated Triple-A through Single-A. We continue to speak to sellers and have our eyes on approximately $30 million to $50 million of additional bonds at prices between $0.20 and $0.70 on the dollar. We will only buy these at the right price.

Although we always believe in patience, obviously investors across the globe have become much more constructive on real estate generally, and more positive about Resource Capital's portfolio specifically. This is, of course, a good and a bad fact.

We believe that when you adjust our book value for our activities since the quarter ended, we probably have another $0.25 to $0.35 or more of book value that is not reflected in the quarter end figure of approximately $6.00 per share. In addition, we have over $30 million, or over $0.75 per share of unrecorded discount in our syndicated loan portfolio that will be accreted over the next three to five years.

Our leveraged loan assets also improved, moving from an approximate $79 weighted average price at June 30, 2009 to $92 at March 31, 2010. We have continued to see price appreciation this quarter as the portfolio has moved to an approximate value of $870 million. This improvement has led to our ability to increase our cushion to our overcollateralization test, as well as to upgrade the quality of our loan book.

As mentioned above, we have over $30 million of discount to accrete over the next few years. This is thanks to the very opportunistic of Gretchen Bergstresser and the entire Apidos team. We are looking to take advantage of opportunities in this space and, of course, at term financing returns -- AKA the CLO market, we will take advantage of lower cost liabilities as we did in the last cycle.

As for real estate, although we have decided to exit one loan, which we will sell at a loss, the reasons have more to do with technical zoning and political forces than the real estate crisis. As I mentioned on the last call, we now see borrowers who see some light at the end of the tunnel, and if lenders are willing to work with them, want to hold on to their properties. They no longer seem to think they are catching a falling knife.

While the property and CMBS markets do seem to be improving, we did take impairments and reserves totaling $15 million, including $1 million added to our general reserves.

Now, I will ask Dave Bloom to comment on the real estate side of our business.

Thanks, Jonathan. Resource Capital Corp's commercial mortgage portfolio has a current committed balance of approximately $716 million across a granular pool of 43 separate loans. Our portfolio of commercial mortgage positions is in components as follows; 63% whole loans, 26% 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 25% multi-family, 24% office, 32% hotel, 12% retail, and 7% other, such as flex office and industrial or self-storage.

We have had one $7 million multi-family loan comprised of three buildings that was 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 pay off the third for $2.5 million. The settlement agreement has been fully executed and is now awaiting court approval, which should be forthcoming shortly. Even a distressed valuation of the assets exceeds our outstanding loan balance, so we remain confident about the ultimate recovery of principal on this loan.

In addition to the one defaulted multi-family loan that has now been settled, we continue to have a $10.5 million mezzanine loan in default that has not paid principal and interest since January. There have been extensive settlement negotiations with the borrower, other mezzanine participants and the special servicer, and there is a conceptual settlement agreement that has been preliminarily agreed to by the parties.

The cash flow from the properties securing the loan covers debt service, but through a technicality, cash flow is being trapped at the senior lender. As part of the settlement, the borrower will be committing fresh equity to the deal and our position will be brought current. In addition, current appraisals for the property securing the loan show our loan basis to be well below the value of the properties. So, again, we are confident about the ultimate recovery of principal in this position.

With the exception of the loans I have highlighted, our portfolio of commercial real estate loans continues to be current. Market fundamentals for commercial real estate tend to lag behind other sectors of the economy. And while we have seen improvement, many of our portfolio properties, we remain concerned about the impact of the weak economy in some situations.

We have modified a number of loans across the portfolio, and in every instance, our goal is to work with the borrower to provide adequate time to see the business plan through and reach a capital event that will pay off our loan. Parts of our portfolio continue to face a choppy market, but we remain fully engaged and continue to benefit from a deep bench of experienced real estate professionals as we push forward to overall stabilization.

The real estate debt markets begin 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, their plans for value creation have been realized. As transaction volumes continue to pick up, we anticipate payoffs across our portfolio.

As the debt markets continue to heal, we're seeing a significant increase in refinancing activity from banks, insurance companies, and especially from reconstituted CMBS programs. The debt capital markets are returning, and we're again seeing situations where multiple lenders are competing for the same loans. The flow of refinance capital is obviously a positive sign for the market in general and for our portfolio in specific as we see a number of our portfolio properties ready for take-out financings.

