Acres Commercial Realty Corp (ACR) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2010 Resource Cap Corp. Earnings Conference Call. My name is Michelle and I will be your operator for today. At this time all participants are in listen-only mode. We will be conducting 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 will now turn the presentation over to host for today's conference, Mr. Jonathan Cohen, President and CEO of Resource Capital Corp. Please, proceed.

Thank you for joining the Resource Capital Corp. Conference Earnings Call for the Second Quarter of 2010. I am Jonathan Cohen, President and CEO of Resource Capital Corp.

Before I begin, I would like 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 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 in its reports on Forms 8-K, 10-Q and 10-K, and in particular, Item 1, 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 obligations to update any of these forward-looking statements.

And with that, I will turn it back to Jonathan.

Thank you, Purvi. First, for a few highlights -- for the four and six months ended June 30, 2010, we had net income of $0.30 and $0.36 per share diluted respectively. And for the three and six months ended June 30, 2010, we had REIT taxable income of $0.30 and $0.55 per share diluted, respectively.

We announced a dividend of $0.25 per common share for the quarter ended June 30, 2010, or $12.8 million in aggregate paid on July 27, 2010 to stockholders of record as of June 30, 2010. GAAP book value was $5.92 per common share as of June 30, 2010.

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

The second quarter of 2010 was marked by many positive events, including first we completed a public offering of 8.625 million shares with net proceeds of approximately $42.8 million. Second, we repurchased $36.1 million par value of our real estate CDO debt at a discount of 45%. Of note, since the quarter-end, we purchased $20 million par value of our CDO debts at a discount of 31%, these were the triple-As.

Triple -- third, we deployed by mid-July, including commitments, most of the capital from our public offering. Fourth, we saw our watch list, or impaired list as laid forth in our press release, each quarter and today drop to 6.5% of our portfolio from 9.5% one year ago, a marked improvement in credit. And fourth -- and fifth, we purchased a large portfolio of leases and loans with terms financing with estimated GAAP returns of 18%.

We are excited about where the balance sheet ended this quarter specifically as it relates to our real estate finance portfolios. We saw leverage fall to a meager 1.7 times. While we continue to build our task position as our investment update press release indicated a week ago or so, we have started to deploy that cash and will continue to do so.

This deployment is high rate, especially inside the CDOs, will augment our already growing net interest margin, which grew by over $3 million in the second quarter of 2010 when compared to the second quarter of 2009.

Now to the CDO bond buybacks. Including $20 million of debt we purchased in mid-July, we have now purchased approximately $137 million of our debt back. During 2010, we have purchased approximately $76.4 million of notes at a blended discount of about 38%. This includes $20 million of notes that we bought in July for gains of $6.25 million or $0.12 per share. Most of these notes were originally rated triple-A through single-A.

While we continue to see debt purchase opportunities and believe we will buy another $20 million to $30 million of debt over the next few months, we are dedicated to growing our interest margin and increasing our gains in our investment portfolio to discount purchases. This has been most obvious in our commercial finance and syndicated bank loan portfolios, where our net spread over LIBOR has increased from 252 basis points as of June 2009 to 270 basis points as of June 2010.

As I said last quarter, we believe we can add between $0.12 to $0.20 of net operating income by putting the cash currently in our structured vehicles as well as some unrestricted cash to work, both in terms of continuing to buy back our debt, as well as with new investments.

We have started to see this, and by September this improvement should be very evident in our earning power. Most importantly, we earn more than our dividend through $0.30 of net income and $0.30 of REIT taxable income. We did this with over $2.50 of cash on our balance sheet and no short-term debt.

Now to credit; this quarter we took the opportunity to sell, or agree to sell after the quarter, a real estate mezzanine loan and a real estate B-note, both purchased in 2006 with a total balance of $43 million at a discount of 15%. Other than that we only had $1.5 million of credit reserves which, in my opinion, is a very good trend. We did this because we believe that we could redeploy the cash at much higher rates, while eradicating more exposure and binary exposure to pre-financial crisis real estate.

