Acres Commercial Realty Corp (ACR) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2010 Resource Cap Corp. Earnings Conference Call. My name is Stephanie and I will be the operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question and answer session.

(Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Jonathan Cohen, president and CEO of Resource Capital Corp. Please proceed.

Thank you for joining the Resource Capital Corp. conference call for the third quarter of 2010. I am Jonathan Cohen, President and CEO of Resource Capital. 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 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 can 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-K, and 10-Q, and in particular item 1A 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 obligations to update any of these forward-looking statements.

And with that, I'll turn it back to Jonathan.

Thank you, Purvi. First, a few highlights. For the three and nine months ended September 30, 2010, we had net income of $0.27 and $0.64 per share diluted, respectively, and for the three and nine months ended September 30, 2010, we had REIT taxable income of $0.20 and $0.73. We announced a dividend of $0.25 per common share for the quarter ended September 2010, or $13.7 million in aggregate paid on October 26, 2010 to stockholders of record on September 30, 2010. GAAP book value increased. It was $6.03 per common share as of September 30, 2010, up from $5.92 the quarter before.

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 third quarter of 2010 was marked by many positive events, including the following. First, our book value per share increased to $6.03 per share from $5.92 per share in June 2010. Second, we repurchased $20 million par value of our CDO debt at a discount of 31%. Third, our cash position increased to nearly $200 million, close to $4 per share, positioning us to expand our investment portfolio at substantially higher rates and deleveraging our balance sheet from a net debt standpoint.

Fourth, our impairments -- and importantly, our impairments reserves decreased substantially from last quarter while our gains and net interest income increased substantially. And fifth, and also importantly, we paid our $0.25 dividend after earning $0.27 per share of net income.

We focused this quarter on making investments and repositioning our commercial real estate mortgage origination business. We are doing this with $200 million of cash on the balance sheet and no short-term debt. We spent the last few years in defensive mode and that left us well positioned. We are now officially on the offense. Our ability to play defense is demonstrated by our deleveraging through discount purchases of our bonds and by the performance of our overall portfolio throughout the financial crisis and after.

As one can see, our credit seems to be getting better with write-offs and reserves going down by 50% quarter-over-quarter. Our ability to play offense is highlighted by the gains in the quarter from spotting attractive investment opportunities over the last six months.

As for investments, we are restarting the engines of our real estate lending machine. We have kept our team intact from before the financial crisis. We have reviewed many opportunities, but were selective to choose only the best ones. That patience has paid off and we are finally finding opportunities that indeed fit the bill.

After the quarter we closed our first two loans, which Dave Bloom, our head of Real Estate Lending, will go over in his report. They are truly accretive to earnings as we are reinvesting cash that is currently sitting on the balance sheet earning nothing.

Now, to credit. This quarter, we took the opportunity to increase our general reserve on our commercial real estate loan portfolio by $2.4 million. Also, due to a court-approved bankruptcy settlement, we foreclosed on a portfolio of condominiums and wrote the asset down to the likely sales proceeds, resulting in a $600,000 charge. This was an asset that was already in default for many, many quarters.

Under the same path, we impaired one originally rated triple-B legacy CMBS bond which was purchased in 2007. We replaced it with higher rated bonds at a steep discount and we were very happy to make this trade. Our credit otherwise remained stable and, indeed, I think, improving.

Our leveraged loan assets also improved, moving from an approximate $87 weighted average price at September 30, 2009 to $94 at October 31, 2010. We've continued to see price appreciation in this quarter as the portfolio has moved to an approximate amortized cost of $913 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.

We have over $30 million of bank loan discounts to accrete over the next few years thanks to the very opportunistic work of Gretchen Bergstresser and the entire Apidos team. We are looking to take advantage of opportunities in this space and, of course, as term financing returns, which it indeed has, a.k.a. those CLO markets, we will take advantage of lower cost liabilities as we did in the last cycle.