We are beginning to see a number of opportunities to originate new loans at post-crisis valuations, premium spreads, and optimal structure. There are hundreds of millions of dollars of loans coming due, and not enough debt providers to address the total refinance demand.

In addition, there are numerous discounted payoffs situations, each needing financing at a new and much lower basis. RCC benefits from our focus and expertise in loans between $10 million and $20 million. And even though there are a number of capital sources in the market to make new loans, the vast majority are looking to make much larger loans.

Our direct origination platform operates on a nationwide basis and is of significant note to our business model. We are not dependent on a CMBS market or a secondary loan trading market because we originate our own loans. Our self-originated whole loans are structured with origination and exit fees, and many of our loans are structured to provide elements of borrower recourse and other credit enhancements.

We have full established origination capabilities and infrastructure, and we have kept our team in place. As the deal flow continues to build, we are uniquely positioned to take advantage of select opportunities for well-structured transactions at premium spreads in today's market, and can map our production levels with our existing financing facilities and capital availability. We will benefit from loan repayments as we revisit -- as we reinvest higher yielding assets into our long-term locked in financing vehicles.

With that, I'll turn it back to Jonathan and 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. As I stated earlier, we have syndicated bank loans with a approximate value of $870 million encompassing over 30 industries. Our top industries are healthcare, 12.5%; diversified, 8.9%; broadcasting and entertainment, 8.9%; chemicals, 5.9%; and printing and publishing, 5%. As of the end of December, our average loan asset yields 2.7% over LIBOR. And our liabilities are costing us 47 basis points over LIBOR.

Now I will ask Dave Bryant, our Chief Financial Officer, to walk us through our financials.

Thank you, Jonathan. Our estimated REIT taxable income for the first quarter 2010 was $9.3 million, or $0.24 per common share. Our board declared a cash dividend for the first quarter of $0.25 per common share.

At March 31, 2010, RCC's investment portfolio was financed with approximately $1.5 billion total indebtedness that included $1.47 billion of CDO senior notes, $51.5 million sourced from our unsecured junior subordinated debentures related to our TRUPS issuances in 2006. We ended the period with $239.6 million in book equity.

RCC's borrowings of $1.5 billion had a weighted average interest rate of 1.02% at March 31, a reflection of continuing very low LIBOR. 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 the critical interest coverage and overcollateralization tests in our two real estate CDOs and three bank loan CLOs. Each of the structures continue to perform and generate stable cash flow to RCC year-to-date in 2010. The real estate CDOs produced over $7 million, and the bank loan CLOs generated over $5.2 million of cash flow in the first quarter of 2010 respectively to the REIT.

Of note, as of April 30th we have an access of $90 million in reinvestable cash comprised of approximately $40 million, and over $50 million in our bank loan and real estate deals respectively. This cash is available for reinvestment in the CLOs and CDOs to build collateral and strengthen our positions in each structure.

For example, during the quarter ended March 31, we bought investment grade CMBS of $7.7 million, at par, for a weighted average price of 64.27. The resulting discount of $2.8 million improved the collateralization in our real estate CDOs, and these CMBS purchases provided a cash-and-cash yield of approximately 9%.

We consider leverage ratio from two positions; our economic book value after adjusting for unrealized losses in our CMBS portfolio, unrealized losses from our cash flow hedges, and including accretion income from discounts on our bank loans is $8.30 per common share at March 31. Our leverage based on economic book value is 4.6 times. When we consider our two TRUPS issuances, which have a remaining term of 26 years as equity, we see our leverage drop to 3.8 times.

Focusing on commercial real estate, we were levered 2.3 times on our real estate CDOs a year ago on March 31. And after giving effect to the debt repurchases of 2009, the additional purchases in first quarter of 2010, we ended the quarter 2.1 times levered.

After taking into account the bonds we purchased in April of 2010, we see our real estate leverage drop down to 1.8 times. We're now very close to reducing the real estate leverage to the 1.7 times target level that we discussed in our December 2009 common stock offering road show. Our GAAP book value per common share was $5.98 at March 31, as compared to $6.26 at December 31, 2009.

This quarterly decrease in GAAP book value of $0.28 is primarily due to the increase of provision for loan losses that Jon mentioned with respect to the CRE loan portfolio. At March 31, our equity is allocated as follows; commercial real estate loans and CMBS 74.6%; commercial bank loans 22.5% and direct financing leases and notes of 2.9%.

