Acres Commercial Realty Corp (ACR) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2012 Resource Capital Corp Earnings Conference Call. My name is Sunny, and I will be your operator for today.

At this time, all participants are in listen-only mode. We will conduct a question and answer session towards the end of this conference.

(Operator Instructions)

As a reminder this call is being recorded for replay purposes. I would like to turn the call over to Mr. Jonathan Cohen, President and CEO. Please proceed, sir.

Thank you. Thank you for joining the Resource Capital Corp Conference Call for the First Quarter ended March 31, 2012. 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.

When used in this conference call, the words believes, anticipates, expects, 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 those contained in the forward-looking statements.

These risks and uncertainties are discussed in the Company's reports filed with the SEC; in the forms 8K, 10Q, and 10K; and, in particular, item 1A on the Form 10K 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.

First, a few highlights -- adjusted funds from operations, or AFFO, for the three months ended March 31, 2012 was $18.6 million, or $0.23 per share diluted. We paid a $0.20 per common share for the quarter in dividends, or $16.9 million in aggregate, on April 27, 2012, to stockholders of record as of March 30, 2012.

Our book value increased to $5.46 per share this quarter from $5.38 as of December 31, 2011.

Our GAAP net income for the three months ended March 31, 2012 was $14.5 million, or $0.18 per share diluted as compared to $13.1 million, or $0.22, for the three months ended March 31, 2011.

Total revenues increased by $4.7 million, or 23%, as compared to the three months ended March 31, 2011, a year earlier. Provisions for loan losses decreased by 16%, as compared to the three months ended March 31, 2011, and decreased 64% as compared to the three months ended December 31, 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 Bryant, our Chief Financial Officer; and Purvi Kamdar, our Director of Investor Relations.

After reviewing our quarterly results, one of our Directors said to me -- congratulations; seems very straightforward and good. That sentiment is a very good summary of our performance this quarter. We made money from our portfolio, grew our book value; our credit quality was good. We kept our debt levels relatively low. And opportunities to expand the franchise and Company remain ever-present.

From a financial standpoint, our adjusted funds from operations, or AFFO, rose to $0.23 from $0.21 last quarter. We paid a sizeable and sustainable dividend of $0.20 for the quarter. And our book value per share increased to $5.46 per share from $5.38 per share as of December 31, 2011.

From an operational standpoint, we also fared well. While our Real Estate Loan production only closed $17 million of net investment for the quarter. We did not sell any loans or get paid off on any loans. Our loan book actually grew. In addition, our pipeline for real estate loans grew substantially, and we are in the process of closing $73 million of new real estate loans during the second quarter.

As Dave Bloom will tell you, over 85% of our current real estate portfolio are now whole loans, senior loans; and less than 11%, mezzanine positions.

We worked hard to obtain those ratios. Also, late in the quarter, we closed a $150 million warehouse line with Wells Fargo. This will really expand our ability to accelerate our whole-loan originations and to generate additional growth.

The world of real estate finance is finally clicking. And this should add vitally to our portfolio over the next few quarters. Our syndicated Bank Loan portfolio continued to perform well. Credit improved substantially across the entire Company. Provisions for loan losses decreased 64% from last quarter. This trend has continued over the last few quarters. Our leasing joint venture continues to grow and improve its portfolio. We expect that venture to turn profitable later this year. We continue to be very excited about its prospects.

Without a doubt, the most exciting aspect of the last three months was all of the growth in our businesses. As compared to the three months ended March 31, 2011 the quarter ending March 31, 2011, this quarter, we recorded revenues of $25.4 million versus $20.6 million a year ago; a tremendous achievement given the steadfastness of our debt-to-equity levels. In addition, the revenue growth came from both the Real Estate Loan segment as well as the Syndicated Loan side of the business. Other revenue also grew as we harvested a distressed equity investment in our joint venture at a very good profit.

Now I will ask Dave Bloom to review our real estate activities.

Research Capital Corp's Commercial Mortgage portfolio has a current committed balance of approximately $744 million in a granular pool of 49 individual loans.

In the first quarter of 2012 through today, we closed and funded new loans totaling $17 million; committed to and are closing five additional loans totaling $73.75 million; and have issued and negotiated term sheets on two more acquisition loans totaling $39.15 million, which will fund when the borrowers close on the properties that secure the loans.

Aggregate new-loan activity since the beginning of 2012 is $127.5 million. This quarter marks a return to whole-loan production levels that we were experiencing in 2007, before the credit crisis, when we were originating approximately $500 million annually.

While real estate debt markets are mercurial and can vary from quarter to quarter, we've seen an overall firming of fundamentals in many markets and are underwriting a consistent forward pipeline of approximately $250 million at any given time. We are optimistic about meeting prior peak production levels and ultimately surpassing these numbers as we scale our well established origination platform.

Since we restarted our loan-origination activities in late 2010, we have been actively pursuing new loan opportunities, although there have been several pullbacks in the real estate finance markets, during which times our primary focus was on price discovery and the analysis of credit trends.