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

Thanks, Jonathan. RSO's commercial mortgage portfolio has a current committed balance of approximately $670 million across a well-diversified pool of 41 separate loans. Our portfolio of commercial mortgage positions is in components as follows; 67% whole loans, 24% mezzanine loans, and 9% B-notes. The collateral base underlying the portfolio continues to be diversified across the major asset categories in geographically diverse markets, with a portfolio breakdown of 26% multifamily, 22% office, 33% hotel, 12% retail and 7% other such as flex office and self-storage.

Across the portfolio there are signs of improving credit, as we see a general trend toward the beginning of the stabilization in the commercial real estate markets. While parts of our portfolio continue to face difficulties, we remain fully engaged and continue to benefit from a deep bench of experience real estate professionals to address issues in the portfolio as they arise.

With the exception of one $10.5 million mezzanine loan that has been in default and is now in the final stages of a restructuring to be brought current, the balance of our portfolio of commercial real estate loans continues to be current and performing.

We continue to see both sale and financing transaction volumes increasing and liquidity returning to the market. In recent months, there has been a significant increase in financing activity from banks, insurance companies, and especially from reconstituted CMBS programs.

The capital dedicated to new real estate loans 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 getting ready for take-out financing.

RSO benefits from our focus and expertise in directly originating loans between $10 million and $20 million, and even though there are a number of capital sources in the market to make new loans, most are not staffed to make loans of this size and many lenders are looking to make much larger loans. We have an extensive pipeline of deals, and are looking to convert select opportunities to loans for our portfolio.

Since the end of the third quarter we have closed two loans. The first loan was in the amount of $8.15 million and is secured by a neighborhood shopping center in Orlando, Florida. The term of the loan is three years with two one-year extensions. The second loan was in the amount of $9.75 million, and is secured by a portfolio of retail and multifamily buildings in the Gaslamp section of San Diego, California. The term of the second loan is also three years with two one-year extensions.

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 financing demand.

We have fully established origination, asset management, and loan 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 and to match our production levels with our existing financing facilities and capital availability.

With that, I'll turn it back to Jonathan and rejoin for Q&A.

Great, Dave. As I stated -- I will now give you some statistics on our corporate bank loan portfolio. As I stated earlier, we have syndicated bank loans of approximately $913 million in amortized costs, encompassing over 30 industries.

Our top industries are health care, 11%, diversified, 9%, broadcasting and entertainment, 8%, printing and publishing, 5%, and chemicals, 5%. As of the end of September, our average loan assets yield 2.71% 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 the financials.

Thank you, Jonathan. Our board declared a cash dividend for the third quarter of $0.25 per common share for a total of $13.7 million. This brings our year-to-date results to $33.1 million of REIT taxable income estimated and a payout ratio of approximately 103%.

At September 30, 2010, RCC's investment portfolio was financed with approximately $1.6 billion of total indebtedness that included $1.4 billion of CDO senior notes, approximately $102 million of leased-equipment-backed securitized notes, and $51.5 million sourced from our unsecured junior subordinated debentures related to our two TruPS issuances back in 2006.

We ended the period with $329.7 million in booked equity, and RCC's borrowings of $1.6 billion had a weighted average interest rate of 1.38% at September 30, 2010, a continued reflection of very low LIBOR. Consistent with our long-stated philosophy of maximizing match funding, our investment portfolio continues to be completely match funded by long-term borrowings and, thus, we have no short-term debt.

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 two real estate CDOs produced over $18.6 million and bank loan CLOs generated over $16.3 million of cash flow in the nine months ended September 30, respectively to the REIT.

Of note, as of October 31 we have in excess of $128 million in investable cash, comprised of $29 million and $99 million in our bank loans and real estate deals, respectively. This cash is available for reinvestment in our CLOs and CDOs to bring collateral -- to build collateral, generate attractive spreads over the cost of the associated debt, and also strengthen our positions in each structure.

For example, during the nine months ended September 30, we bought investment grade CMBS of $27.2 million at par for a weighted average price of $72 spot rate. The resulting discount of $7.6 million improved the collateralization in our CRE CDOs and these CMBS purchases provided a cash-on-cash yield of approximately 8%.