Going into the detail, here's a recap of our sources and uses of funds, year-to-date days in 2010. We sourced and used approximately $87 million during the three months ended March 31. Our major categories of sources include unrestricted cash, $24.3 million; borrower repayments of $22.9 million, dividend reinvestment plan proceeds of $18 million, net operating income of $10 million, gains on debt extinguishment of $6.6 million, working capital of $3.8 million, and finally, margin collateral return of $0.6 million, for total sources of $87.2 million.

Our major uses during the 12 -- the three months, excuse me, were a net reduction in our borrowings $20.2 million; provisions for loan losses, $15.2 million; CLO reinvestments of $15.1 million; dividend paid, $10.1 million, new loans of $10 million, purchases of equipment leases and notes, $9.4 million; purchase of CMBS, $6.8 million, and an investment in a real estate joint venture of $0.4 million, for total uses of $87.2 million.

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

Thanks, Dave. Again, as I said last quarter and the quarters before, management reiterates our $1.00 dividend guidance and believe that we can start from here to grow book value through debt buybacks and other means. Our liquidity has increased, and we will continue to build cash and position ourselves defensively, although we are starting to invest and put that cash to work to add to the bottom line.

Thanks for participating in our call, and now I'll open the call for any questions.

(Operator Instructions)

And our first question comes from Steve Delaney of JMP Securities. Steve, you may proceed.

Thank you, good morning. I was little unclear -- Dave was good enough to go through the two problem commercial real estate loans, the $7 million multi-family, and the $10.5 million mezz. So I guess, Jon, what I was unclear on given the resolutions that were described there, can you help me understand that $15 million provision in the quarter and exactly what loan that provision was made for? Because it sounded like other than $1 million that went to general --

Yes, sorry about that. The two loans that Dave described, where there was an -- a issue, we're expecting a full payback and we're about to finalize the agreements on those. So those are sort of -- by next quarter hopefully in the good bucket, and not in the bad bucket. They've both been in the bad bucket for a quarter, two quarters, or three quarters.

The new loan. which we basically had determined that we're going to get out of, really is a loan in California and that's the bulk, almost entirety of the reserve that we took. And it had to do -- It's a very complicated zoning issue with a short-term stay and long-term stay issues in California. So, that's a separate loan.

Okay, so that's separate. So if we include -

But it's a very singular -- I just want to make the point; it's a very singular event that has really nothing to do, unfortunately, with the credit crisis or like with our underwriting or the zoning change by the City of Los Angeles -- or not a zoning change, but zoning confusion, I would say, among California, LA and others that just made it untenable for us to spend the time to work through that loan.

Okay. So your $14 million, you're saying, pretty much, it fully covers your exposure there. You are just kind cutting it -- you're done with that one.

Yes, exactly.

Okay, and could you talk a little more, I mean, looking forward to the opportunities, which I think is a -- now that we're through -- now that you've clearly survived and taken advantage of the debt opportunities, it's kind of exciting to be, I'm sure for all of you, with your platform to be back, to doing the business you were created to do.

Can you talk a little more specifically about the types of new loans that we're likely to see over the next couple of quarters? Would these be more mezz loans? Or would -

No, these will be whole loans.

Yes, okay whole loans.

Our traditional business, whole loans, going up to 75% probably is where we were before; it's where we are now. We're negotiating certain lines of credit that we'll enter into, but primarily we think on -- whether we sell -- in some cases we'll be selling the first to CMBS, and in some cases -- and retain the mezz, but we'll be originating all of our loans, and having significant controls over the properties. And these will be kind of anywhere from 8% to 10% unlevered with some sort of participation.

And you think some of them might confirm to conduit guidelines?

Yes, we'll be working to conform at least while we underwrite it, like, the ability to sell off an AP as to conduit.

Yes, and you might -- so you do 75, you might keep 15, 20, in a B-note?

Yes, something like that, although it's still very fluid. But the conduits, as they reopen the CMBS, they need people on the ground, they need loans and diversity, and so it's an excellent opportunity for us to originate and sell part of it at a gain, and also hold onto the risk that we like.

And that little bit of leverage to kind of get your, to boost your return -- you've mentioned bank lines of credit, so you'd try to work up some kind of a term line with the bank for that portfolio.

Yes.

Okay, thanks a lot.

Thank you.

(Operator Instructions)

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

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

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