Acres Commercial Realty Corp (ACR) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter, 2011 Resource Capital Corporation Earnings Conference Call. My name is Jenade and I will be your operator for today. At this time all participants are in listen-only mode. Later, will conduct a question and answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Jonathan Cohen, President and CEO. Please proceed.

Thank you for joining the Resource Capital Corp. Conference Call for the second quarter, ended June 30th, 2011. I am Jonathan Cohen, President and CEO of Resource Capital Corp. Before I begin, I would like to ask Purvi Kamdar, our Director of Investor Relations, to read the Safe Harbor statement.

Thank you, Jonathan. When used in this conference call, the words 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 1-A 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. For a few highlights -- we had adjusted net income of $18 million, or a $0.25 per share-diluted, and $33.7 million, or $0.51 per share-diluted for the three and six months ended June 30, 2011, respectively.

As compared to $10.9 million, or $0.24 per share-diluted and $21.1 million, or $0.51 per share-diluted, for the three and six month ended June 30, 2010, respectively, which is an increase of $7.1 million, or 65% for the quarter and $12.6 million, or 60% for the six months. We announced a dividend of $0.25 per common share for the quarter, or $18.6 million in aggregate, which was paid on July 27, 2011 to stockholders of record on June 30, 2011.

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; David Brian, our Chief Financial Officer; Christopher Allen, Senior Vice President of our leveraged loan business; and Purvi Kamdar, our Director of Investor Relations.

The second quarter, 2011, saw consistency for Resource Capital, but it was also a very active period in terms of moving forward with our plans. We continue to build our investment portfolio while pairing some older and riskier real estate positions. In fact, we originated over $61 million of real estate whole loans for the quarter, this is self-originated by our team, and are in the process of closing even more after June 30th, a tremendous effort.

We saw an increase in our net interest income of over $2.7 million, or 17% for the quarter ending June 30th, versus a year ago, and $7.2 million, or 25% for the six months ended June 30, 2011, versus the first six months of 2010.

We sold some positions and received over $50 million of cash from repayments in sales. We impaired our last low rated 2007 fixed CMBS bond. We converted two real estate positions to equity ownership and, after the quarter ended, bought another real estate property very opportunistically. A very active quarter, and one that is positioning us to obtain our goals.

While credit generally continued to improve, we ran certain impairments through the balance sheet including, as I mentioned, our last, and yes, I said our last, 2007 CMBS fixed rate bond, almost $5 million in real estate loans, which we converted to equity.

We also had a very unique loan provision on the leveraged loan side of the book for two loans. Loan losses, in general, decreased significantly from a prior year but we are still elevated due to one time items. We believe the credit environment is still improving for real estate and remains extremely benign on the corporate side, but we note with caution the weaker macros situation.

These activities mark good progress for our company. We are focusing on making high quality present and future investments, so, while getting rid of some older subordinate positions, we have been investing in new senior secured real estate opportunities. Although most of these new loans did not close in the quarter, we now have closed approximately $100 million since restarting our commercial real estate lending program, post financial crisis.

Our pipeline is substantial, as David Bloom will discuss. In addition, we started ramping our newest CLO of commercials syndicated bank loans, which we expect to close within a short period of time. We continue to build our leasing venture and expect it to turn a profit as a Company within the next few quarters.

The financing markets are back and we are actively pursuing opportunities to grow our net investment income. It is nice to know that banks and others continue to want to grow their business with us. We are nearing completion of new facilities and are excited by the prospect of new capital to fuel our growth.

We are well capitalized, have access to all types of liquidity, and are prepared to grow. With these results and with our new investments, I reiterate, as I have before many times, that we are dedicated to a $1 cash dividend for 2011.

The second quarter of 2011 was marked by many positive events including earning $0.25 of adjusted net income with over $235 million of cash on hand to invest. And making new investments of over $206 million during the quarter, and $387 million for the six months into commercial real estate loans, syndicated bank loans, and commercial finance. All areas where we expect to achieve pretax returns of 12% to 25% on new dollars invested.