During the three months ended September 30, we agreed to a bankruptcy court approved settlement on a CRE loan. Notably, this represents the resolution of a previous default in our portfolio. As part of the settlement the loan was paid down by approximately $2.3 million from $7.3 million to just north of $5 million.

In addition, we received possession of the remaining real estate collateral, which was written down to its estimated fair value of $4.4 million and classified as property available for sale on our balance sheet as of September 30th. So, we intend to liquidate the real estate. As Jonathan mentioned earlier, we also added $2.4 million to our general CRE loan allowance.

Our leverage is 4.7 times. When we consider our TruPS issuances, which have a remaining term of approximately 26 years as equity, we see our leverage drop to four times.

Focusing on real estate, we were levered 2.3 times on our real estate CDOs at December 31, 2009. After giving effect to the debt repurchases in the nine months ended September 30, we ended the quarter 1.6 times levered on our real estate portfolio. This is a modest improvement 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 $6.03 at September 30, up $0.11 from $5.92 at June 30th. Net income of approximately $0.27 per share less the dividend payout of $0.25 added $0.02 to book value. The balance of the improvement came from increases in the mark-to-market on our CMBS portfolio amounting to approximately $0.10 per share. Particularly, we saw this improvement on bonds purchased in 2009 and 2010, a reflection of a huge rally in that space.

At September 30, our equity is allocated as follows; commercial real estate loans and CMBS, 78%, commercial bank loans, 18%, and lease receivables of 3%, and finally structured notes of 1%.

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

Thanks, Dave. Again, as I said last quarter and many times before, management's recommendation is that our intention is continue to pay our dividends in cash and our intention at this point is to -- is to have a $1 dividend in 2011. And this is based on management's expectation of continued good performance and is based on our liquidity increasing and, hopefully, our intent is then to look during 2011 to increase interest income and eventually increase the dividend.

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

Thank you.

(Operator Instructions)

Our first question comes from the line of Gabe Poggi with FBR Capital Markets. Please, proceed.

Hey, good morning, guys.

Hi, Gabe. How are you doing?

Good, how are you?

Good.

A couple of quick questions. Can you talk about what you guys have scheduled for maturity on the asset side of things, the CRE book? How much in total matures in 2011, and then kind of what your thought process is in dealing with any maturities? And then I've got some other questions behind that.

I would say I think we don't have that information right on hand here, but there's nothing maturing in -- and we're happy to go through with you if you give Dave Bloom and Dave Bryant a call, but there's nothing maturing that is worrisome to us. That's probably --

Right, because there's not just -- you don't have a big chunk?

No, that's probably why we don't have the listing.

Perfect. Okay. In terms of you talked about the pipeline going forward, playing offense and Dave had mentioned it's extensive. Do you guys -- I mean, what's the size or the scope of what you're looking at is it $1 billion worth of stuff, couple of hundred million? I'm trying to get a sense of how many pitches you guys are seeing to hit, so to speak.

Yes, I mean basically we have about $150 million to $200 million of cash. We're going to invest all that and during the next six months to nine months, most of it in the next three to six months.

Okay.

Well, I should say most of it in the next six months, although we, as Dave said, we've started to write loans. We're looking at opportunities in all the areas that we focus on, not just real estate. And we are also engaged in thinking about having the appropriate term leverage on new investments and we'll see how that goes, and if so, the number will be bigger.

Got you. And then last question is a follow-up to that is -- and if, Dave, you mentioned it, I apologize. what, just generally speaking what do you guys see as the spread pickup between new paper you can write and, for lack of a better word, legacy paper in your CRE CDOs? In other words, what's your spread pickup? What's the delta there?

It's all in somewhere because -- remember, we've been in an accommodative mode as we played defense, so we were lowering LIBOR floors, we were rewriting loans that may the -- may help the borrowers out more than it helped us or we took it on the backside. Now we're basically in the mode of getting repaid and putting money out at higher spreads. So somewhere, I would say, between -- what would you say -- like 250 to 400 basis points of increasing spreads?

