Acres Commercial Realty Corp (ACR) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 Resource Capital Corporation Earnings Conference Call. My name is Kim, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session at the end of today's conference.

(Operator Instructions)

As a reminder, this call is being recorded. I will now turn the call over to your host for today's conference, Mr. Jonathan Cohen, CEO and President. Please proceed, Mr. Cohen.

Thank you, and thank you for joining the Resource Capital Corporation's conference call for the fourth quarter and year ended December 31, 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 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 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. Adjusted funds from operations, or AFFO, for the three months and year ended December 31, 2011, was $17 million, or $0.22 per share diluted, and $63.9 million, or $0.90 per share diluted, respectively.

Our GAAP net income for the three months and year ended December 31, 2011, were $413,000, or $0.01 per share diluted, or -- and $37.7 million, or $0.53 per share diluted, respectively, as compared to GAAP net loss for the three months ended December 31, 2010, of $9.4 million, or $0.17 per share diluted, and GAAP net income for the year ended December 31, 2010, of $19.4 million, or $0.41 per share diluted, respectively, increases of $9.8 million, or 104%, and $18.3 million, or 94%, respectively.

Total revenues increased by $9.6 million, or 51%, and increased by $26.7 million, or 40%, as compared to the three months and year ended December 31, 2010. We paid a dividend of $0.25 per common share for the quarter, or $20 million in aggregate, on January 27, 2012, to stockholders of record as of December 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 lending, David Bryant, our Chief Financial Officer, and Purvi Kamdar, our Director of Investor Relations.

During the year ending December 31, 2011, Resource Capital Corp. shifted its approach to creating shareholder value from short-term to long-term thinking. When the year began, we were focused on, first, the continuing overhang from the credit crisis that began in 2008. Second, maximizing current returns from buying back our own debt at a discount and distributing as much cash to our shareholders as could be deemed responsible.

And third, positioning the Company for the future by building our capital base and growing and diversifying our assets. We believe that we were successful in doing all three, and that allows us to really focus on the future.

As we ended the year, shareholders should take note of declining credit costs, increasing revenue, and our guidance of $0.80 to $0.90 of FFO, which means we can look to growing our dividend from a very stable and sustainable base of $0.20 per quarter.

During 2011, as we began to accelerate our focus on the future, we set and met good dividend guidance. We term financed a new syndicated bank loan structured vehicle. We secured multiple commercial real estate lines, including a brand new $150 million real estate loan facility. We made investments in real estate and increased our loan origination, and we lowered to under $67 million the amount of mezzanine loans from the pre-financial period -- pre-financial crisis period. We end the year with only 4.2 times in leverage and 1.5 times in leverage against our real estate portfolio.

Our focus on the future includes several key elements. We used our capital to grow our business and portfolios. The result of this is the massive increase in revenue, year over year, of over 40%. We also made multiple long-term investments that we think will be book value enhancers -- read -- long-term gains that have low or zero current return.

These investments included our $36 million investments alongside a private fund in a leasing platform, as well as the continued equity investment program into distressed and value added real estate. We also continue to opportunistically buy discounted structured credit, as well as CMBS.

All of these investments are meant to grow book value over the next few years. We believe that a capital allocation that includes both solid, well performing current credit based assets, along with longer term capital appreciation investments, will benefit our shareholder now and into the future.

Book value ended the quarter at $5.38 and was primarily down -- was down, primarily due to tax planning moves taken in the fourth quarter of 2011. These moves were necessary because of the outperformance of the non-real estate businesses, principally in syndicated bank loans and will not need, I repeat -- and will not need to be repeated as we have increased our real estate revenue with the addition of owned real estate.

Book value also decreased due to mark to market of our structured bonds (inaudible) ABS, while our CMBS portfolio was flat. We believe that these securities have rallied significantly since January 1, 2012, and pro forma would add approximately $0.07 to $0.10 per share if marked as of the end of February, or closer to $5.45 to $5.48 per share of book value. We are very pleased about this trend and believe there is further upside to this number. In addition, this does not include approximately $35 million of discount that we have yet to accrete on our syndicated bank loan portfolio, or approximately another $0.40.