Under the same path of thinking, we impaired two originally rated triple-B legacy CMBS bonds; one of which was purchased in 2006, the other which was purchased in 2007. This was just other comprehension -- comprehensive loss, which we ran through our P&L. In other words, this was already in our book value, for the most part.

We replaced those with higher-rated bonds at a steep discount, and we were very happy to make this trade. Our credit, otherwise, remains stable and improving. We are seeing 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 the business where our borrowers are willing to now invest equity to refinance.

The CMBS market has come back for better quality properties, and believe it or not, the mezzanine market is now functioning. We are very comfortable with our portfolio, 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, we reiterate, once again, our $0.25 quarterly cash dividend guidance throughout 2010. Our leveraged loan assets also improved -- these are our syndicated bank loans, moving from an approximate $79 weighted average price at June 30, 2009 to $96 at June 30, 2010. What a rally.

We are continuing to see price appreciation this quarter as the portfolios move to an approximate amortized cost of $914 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 thanks to the very opportunistic work of Gretchen Bergstresser and the entire Apidos team. We are looking forward to taking advantage of opportunities in this space and, of course, a term financing return a.k.a. the CLO market, we will advantage -- we will take advantage of lower-cost liabilities as we did during the last cycle.

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

Thanks, Jonathan. Resource Capital Corp's commercial mortgage portfolio has a current committed balance of approximately $692 million across the granular pool of 42 separate loans. Our portfolio of commercial mortgage positions is in components as follows; 65% whole loans, 27% mezzanine loans, and 8% 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, 22% office, 33% hotel, 12% retail and 7% other, such as industrial self-storage and flex office.

We have had a $7 million multifamily loan comprised of three buildings in default, but the loan has been settled and approved by the court. For the terms of the settlement, we will be receiving title to two of the buildings, and a payoff of $2.5 million for release of the third building.

The settlement is expected to close within the next month, and we remain confident about our recovery of principal in this situation. 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 a special servicer, and the terms -- and terms have been reached for a settlement.

The settlement needs to be documented, but by its terms the borrower will be committing fresh equities to the deal and our position will be brought current. 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.

Current appraisals for the property securing the loan show our loan basis to be well below the value of the properties, so we are confident about the ultimate recovery of principal in this position.

In addition to the multifamily loan that has been settled and mezzanine loan position that is being worked out, we have a $5 million mezzanine -- we had a $5 million senior mezzanine position on a three-building office portfolio go into default in the second quarter.

The portfolio lost its largest tenant, and the special servicer projects a loss at the first-mortgage level. As a result of the facts, we allocated a $5 million -- we allocated $5 million from general reserves for this position, the full amount of our loan.

With the exception of the loans I've highlighted, our portfolio of commercial real estate loans continues to be current. We have seen both sale and financing tracks -- transaction volumes increase and liquidity returning to the market. And we are beginning to experience payoffs in our portfolio.

Parts of our portfolio continue to face a difficult 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. 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 their business plan through and to reach a capital event that will pay off our loan.

As the debt markets continue to heal, we are seeing a significant increase in refinancing activities from banks, insurance companies, and especially from reconstituted CMBS programs. The debt capital markets are returning and we are seeing situations, again, 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 takeout refinancing.

RSO benefits from our focus and expertise in directly originating loans between $10 million and $25 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. We have an extensive pipeline of deals, and are looking to convert select opportunities to loans in our portfolio.

We are actively sourcing new deals and are seeing 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 and REO situations each needing financing at a new and much lower basis.

We have fully established origination asset management and servicing teams, and infrastructure in place. As deal flow continues to build, we are uniquely positioned to take advantage of opportunities for well-structured transactions at premium spreads in today's market, and to match or production levels with our existing financing facilities and capital availability.