Yes, certainly.

Yes.

Yes, so at least --

It's just below 5% weighted average now and Dave's writing loans at 7.75 or so --.

Yes, plus points.

Got you. Okay.

Origination point and an exit point.

Yes, right, plus a point on each side. Okay, that's very helpful. Thanks. Good quarter, guys.

Thanks.

Thanks, Gabe.

(Operator Instructions)

Our next question comes from the line of Steve DeLaney with JMP Securities. Please, proceed.

Good morning, everyone, and congratulations, on another solid quarter.

Thanks, Steve.

My question has to do with the two loans you elected to sell in the quarter. I think it was about -- looks like it's about $37 million. I was just wondering if you'd give us some color? I mean, were these like loans, this sale was sort of part of a work, the conclusion of a workout process? Or, talk a little bit about that and whether -- were those loans that were within the CDOs and you're just basically converting them into cash for new investment?

Steve, very good question. We -- those were loans that people approached us to buy. They were both mezzanine B-note type of loans on large assets that people wanted to buy. And since mezz and -- mezz and B-notes tend to be binary -- they either work out or they don't, we were willing to sell them at about, I think about $0.85 on the dollar. So, they weren't in workout. We sort of took a discount because there is somebody waving cash in front of us.

Right.

But otherwise, we would have excepted them to go to par.

And, Steve, I would add that as of June 30 we knew about those situations and wrote those loans down to those recoverable values.

Right.

In other words, you were -- you were sort of getting those feelers in those bids and kind of indicating where the market -- and I guess in your mind that kind of put them in sort of a held for sale --

Yes. As soon as we know we were going to sell them at a discount, we took the charge in the -- I think in the third -- in the second quarter.

Correct.

Right.

Right. Well, that looks to be a very healthy sign in the market. We've been hearing about these turns --.

So I would -- I would just say generally the mezzanine and B market is increasing liquidity daily.

Yes.

And I would say values for those pieces have gone up tremendously. I wish we had bought more at the bottom.

Yes, I mean, that's good color, because we see it in the home loan market with the insurance companies and the CMBS conduits. You can see those like ten year loan yields dropping, but that's the first color I've heard on sort of the mezz B-note market where they're actually -- they're buyers out there with cash in hand looking to find those assets.

And it's a combination of opportunity funds. We have a lot of money looking for control positions on assets and large insurance companies and pension funds who are just willing to own seven years at 8% because they can't get it elsewhere. And they buy that at a discount; they're getting like 11%. And they don't mind owning the building at that basis.

Yes, yes. Okay, great. And then one final thing, this is just sort of a technical thing. I guess it's for Dave Bryant. Your -- I guess between taxable and GAAP there's always timing issues with respect to when actual losses are run through the system, and for GAAP, you do your provisions and then the actual loss comes later. Is that what is going on that pushes your taxable to $0.20 versus your GAAP at $0.27?

Yes, pretty much, Steve. That's pretty much the explanation.

But also, we have things in a -- in taxable REIT subsidiaries where we're paying taxes. So it's -- even though we're making the money we are providing for tax income there.

Correct.

Right. So it sounds, even if we get that anomaly of taxable being a little less, as long as you've got the GAAP -- the GAAP earnings, that sounds like with the Board -- that's the basis on, which your Board is going to support your dividend.

Yes, exactly. Exactly, and as I said at the end of the call, we are looking at the 2011 and we feel that $1 is very solid there.

All right, guys. Well, congrats, and have a good day and thanks for the comments.

Thank you.

With no further questions in queue, I would now like to turn the call over to Mr. Jonathan Cohen for any closing remarks. Please, proceed.

Well, I just want to thank everybody for their continued support and interest and let us know if you need anything. And you can find us through Purvi Kamdar, our Director of Investor Relations. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for participation. You may now disconnect, and have a great day.