We continue to grow our business through further investments in real estate loans, real estate distressed investments, and value added real estate equity investments. The results of these initiatives are best illustrated through the new $150 million loan facility that we signed with Wells Fargo, as well as the gains from the sale of distressed real estate that we earned in the December quarter.

During the December quarter, a joint venture in distressed real estate between RSO and an institutional partner sold two real estate investments, resulting in cash proceeds to RSO of $2.9 million, representing approximately $1.1 million of gain on the investments. We just completed the sale of another investment very recently, with cash proceeds at $1.2 million to RSO and a gain of approximately $1.2 million.

We are very focused on growing our business and eager to complete the investment of $185 million of cash, the remainder on our balance sheet as of December 31, 2011. We expect this number to decrease more significantly within the next few months.

Our confidence in the ability to grow our real estate business is bolstered by our recent accomplishments. In fact, we originated $139 million of real estate whole loans for the year ended December 31, 2011, and are in the process of closing even more. In this same timeframe, through a joint venture, we purchased approximately $700,000 of distressed real estate investments, representing a 5% interest.

We acquired a multifamily property for approximately $18 million and opportunistically converted two loans, with close to $35 million into equity ownership. We also purchased a 10% equity interest in another joint venture for $2.4 million to acquire a multifamily property and also provided an additional $7 million whole loan for a total of $9.4 million. We sold some positions and received almost $44 million of cash for -- from repayments and pay downs this last year.

Consistent with our goal to strengthen our assets, our commercial real estate portfolio is now approximately 87% whole loans, as compared to 67% a year ago. We are growing as demonstrated by our revenue growth of $26.7 million, and this should start to translate into dividend growth. We had a very strong credit performance this year, with provisions down 68%, year over year. Now I will ask Dave Bloom to review our real estate activities.

Thanks, Jonathan. Resource Capital Corp.'s commercial mortgage portfolio has a current committed balance of approximately $683 million in a granular pool of 44 individual loans. The collateral base underlying the portfolio continues to be spread across the major asset categories in geographically diverse markets, with a portfolio breakdown of 41% multifamily, 9% office, 23% hotel, 15% retail, and 12% other, such as mixed use and self storage. From the fourth quarter of 2011 through today, we originated four new loans, with an aggregate balance of $49.6 million.

Since real estate markets began to stabilize in late 2010, we have been actively originating new loans. Although there have been several pullbacks into real estate's finance market, during which time we focused exclusively on price discovery. To date, we have closed or are closing 14 new loans, with an aggregate balance of approximately $166 million, with a weighted average coupon of 7.26%.

When you take into account the typical 1% origination fee, which is accreted income over the initial two year term of the loans, our starting coupon is 7.76% on a floating rate basis over a LIBOR floor, notwithstanding, recent starting coupons of approximately 7.25%. We know pricing pressure as CMBS has reemerged for stabilized assets at fixed rate coupons close to 5% and as banks are aggressively looking to put out new floating rate loans at post crisis valuations. We will continue to focus on credit quality and make prudent pricing adjustments as may be required for high quality loans.

Our portfolio of commercial mortgage positions is in components as follows -- 87% whole loans, 11% mezzanine loans, and 2% B-Notes. We continue to benefit from an increasing percentage of whole loan [possessions] in our portfolio, having gained another 3% this quarter, which continues a trend that began as we started lending again and began to realize payoffs in a number of our legacy subordinate debt positions.

We still have some restricted cash in our second structure financing facility, which is $500 million, and we have a robust forward pipeline and look to be fully in this vehicle in advance of the closing of this reinvestment period, which ends in June of 2012. As previously noted, our first structured term finance facility, which was $345 million in size, was fully invested when its reinvestment period ended in September of 2011.

On February 27 of this year, we closed a new $150 million term financing facility with Wells Fargo Bank that is designed to fund continued growth of our core lending business, floating rate whole loans on lightly transitional cash flowing properties nationwide. The addition of this leverage will greatly enhance our net interest margin and drive a meaningful increase in return on equity and our lending platform in RSO's overall profitability.