Our direct origination platform operates on a nationwide basis, and is of significant note for our business model. We are not dependent on a CMBS or 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 will benefit from loan repayments as we reinvest well-structured, higher yielding assets into our long-term locked-in financing vehicles.

With that, I'll turn the call beck to Jonathan, and will rejoin you for Q&A at the end of the call.

Thanks, Dave. I will now give you some statistics on our corporate bank portfolio. As I stated earlier, we have syndicated bank loans of approximately $914 million in amortized cost encompassing over 30 industries. Our top industries now are healthcare 12%, diversified 9%, broadcasting and entertainment 7.5%, chemicals 5%, and printing and publishing 5%. As at the end of June, our average loan asset yields 270 basis points over LIBOR, and our liabilities are still costing us 47 basis points over LIBOR.

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 second quarter 2010 was $13.4 million or $0.30 per common share. Our Board declared a cash dividend for the first quarter of $0.25 per common share for a total of $12.8 million. This brings our year-to-date results to $22.7 million of REIT taxable income, all of which has been paid out as a dividend.

At January 30, 2010 RCC's investment portfolio was financed with approximately $1.6 billion of indebtedness, that included $1.3 billion of CDO senior notes, approximately $110 million of lease equipment-backed securitized notes, and $51.5 million sourced from our two TRUPS issuances in 2006. We ended the period with $301.8 million in book equity, and RCC's borrowings of $1.6 billion had a weighted average interest rate of 1.43% at June 30, 2010, a continuation of low LIBOR.

Consistent with our stated philosophy of maximizing match funding, our investment portfolio is completely match-funded by long-term borrowings, and thus we had no short-term borrowings. We continue to pass all the critical coverage and overcollateralization tests in our two real estates CDOs, and three bank loan CLOs.

Each of the structures continues to perform and generate stable cash flow to RCC year-to-date in 2010. The CRE CDOs produced over $13.1 million, and bank loan CLOs generated over $10.6 million of cash in the six months ended June 30, 2010 for the REIT.

Of note, as of July 31, 2010 we have in excess of $103 million in investable cash comprised of $21 million and $82 million in our bank loans and real estate deals respectively. This cash is available for reinvestment in our CLOs and CDOs to build collateral, generate returns and strengthen our positions in each structure.

As an example, during the six months ended June 30th, we bought investment-grade CMBS $15.2 million at par, for a weighted average price of $68.30. The resulting discount of $4.8 million, improved collateralization in our CRE CDOs and the CMBS purchases provided a cash-on-cash yield of approximately 8.3%.

We also have committed over $20 million of CDO capital to fund first-mortgage commercial real estate loans, originated by our manager. We expect these loans to close in Q3.

Our leverage is 5.3 times. When we consider our trust issuances, which have a remaining term of 26 years, as equity we see our leverage drop to 4.4 times. Focusing on commercial real estate, we were levered 2.3 times on our CRE CDOs at December 31, 2009, and after giving effect to the debt repurchases in the six months ending June 30th, we ended the second quarter 1.7 times levered, as Jon mentioned during our CRE portfolio.

After taking into account the $20 million bond purchasing in July, our CRE leverage dropped down to 1.6 times. This improves upon the projection from our December 2009 common stock offering, when we had targeted CRE leverage to the 1.7 times level.

Our GAAP book value per common share was $5.92 at June 30th, as compared to $5.98 at March 31st. Our second quarter gains on debt extinguishment exceeded the dilutive effect of our common stock offering in May 2010. However, necessary increases in our provisions for loan losses in asset impairments offset this impact caused our book value to decrease slightly.

The increase in loan provisions was, to a large extent, $7 million of the $7.9 million or $0.14 per share; the direct result of our decision to sell B-note and mezzanine loan position after quarter end, each was approximately 85% of face value. These sales reduced our exposure to commercial real estate loans other than our self-originated whole loans.