We believe that our investment results will improve dramatically as we get more fully invested. We are now only 3.4 times levered and need to invest the $235 million of cash available to us. Stay tuned for the next three to six months.

We are confident that this reshuffling, selling risky legacy debt, and originating higher yielding new senior loans, has resulted in a much improved Company, more stable and able to seize more upside. We are proud that we are able to do this while maintaining a meaningful cash return to our shareholders.

Going forward, we will focus on expanding our real estate lending operation, finding new investments and syndicated bank loans, and finally, building franchise value at our commercial finance business. Now I will ask Dave Bloom to review our real estate activities. Dave?

Thanks very much, Jonathan. Resource Capital Corp's. commercial mortgage portfolio has a current committed balance of approximately $706 million, and a granular pool of 46 individual loans. On our call last quarter, the portfolio had a balance of $664 million. However, as Jon mentioned, in the second quarter we sold two legacy positions and received two payoffs totaling $52 million, which reduced the size of the portfolio to $612 million.

There has been a net increase of $94 million in the size of our portfolio since our last call, and with our full forward pipeline, we see the size of our portfolio continuing to grow appreciably. The collateral base underlying the portfolio continues to be spread across the major asset categories in geographically diverse markets with a portfolio breakdown of 37% multifamily, 11% office, 27% hotel, 11% retail, and 14% other, such as light industrial and self storage.

Our portfolio of commercial mortgage positions is in components as follows; 80% whole loans, 14% mezzanine loans, and 6% B-notes. Still of note in our portfolio composition is the significant increase in the percentage of our self-originated whole loans and the corresponding decrease in our subordinate debt positions.

We continue to benefit from a 15% year over year increase in our self-originated whole loan positions, from 65% in August of 2010, to the 80% we have in portfolio today. This mix shift is the result of our origination of new whole loans in the sale of legacy subordinate debt positions.

Since we have been actively originating new loans again, which began in the fourth quarter of 2010, we have originated and closed, or are in the process of closing, a total of 12 new loans with an aggregate balance of approximately $139 million. We have steadily ramped up our loan production and our originations by quarter breakdown as follows; two loans totaling approximately $18 million in the fourth quarter of 2010, two loans totaling approximately $22 million in the first quarter of 2011, four loans totaling approximately $52 million in the second quarter of 2011, and four loans totaling approximately $47 million, so far, in the third quarter of 2011.

We continue to see both sale and financing transaction volumes increase and liquidity returning to the market. We continue to experience payoffs in our portfolio. We currently have a full forward pipeline of approximately $200 million of new transactions and will continue to convert select opportunities to loans for our portfolio.

From a credit perspective, we note improving metrics across the portfolio, with the majority of our properties securing our loans, having improved cash flow on a year over year basis and continuing to trend in an upward direction.

We are seeing borrowers plans for value creation being realized across the multifamily properties, with rents increasing, occupancy and average daily rate numbers at hotels are rising, new leases being signed in office buildings, and so on.

I am pleased to report that our commercial mortgage portfolio continues to be current with no defaults. The real estate debt markets have definitely returned and we continue to observe a significant increase in financing activity from banks, insurance companies, and from reconstituted CMBS programs.

That said, in recent weeks we have seen some instability in the CMBS market and a general pull back by these long term fixed rate lenders as the debt capital markets continue to recalibrate. The retreat of CMBS lenders is certainly a positive for the RSO lending platform as we originate loans for our own balance sheet and are not dependent on CMBS, or a secondary loan trading market. There will be many more borrowers seeking alternatives to CMBS in the near to intermediate term.

RSO benefits form our focus and expertise in directly originating floating rate loans on lightly transitional properties between $10 million and $25 million. Even though there are a number of capital sources in the market to make new loans, there are relatively few market participants focusing on floating rate loans for the middle market. RSO will continue to benefit from loan repayments or select additional loan sales, as we invest well structured, higher yielding assets into our long term, locked-in financing vehicles.

In addition to our whole loan origination activities, we are also seeking to take advantage of good opportunities to own properties. In the second quarter, we converted two properties, with an aggregate loan balance of approximately $35 million, to equity. The properties are solid long term holds with great potential for capital appreciation over time.