We are pleased to see that the majority of the asset specific business plans across the portfolio are back on track and progressing towards the realization of borrowers' plans for value creation. And we note improving metrics across all asset classes, with the majority of the property securing our loans realizing improved cash flow on a year over year basis and continuing to trend in upward direction.

Sales and financing activity continues to increase as the commercial real estate recovery takes hold in additional markets. CMBS lenders, banks, insurance companies, and well established portfolio lenders, such as RSO, are all seeing increased lending opportunities. While keeping an extreme focus on credit quality, we anticipate year over year loan production growth and an overall increase in the size of our loan portfolio.

RSO benefits from our focus and expertise in directly originating floating rate bridge loans between approximately $10 million and $25 million. Even though there are a number of capital sources in the market to make new loans, and despite some signs of pricing pressure, we are still actively underwriting between $250 million and $500 million of transactions a month and are confident in our ability to continue to grow new loan originations in an impactful manner.

We look forward to steady new loan origination, while maintaining the credit quality, structure, pricing, and diversity of our current portfolio, continuing to grow the RSO loan platform.

As I've noted on previous calls, as a value added strategy to our focus in new whole loan production, since the beginning of 2011, our dedicated CMBS team has been actively buying highly rated CMBS bonds for our two structured finance vehicles and on a $100 million credit facility, also with Wells Fargo Bank, that is designed for this purpose.

Aggregate CMBS purchases for 2011 total $4 million par value at an average price of 99.6%. The Wells Fargo CMBS facility provides RSO with the ability, capital, and triple A rated investments' returns of between 12% and 15%.

In addition to our whole loan origination and CMBS bond activities, we continue to take advantage of opportunities to own properties. RSO's equity portfolio currently consists of four properties, three multifamily properties and one office building, all of which continue to perform at or ahead of pro forma. These properties are planned to be medium to long-term holds, and we see strong potential for capital appreciation over time.

We are still targeting 15% to 25% overall returns for these properties, but pro forma shows the potential for returns well above original underwriting. RSO will continue to look for real estate acquisition opportunities to 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&A at the end of the call.

Thanks, Dave. Now I would like to review our investment in commercial finance. In early 2011, 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, as well as [EOS].

Since then, LEAF has made great progress in building its vendor programs and making high quality leases. It completed its first securitization rated by Moody's, which was widely distributed. These are good accomplishments in the -- in just a few months, and we look forward to even making more progress in future periods.

Now I will also review our syndicated bank loan portfolio. Resource Capital's bank loan portfolio has a carrying value of approximately $1.2 billion at amortized cost. Overall, in my opinion, our portfolios remain in excellent condition, and little has changed since last quarter. As of December 31, 2011, we have specific reserves of $1.6 million and general reserves of $1.7 million, as compared to specific reserves of $166,000 and general reserves of $3.3 million for the third quarter.

We continue to forecast a very, very benign outlook in corporate credit for the next year or two. In the last 12 months, there was only one new loan default and one loan where we took an additional impairment. The default rate for the last 12 months was 0.3%.

As we mentioned last quarter, Resource Capital Asset Management is also entitled to earn incentive fees for performance in addition to the base fees earned from managing five bank loan portfolios. These are the bank loan portfolios that we manage for other investors. Since the deal closed to purchase those management contracts in February of last year, we are on track to receive what we estimated to be approximately $33 million over the next several years. We've received $7.8 million in fees to date. Now I will ask Dave Bryant, our Chief Financial Officer, to discuss our financials.

Thank you, Jonathan. RSO's board declared a cash dividend for the fourth quarter and full year 2011 of $0.25 and $1.00 per share, respectively.

Last quarter, we began reporting on funds from operations, or FFO, as an operating performance measure. We are now expanding on that metric and reporting adjusted funds from operations, or AFFO, which reflects the normalized performance of our operations and support both our current and longer term earnings in growth that fuels our cash dividend payouts today and going forward.