Taking into account periods in 2011 that we were not in full origination mode, we've been actively looking at new lending opportunities for about 12 months in total. During the time since we commenced our lending efforts again, we have closed or are closing approximately 21 new loans totaling approximately $280 million. The average size of our new vintage loans is $13.3 million.

And the weighted average starting coupon is 6.96%; however, when you take into account the typical 1% origination fee, which is accreted into income over the initial two-year term of the loans. We have realized starting coupons of 7.46% on a floating-rate basis over LIBOR floors.

While there are many lending opportunities, we continue to be keenly aware of credit and deal structure. And although we are lending on lightly transitional properties, we are only doing loans with day-one cash-flow coverage and meaningful sponsor equity.

Notwithstanding the starting coupons that we have realized to date, there has been a tightening of pricing as banks have reemerged and are aggressively looking to deploy capital into the floating-rate commercial real estate loans that post prices without valuations. And while not perfectly correlated, as CMBS 3.0 has taken hold with fixed-rate coupons close to 5%, this certainly adds to pricing pressure.

Regardless of others in the market, the number and capacity of balance-sheet lenders still greatly trails the ever-expanding opportunity set. We will continue to be guided by credit quality and make prudent pricing adjustments as may be required for high-quality loans.

In September of 2011, our first CDO, a $345 million vehicle, was full when its reinvestment period closed. Our second CDO, a $500 million vehicle, has a reinvestment period that ends in late June of this year. And the balance of the restricted cash in that vehicle is committed to loans that we are currently closing.

With both of our CDOs full at the end of their respective reinvestment periods, we will now utilize the $150 term financing facility we put in place in late February, which is designated specifically to fund our established Bridge Lending business.

The addition of the leverage from the term facility will greatly increase net interest margins with leveraged yields on new loans targeted between 13% and 18%, which will increase the return on equity and overall profitability of RSOs real estate lending platform.

Our existing financing facility has a revolving period prior to match-funding the loans that remain financed. And we will seek to increase our existing facility as well as line up additional prudent leverage as we continue to grow our Commercial Mortgage portfolio.

In speaking to RSO's Commercial Mortgage portfolio as a whole, the underlying collateral base continues to be spread across the major asset categories in geographically diverse markets with a portfolio breakdown of 38% multifamily, 13% office, 20% hotel, 17% retail, and 12% other such as mixed-use and self-storage.

The portfolio is in components as follows -- 88% of home loans; 10% mezzanine loans; and 2% [B] notes. The legacy subordinate debt portion of the portfolio has increased dramatically over time from a high of 47% in 2007 to the 12% we carry today; a change of 35%, which has shifted to self-originated whole loans.

As our new loan production continues to grow, subordinate debt constitutes a significantly diminishing component of the portfolio. Credit across the portfolio continues to move upward and we note improving metrics across all asset classes. The majority of the properties securing our loans continue to realize improved cash flow on a year-over-year basis and to trend in a positive direction.

There are still a small number of legacy transactions that require extra asset-management attention, but we remain extremely proactive in these situations, which continue to resolve and to be a much smaller portion of the portfolio.

In other commercial real estate activities, we continued to utilize our $100 million CMBS credit facility as well as an additional CMBS repurchase facility to buy highly rated CMBS bonds and to deploy meaningful amounts of capital into AAA investments for very healthy risk-adjusted returns between 13% 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 comprised of 1, 154 units; and one 30,000 square foot office building; all of which continue to hit or exceed their budgets.

Also, RSO, along with an institutional partner, owns a portfolio of 16 distressed multifamily properties that were acquired at substantial discounts for a total investment just under [$115] million. RSO participates in up to 25% of the profits as these investments are harvested, and RSO has already realized gains from the venture from early resolutions of a small portion of the venture's investments.

RSO will continue to invest in both value-add and distressed real estate transactions that provide opportunities for significant value creation and capital appreciation.

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

Now I will also review our Syndicated Bank Loan portfolio. Resource Capital's Bank Loan portfolio, or Syndicated 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 March 31, 2012, we have specific reserves of $2.5 million and general reserves of $2.6 million, as compared to specific reserves of $1.6 million and general reserves of $1.7 million for the fourth quarter.

We continue to forecast a very, very benign outlook in corporate credit, especially at the loan level, for the next year or two. The default rate for the last three months was less than 1%, or 0.5%. This has been a terrific business line for Resource Capital, and we will continue to allocate capital to it.

In addition to our portfolio of syndicated bank loans, we also collect management fees for managing other CLOs. Since we bought the rights to manage five bank loans and portfolios, we've received approximately $10.9 million in fees and received $2.1 million in fees this quarter alone.

Now, I will ask Dave Bryant, our Chief Financial Officer, to discuss our financials.