RSO is also directly buying real estate on an opportunistic basis, both alone and with institutional partners. In the second quarter, RSO teamed with one of our institutional partners on a 90-10 basis to acquire a distressed note, secured by a 494 unit apartment complex, at a substantial discount. We will receive our 10% share of the profits and are also entitled to a 25% promoted interest over a stated hurdle.

In another opportunistic purchase that closed just yesterday, we acquired a 504 unit multifamily apartment complex for $18.6 million. In this instance, RSO acted alone and we will recognize all the capital appreciation ourselves. This is a value add opportunity and there will be additional equity added to the situation as plans to improve the property and measurably increased cash flow are realized.

RSO will continue to look for real estate purchases that provide strong current cash flow characteristics and the possibility of significant value creation and capital appreciation. With that, I'll turn it back to Jonathan and rejoin you for Q and A at the end of the call.

Thanks, Dave. Now I would like to review our investment in commercial finance. In January, we transformed our previous investment into a new one and now we own our interest through a joint venture we formed with LEAF Financial and Guggenheim Securities. This JV is going well and is building its balance sheet, its proprietary vendor financed programs and its staff, we have been encouraged by the results in building the vendor financed business and are committed to making LCC into a industry leader.

RSOs preferred stock investment has a stated dividend rate of 10%, and earned $1.5 million in dividends during the six months ended June 30, 2011. Remember, we also have warrants to purchase 48% of the business at a nominal price. These warrants give us the upside we are looking for while the coupon gives us the ability to generate a nice current return.

As for our syndicated bank loan business, I want to introduce Christopher Allen, our Senior Vice President of leveraged loans, who will walk us through our existing portfolio and our recent purchase of the management fees of Churchill Pacific, which is now Resource Capital Asset Management or RCAM. Chris?

(inaudible) and the Chief Operating Officer of Apidos Capital Management and work together with Gretchen Burgstresser, who is the Senior Portfolio Manager. Resource Capital has direct exposure to bank loans through three CLOs, managed by Apidos, and it earns fees on additional bank loans through its ownership of Resource Capital Asset Management, formerly Churchill Pacific Asset Management.

Resource Capital's three bank loan portfolios have a carrying value of $903.5 million, and approximately $929.3 million in par value. Resource Capital Asset Management has additional assets under management of approximately $1.8 billion.

For the most recent quarter, the three CLOs that the Company owns produced interest income 23% higher than during the second quarter of 2010. Apidos CLOs have produced annualized equity returns at 24% since inception for Resource Capital.

The current cash-on-cash returns, based upon our original investment of $79.5 million, is approximately 37%. The carrying value of our bank loan portfolio is approximately $61 million, representing approximately $0.82 of book value per share. So that the return on equity of our bank loan investments is approximately 53%, with remaining upside to be gained from accretion from loans and securities that we purchased at a discount in the amount of nearly $22 million.

Overall, in my opinion, the portfolios remain in excellent condition, and very little has changed since last quarter. We remain very diversified across industries. The average position size is about 31 basis points, or roughly 1 million. The highest concentrations are in health care, business, services, chemicals, and automotive. Included in the top ten holdings are issuers such as; Community Health Systems, SunGard Data Systems, Cablevision, and Flextronics.

The average rating is between B2 from Moody's and B plus from SMP, strong ratings for loans suitable for CLOs. There is very little CCC exposure, of less than 5%, across the portfolios, just over 2% of second liens and no corporate bonds. We hold just one loan with the par value of $362,000 that was in default at June 30, 2011.

In the current quarter, we took an additional $24,000 to reflect its lower market value. We increased our general reserve $1.7 million, as a result of adding three new positions to those that are on our watch list due to near term restructuring concerns, for a total of seven positions, totaling $11 million of par.

Finally, we sold loans during the quarter, resulting in losses of $317,000. As of June 30, 2011, we have specific reserves of $136,000, and general reserves of $3.4 million, as compared to specific reserves of $112,000, and general reserves of $1.7 million for the second quarter.