Our AFFO income for the fourth quarter and year ended 2011 was $17 million, or $0.22 per share, and $63.9 million, or $0.90 per common share diluted. AFFO for the fourth quarter and year ended 2011 was impacted by several noncash items totaling $6.4 million and $15.8 million and reduced adjusted FFO income by $0.08 and $0.22 per share, respectively.

Also, during the period, we took steps to ensure compliance with a 75% REIT gross income test. We believe these task compliance steps to be nonrecurring in nature and not a normal part of our operations.

We continue to pass all the critical interest coverage and overcollateralization tests in our two real estate CDOs and four bank loan CLOs through February 2012. Each of these structure financings performed and provided stable cash flow to RSO in 2011.

The real estate CDOs produced over $22 million and bank loan CLOs generated over $27 million of cash flow during the year ended December 31. Notable cash flow will (inaudible) in 2012, as we deploy restricted cash available for reinvestment and participate in cash flow from our new Apidos CLO VIII, beginning in 2012.

As of December 31, we have in excess of $138 million of restricted cash in these structures, comprised of approximately $58 million and over $80 million in our bank loans and real estate deals, respectively. Except for approximately $20 million in Apidos CDO I, where our reinvestment period expired in July, this cash is available for reinvestment in our deals, which we expect will provide very attractive spreads over the cost of the associated debt.

Of the Q4 provisions for loan losses of $6 million, $5.1 million is related to bank loans, and $0.9 million is for real estate loans. Regarding our bank loan portfolio, we increased our reserves by $4.3 million, with virtually all of it related to loan sales during the quarter. On our real estate loans, the $855,000 was added to reserves for a previously impaired whole loan. Overall, I characterize our credit as improving, and importantly, all of our 40 real estate loans, including the legacy loans, are performing through February, 2012.

Our leverage is 4.2 times. When we treat our TruPS issuances, which have a remaining term of 25 years as equity, our leverage is 3.6 times. Our leverage increased from September 30, 2011, primarily due to the issuance of our [fourth] CLO Apidos VIII that closed in October. We retained 43% of the equity in this deal.

Focusing on real estate, we began 2010 approximately 2.3 times levered in our real estate CDOs. After accounting for the debt repurchases in 2010 and 2011, we end 2011 a conservative 1.5 times levered on our real estate portfolio.

We ended 2011 with a GAAP book value per share of $5.38, down from $5.66 at September 30. The $0.28 change resulted primarily from reduced mark to market adjustments when our available for sale ABS portfolio of $0.04 per share combined with the cash dividend of $0.25, offset by net income for the quarter of $0.01.

At December 31, 2011, our equity is allocated as follows -- commercial real estate loans in CMBS, 63%, commercial finance, 31%, and 6% in other investments. With that, my formal remarks are completed, and I'll turn the call back to Jonathan Cohen.

Thanks, Dave. With that, I will open the call for any questions.

(Operator Instructions). And your first question comes from the line of Steve DeLaney with JMP Securities. Please proceed.

Thank you. Good morning, everyone.

Good morning, Steve.

Good morning, Steve.

My first question -- I have two things, but my first was to ask you about the -- while recognizing the big drop in the provision for credit losses, year over year, I did notice that $6 million in the fourth quarter looked higher than we'd seen in the last couple of quarters, and Dave Bryant did touch on that.

I guess I was surprised to find that the majority of that was actually on bank loans rather than CRE. So, could you maybe give us a little color as to -- since the bank loan portfolio has performed so well, was there a specific credit exposure -- can you hear me?

Yes, I can hear you. Go ahead, Steve.

Yes, I was just going to ask if there was a specific exposure that you were trying to shed, kind of like you've been shedding mezz in the CRE portfolio. And as part of that, the -- there was like $1.8 million of realized loss in the quarter on investments and loans available for sale, and I didn't know whether those two items were connected in some way. Thank you.

Yes, Steve, just to address that. Those -- the reason we sold -- so, we -- basically, as we put forth, most of the noise in that -- in the quarter was from cash planning. What happened was the bank loan portfolio, quite frankly, over performed in the real estate, in terms of revenue, and real estate was a little bit less, mostly because it didn't keep up with the speed of investment and profit that was coming from the commercial finance part of the business.