At June 30th, our equity is allocated as follows; commercial real estate loans and CMBS 78%, commercial bank loans 19%, leases and notes of 2%, and structured notes of 1%.

When we review our operating performance and trends, it helps to look at an adjusted NOI metric. We had two notable transactions in the second quarter which are currently classified as other revenue that we wanted to highlight on our call. First, we had investment gains from selling securities of $2.5 million.

Secondly, as we had noted in the investing update from July 23rd we realized a nice gain on a real estate joint venture which we had entered into in the fourth quarter of 2009. We sold an interest in the multifamily property at a gain to the Company of over $750,000.

These second-quarter gains, when added to NOI of $7.3 million, and before deducting the incentive fee which was not incurred in the 2009 period, yield an adjusted NOI $13.6 million or approximately $0.31 per share for the 2010 period, versus $9.5 million in the 2009 period. This adjusted NOI metric and positive performance trend gives us comfort in reiterating our $0.25 quarterly dividend guidance for the balance of 2010.

Last, here is a recap of our sources and uses of funds year-to-date for 2010. We sourced and used approximately $296 million during the six months ending June 30. Our major categories of sources include; issuance of equipment-backed securitized notes, $111.3 million; common stock offering proceeds of $42.8 million; borrower repayments of $41.2 million.

Dividend reinvestment plan proceeds of $32.5 million; gains on debt extinguishment $23 million; net operating income of $18 million; unrestricted cash, $13.4 million; working capital, $8.9 million; gains on sale of securities, $2.9 million; gain from property sale on a real estate joint venture, $0.7 million; and margin collateral return of $1.1 million, for total sources of $295.8 million.

Our major uses during the six months were; purchases of equipment leases in notes, $117.6 million; a net reduction in our borrowings of $56.3 million; an increase in investable cash of $24.6 million; provision for loan losses of $23.3 million; CLO reinvestments of $22.8 million; dividends paid, also, of $22.8 million.

Related party loans of $10 million; asset impairments on CMBS of $6.1 million; structured notes investments of $5 million; purchase of CMBS $4.9 million; additional investment in our real estate joint venture of $1.5 million; and finally, loan commitments funded of $0.9 million. Total uses $295.8 million.

With that, my formal presentation is completed and I'll turn the call back to Jonathan.

Thank you, Dave, and Dave. Our basic strategy continues to be -- continues to be to position ourselves defensively to protect our book value, and even build book value and certainly to protect our cash flow and build our cash flow, so that one day we can, not only have a $0.25 dividend, but look to grow it.

Thanks for participating in our call. Now, I will open the call up for any questions.

(Operator Instructions)

Your first question comes from Gabe Poggi of FBR Capital Markets. Please, proceed.

Hey, good morning, guys.

Good morning, Gabe. How are you?

Good, how are you? Two quick questions -- the $36 million of debt you bought back in 2Q -- you guys may have said this; I may have missed it. Where in the stack were they? Were they triple-As? You guys said the stuff, post-quarter end were trip-As?

No, they were above single-A -- single-A, double-A.

Okay. And then, do you guys have any commentary on the asset maturity side of things outlook - looking out in 2011? How much you guys have coming due from the asset side -- how much you're going to have to work with borrowers in 2011?

We've been really working with borrowers, so I think that we are not overly concerned about that, and where we have -- where we have and we're hearing, actually, that they're looking to refinance in the last -- let's call it, eight weeks and tell us that they're not looking for an extension they're going to pay us off .

Great. Okay, thanks.

Sort of becoming the new world, Gabe.

That's a good thing. All right, that's all I had. Thanks, guys.

Thanks.

(Operator Instructions)

If there are no further questions. I would now like to turn the call back over to management for closing remarks.

Well, we thank you very much for participating in our call, and thank you for your support and encouragement during the financial crisis and afterwards. And we look forward to, I think, continuing the performance we have. Thank you.

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