We continue to forecast a very benign outlook in corporate credit for the next two years. There were no defaults in June or July and, according to SMP, on August 1st the lagging 12 month default rate for the SMP LSTA index of loans fell to a 42 month low of 77 basis points by principal amount, and 1.21% by issuer. If there are no defaults in August, the rate by principal amount will drop to 33 basis points. Currently the Apidos last 12 month default rate is 3 basis points.

All of our deals have increasing amounts of principal cushion, versus last quarter, and a year ago. According to Citigroup's global structured strategy report, as of March this year, Apidos is five out of 48 US CLO managers for having the highest average cushion in its CLOs. During the downturn in March 2009, Apidos had the highest cushion, according to the same research.

As you mentioned last quarter, Resource Capital Asset Management also is entitled to the fees earned from managing five bank-loaned portfolios. Since the deal closed in February of this year, we are on track to receive, what we estimate to be approximately $33 million over the next several years. And our variance forecast to date is roughly $50,000. Going forward, we believe that the trend of manager consolidation will continue and that Resource Capital will be a major beneficiary. We regularly review additional acquisition candidates.

The new issue CLO market is becoming much more attractive as well. For the first time in several quarters, secondary loan prices have declined in price, while liability spreads have remained tight. In June, Resource Capital formed Apidos CLO-8, and through a warehouse agreement with Citibank, began warehousing loans. At June 30th, there were no outstanding borrowings on the facility. At the end of July, Apidos had purchased $48 million in bank loans. The facility bears interest at a rate of three months LIBOR, or plus 1%.

Research Capital intends to purchase the majority of the equity in Apidos CLO-8 upon closing of the CLO transaction in the fourth quarter of 2011. And we have received significant reverse inquiry from potential investors.

With AAA lending at attractive levels, we should have the opportunity to earn pretax gross returns in the high teens or low 20s. We have deployed our efforts on behalf of Resource Capital with excellent results and look forward to continuing and expanding that success in the future. Please feel free to contact me if you would like more information on our bank loan activities. Thank you.

Thanks, Chris. Now I will ask Dave Bryan, our CFO, to walk us through the financials.

Thank you, Jonathan. RSO's Board declared a cash dividend for the second quarter of $0.25 per common share, which approximates our adjusted net income for the quarter. Our estimated REIT taxable income for the second quarter, 2011, was $2.9 million, or $0.04 per common share-diluted.

REIT taxable income in the second quarter was impacted by three tax deductions not included in GAAP earnings. Namely, losses from a real estate joint venture of $6.4 million, a capital loss carryover of $3.5 million, utilized during the second quarter, and losses of $1.3 million on the bank loan portfolio.

Combined, these three non cash deductions of $11.2 million, each representing timing differences, reduced REIT income by $0.16 per share without affecting our liquidity and or ability to pay the $0.25 dividend for, what is now the seventh consecutive quarter.

We continue to pass all of the critical interest coverage and over collateralization tests in our two real estate CDOs and three bank loan CLOs through July of 2011. The over collateralization and interest coverage tests in each of our real estate CDOs was improved by our cancellation of several previous repurchased bonds on June 21st, which added to our equity interest in these securitizations.

Each of these financings performed and generated stable cash flow to RSO in the second quarter. The real estate CDOs produced over $9.9 million and bank loan CLOs generated over $13.5 million of cash flow for the six months ended June 30th.

Of note, as of July 29th, we have an excess of $176 million in restricted cash, comprised of approximately $68 million, and over $118 million in our bank loans and real estate deals respectively. This cash is available for reinvestment in our CLOs and CDOs to generate very attractive spreads over the cost of the associated debt and to support our investment in each structure.

Of our provisions for loan losses of $4.1 million, $2 million is related to bank loans, and $2.1 million is for real estate loans. When real estate loans, $1.4 million was recorded as a valuation adjustment for a property that we acquired by converting what had been a loan during the second quarter. $500,000 was added for a previously impaired whole loan, and $100,000 came from the sale of a whole loan after quarter end.