Got you.

Recognizing this, we needed to sell things on the bank --syndicated bank loan side or the commercial finance side. So we were selling things at a slight discount, in order to generate [tax] losses, in order to come back into compliance for the REIT test. It really didn't have anything to do with the quality of the assets or whether or not they would have been impaired, but just in selling them, we were generating losses.

So we were selling things, that even though we thought were perfectly good credit that would go to par, that we had to generate losses. So we were selling what we had to at a discount in order to generate tax losses.

Right.

It really had nothing to do with credit. It really had much more to do with tax planning in the fourth quarter, and, as we'd mentioned, that won't recur again, because we've now bought real estate properties and have enough revenue that's coming in from those real estate properties or, I should say, converted loans to equity, so that we won't have that problem going forward. So, the bank loan product -- the bank loan portfolio is in excellent shape, and in no means were those losses kind of credit oriented, as much as they were sold at a discount to generate tax losses.

And those losses, Steve, are just geography. The -- when the loans were sold at losses, the loss goes through the provision line item.

Understood. So that's very helpful. I apologize if I missed that --

No, no, no. It's a little bit confusing, but it really had more to do with outperformance in tax planning than it did with credit. The credit on the bank loan portfolio is pristine.

And specifically, you're referring to -- I think it's the 80% income test for good REIT income. Is that --

It's a75% -- it's commonly committed to 75%, where at least 75% of your gross income must come from qualifying real estate.

Real estate. Yes. Okay, great. That's helpful.

And as I pointed out, even though we took the hits there, we did buy a large portfolio of -- which is Apidos VIII -- of bank loan portfolios at a deep discount. And so, we actually have $40 million -- $35 million of accretion that we haven't accreted in the book. So, when you add that back in, you obviously make up a lot of the difference that we, unfortunately, had to sell for tax reasons.

Understood. That's helpful. And my second question had to do with the CMBS effort, which appears now to kind of be ramping up with the $100 million Wells line. We -- you've talked a lot over the years about the strength of Gretchen's team on the bank loans. Could you just talk briefly about the resources you had within REXI and who is specifically leading that CMBS underwriting effort?

Sure.

Are you -- and where in the cap stack? Are these like AM and HA tranches, and what type of unlevered yields you're seeking to obtain there? Thanks.

Well, we really -- I just want to be clear, Steve. We really have two efforts. One is on the CMBS side, and that's led by a woman named Joan Sapinsley and her team. Joan had some experience leading the charge for a very large insurance company -- [Teachers'] Insurance Company, one of the largest buyers of CMBS. She bought, at Teachers', everything from triple A down to subordinate notes. A true veteran of the CMBS world, she's been with us, probably, four or five years or more and has done an excellent job leading the charge on CMBS.

We're mostly buying, at this point -- we buy cyclically. As AJs or AMs go down, we'll buy them and ride them up, and we have a lot of unbooked gains that are in that portfolio from buying -- which we sold out before now. We bought when they went down. Now they've rallied significantly, as we mentioned in the call.

But you -- most of the time, right now, we're buying very short dated, AAA, very high up the stack, basically looking for -- even though it's very short and are paying off very quickly, so we have to replenish it -- returns between 10% and 15% and betting a little bit more our understanding of the rate of prepayment rather than the credit in the portfolio.

Okay. Very good. That's helpful, Jonathan. Thank you.

And then, the second part of what we're doing, just not to confuse it -- we do have $100 million line to do that, which we've been using, but we've also just secured a $150 million line, which really goes to reinvigorate outside of the traditional CD that we've used -- our real estate lending business, which is lending to borrowers, who want to borrow to buy or refinance properties that, with some sort of value, add transitional nature to it. So we're able -- and we think that that's a mid teens -- kind of, call it 12% to 17% kind of low levered return business that we like a lot.

Very helpful. Good luck in 2012 now.

Thanks.

(Operator Instructions). Mr. Cohen, there doesn't -- there is no further questions at this time.

Thank you very much, and we look forward to reporting on our next quarter.

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