While we have marked the converted loan to today's estimated value of the real estate, we do not expect a loss on the ultimate disposition of that asset. On the bank loan portfolio, we increased our reserves by $2 million, of which $1.7 million was related to two positions with credit concerns, both of which are performing.

We do not see the credit concerns on these two loans as a continuing trend, with respect to that portfolio. Overall, I would characterize our credit as stable to improving and, importantly, all of our real estate loans, both legacy and newly underwritten loans, are performing.

Our leverage is 3.4 times. When treat our TruPS issuances, which have a remaining term of 25 years, and no covenants, as equity, our leverage is 2.9 times. Focusing on real estate, we began 2010 approximately 2.3 times levered in our real estate CDOs. After giving effect to the debt repurchases throughout 2010 and to 2011 operations, we ended the June 2011 quarter a mere 1.5 times levered on our real estate portfolio.

Our GAAP book value per share was 584 at June 30th. The change from Q-1 resulted primarily from reduced mark to market adjustments, first on our CMBS portfolio of $0.07 per share, and second, a decrease on our cash flow hedges of $0.06 per share. The dividend of $0.25 per share was offset by earnings of $0.13, and a $0.01 per share improvement from our [drip].

At June 30, 2011, our equity is allocated as follows; real estate loans and CMBS, 66%, commercial finance, 29%, and 5% in other investments. With that, my formal remarks are completed and I'll turn the call back to Jonathan Cohen.

Thanks, Dave. We are excited to reap the benefits of new opportunities that we have already seized and to take advantage of even more opportunities, as we have started to do so already. We look forward to sharing the results and any color on them with you in future periods. Now we will open the call to any questions. Thanks.

Thank you.

(Operator Instructions)

Your first question comes from the line of Steve Delaney with JMP Securities. Please proceed.

Thank you. Good morning, everyone.

Morning, Steve.

Well, congrats on the success on building the origination pipeline.

Thank you.

My first question had to do with the realized investment gains in the quarter, I think it was $3.7 million. You described the impairment of about $4 million on the -- I think those were 2007 CMBS, but can you give us a little background on what securities were involved in the realized investment gain?

For the most part, that was securities that we bought in the downturn in 2009, and in May and June sold what was near the peak of the CMBS market.

Right. Okay. So just culling -- taking some gains out of that legacy portfolio.

Yes. And now a lot of the securities are a lot cheaper now. So now we are looking at them again, so.

And using your [wells] line for that, right?

Either using the wells or we have room in some of the CDOs.

Correct. Okay. And then I just wanted to clarify a couple of things when Dave was going through. So I believe I heard him say that of the $187 million or so of cash in the structures, was the number $118 million in the two CRE CDOs?

It was. In the real estate CDOs, $118 million, Steve.

Yes, but I want to point out that part of our sort of lag in putting out cash here is, a lot of the loans that we closed in this quarter closed towards the end of the quarter so we didn't really pick up much interest income from them. And then we have pending really this week and last week, and the week before, probably about $40 million, some odd $50 million new loans that they have originated. So when you look at it, our investment book and our investment income in the next quarter, it should be a lot heavier from the real estate side.

Understood.

A lot of that cash will be used within the CDOs.

Given that you have got a pipeline of about $200 million against that $118 million, are you starting to look at other funding sources that would allow you to continue to fund once you have pretty much used up your free cash in the CDOs?

Yes, we are in the final, sort of final finals with a bunch of facilities that will enable us to use to continue to grow that business significantly over the next, like, three months, four months as we finish up the cash that is in those CDOs. We will be able to continue to grow the business. But remember, one of the parts of the business that has come back, which we like, is that people pay off their loans and we can replace them because we do get origination and active fees, and occasionally some sort of upside to the sale of a property.

Steve Delaney. Right, right. Okay. And one last thing, guys, sorry to be tedious with these numbers, but I just want to get it straight.

Sure. Of course, Steve.

The second quarter loan loss provision, the [$4.1 million], Bryan, did I hear you correct that included in there is the $2 million increase, and the bank loan provision is included in that $4.1 million?

Correct.

Okay. And that, you said, was sort of a one related --

Yes, and that was just a very odd restructuring situation that surprised people and we felt, based on the accounting and the situation, that it was more prudent to book a reserve, even though who knows what really happens there.

Okay. Well, thanks a lot for the comments and good job on getting this pipeline built up.

Thanks, Steve.

Your next question comes from the line of Lee Cooperman with Omega Advisors, please proceed.

Yes, hi.

Hi, Lee.

Good morning to you.

Good morning.

Thanks for the comprehensive run down. I have kind of a question along the fine lines. You mentioned the commitment to the dividend which had been steadfast and you have lived up to that commitment, but you are really saying for the rest of 2011, which, really, the year is more than half over -- Question, if your dividend was limited in 2012 to your expected cash earnings, and not the dollar but cash earnings, how much lower are cash earnings than your present dollar dividends expected to be? Or, possibly, do you expect cash earnings in 2012 to be in line with the present dividend?

No, we wouldn't keep the dividend here if we didn't expect, at this point, that the cash earnings would be a dollar, and we have $235 million that we have to put out in order to get the cash earnings of the Company on a basic -- you know we earn $0.13 but we had $0.25 of adjusted. To get it to that $0.25, you need to put the $235 million out and stop selling investments during the quarter. So we expect when we model out to get to a $1 and stay there.

So in other words, I think I heard what you said but I want to make sure, you expect that a time you employ, this capital in 2012, you will be earning enough money and cash to have maintained a $1 dividend?

Yes, exactly, Lee. The reason I hedge and say 2011 is because, you know as we put out the money, of course interest rates on the ten year bond have gone from -- when I first started talking about it it was like 3.5%, 4%, now they are at, whatever, 2.7%. So it becomes harder and harder to put out money at, you know, 9% or 10% or 8%, unlevered. So, really, there are swing factors, but right now, as we will model out, the dividend is good to go at $1.

Good. Thank you, good luck. You have done a very good job relative to your peer group.

Thanks, Lee.

(Operator Instructions)

Your next question comes from the line of (technical difficulty) for FBR. Please proceed.

Hey, good morning, guys, it is Zach Tanenbaum for Gabe.

Hey, Zach.

First question is, could you please comment on how much equity you expect to contribute to new Apidos CLO transaction?

It is really up in the air now because we do have inquiries from other outside investors who also want to participate in the equity. So, you know, could be as much as $30 million or $40 million, eventually. We have probably $10 million or $15 million or $20 million that is already up on a line that is accumulating assets, so it would probably be another $15 million, $20 million. Nothing that would cause us to raise capital in the marketplace.

Great, thanks. And then switching gears a little bit, on the two properties that you took back in the quarter, could we get a little more color there just in terms if there is still cash flowing, and maybe just a little bit more about the situation?

Sure. This is Dave Bloom. The two properties were actually very strong performers from a cash perspective. We originated them ourselves and when we originated them we put in some pretty hefty triggers for renewals that required substantial de-levering and some fees. And to the extent that the parties didn't make it, you know, we were more than happy to step in and take these properties. These are great opportunities and over time we will really do extremely well. I think it was the structuring up front of the heavy triggers for extension that allowed us to walk in. In one of the situations, we also had substantial personal recourse that we were able to use to get the property and, you know, we are happy to have them in portfolio.

I just want to add, this is Jon, that, you know, as we look at the book of Resource Capital, we are trying to take 10% or more and be opportunistic and actually own real estate. We just bought another property that was sort of an opportunistic value-add apartment situation that we thought was coming out very low in terms of pricing.

We are doing things that are opportunistic to build book value over time for our shareholders. And this is a great example of, even though the accounting made you book a loss on one of the loans, really, when we look at it with a few little tweaks and all the great cash flow from the properties, these are incredible situations that will enable us to build value and we are looking forward to that.

Great. Thanks a lot, guys.

Thanks, Zach.

And at this time, we have no further questions. I would now like to turn the call back over to Jonathan Cohen for any closing remarks.

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