RSO's Board declared a cash dividend for the first quarter of $0.20 per common share, or approximately $17 million in the aggregate. Our adjusted funds from operations, or AFFO, was $18.6 million for the first quarter, or $0.23 per common share. AFFO was impacted by several non-cash adjustments totaling $4.3 million and, to a lesser extent, cash items of approximately $300,000.

This represents a payout ratio of approximately 91%, and demonstrates our ability to cover the dividend from operating cash flow.

We continue to pass all of the protocol, interest coverage, and overcollateralization tests in our two real estate CDOs and four Bank Loan CLOs through April of 2012. Each of these structured financings performed and continue to generate good cash flow to us in 2012.

The CRE CDOs produced over $6.2 million and Bank Loan CLOs generated approximately $6.7 million of cash flow during the quarter ended March 31. This compares favorably to the same period in 2011 when these structures generated $5.1 million and $6.3 million from CRE and bank loans respectively. This reflects both improved credit, as well as our ability to get the restricted cash balances from the 2011 put to work.

In addition, in April, we received an initial distribution in our newest deal, [Apados] CLO-8 of $1.1 million. As of March 31, we have an excess of $133 million of restricted cash in these structures on a combined basis. This is comprised of approximately $88.7 million and $44.3 million in our bank loans and some real estate deals, respectively.

Of these balances, $39 million and $44 million are available for reinvestment in our CLOs and CDOs, which we expect will provide meaningful spreads over the very low [frost] of the associated debt. In fact, as Dave Bloom mentioned, we have commitments with borrowers to lend and thus fully invest the balance of the CRE CDO cash in our 2007 CDO during the second quarter.

Of the Q1 provisions for loan losses of $2.2 million, $1.8 million is related to bank loans, and $400,000 for real estate loans.

Regarding our Bank Loan portfolio, we allocated $900,000 to general reserves and $900,000 for two loans in the fall. On our real estate loans, $400,000 was added to reserves for a previously impaired whole loan.

Overall, I continue to characterize our credit as stable to improving; and, notably, all of our 41 real estate loans, both legacy and newly underwritten loans, keep on performing.

Our leverage ratio stands at 3.9 times at March 31. When we treat our [Trupps] issuances, which have a remaining term of over 24 years, as equity, our leverage is 3.4 times. Our leverage decreased from December 31 primarily due to pay-downs and runoff of CLO debt, mainly in Apados 1, as well as equity raised through our Dividend Reinvestment program and improvements in mark-to-market indications on our Available for Sale securities portfolio.

Focusing on real estate, we began two years ago, in 2010, approximately 2.3 times' levered on our real estate CDOs. After accounting for the debt repurchases since then, we end Q1 2012 approximately 1.6 levered on our Real Estate portfolio.

We ended the March quarter with GAAP book value per share of $5.46, up modestly from $5.38 at December 31. The $0.08 change resulted primarily from improved mark-to-market adjustments on our Available for Sale CMBS and ADS portfolios of approximately $0.12 per share, offset by the net difference between the cash dividend and net income from the quarter, or $0.03 per share, based on outstanding shares at quarter end.

At March 31, our equity is allocated as follows -- Commercial Real Estate Loans and CMBS, 62%; Commercial Finance, 31%; and 7% in other investments.

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

With all that discussion being behind us, I will open the call for any questions.

(Operator Instructions). Steve DeLaney, JMP Securities.

Congratulations on the good progress in the first quarter. John, I noticed that the common share count increased by about 5 million in the quarter. I know that you didn't do a public offering. Was that a combination of [drip] plan issuance and maybe a little bit of the at-the-market plan as well?

Yes. Well, we don't do the at-the-market, but it was drip.

Okay. So it was all drip?

Yes.

And I note recently -- well, not so much the last couple weeks -- but in the February --?

I just wanted to mention that our average price was $5.54 -- significantly above book value.

Do you have an ATM plan actually set up and just not using it, or you just don't -- you haven't gone --

We don't use ATM plans. We only drip when the price is at a level that we feel like it's productive to drip. So, for instance, one month, when the price is down, we will not drip. And then the next month, if it's up, we may do something very small. We have a use for the capital.

It seems with this new $150 million line in the current flow that you're in pretty good shape liquidity-wise on the balance sheet. It doesn't seem that you have any real near-term, pressing needs for additional capital. Things seem to be balanced.

But we did see some companies come to market in February and March -- some mortgage REITs -- and take advantage of these historically low rates and issue either straight preferred or unsecured senior notes and coupons in the range of about 8% -- but kind of like Dave Bryant just mentioned -- treating the Trupps as capital.

I think we view that more as capital than we do as debt. And I was just curious whether that type of security might have a role in your balance sheet and might be appealing to you.

First, we signed a deal with Wells Fargo -- obviously, one of the reasons we're dripping is because we plan on expanding our balance sheet. And to do $150 million line of credit, you probably need $70 million of equity, of which we had some, but now we put away more so that we can be super aggressive in expanding our Commercial Real Estate Finance Loan Origination effort, which is expanding as we speak.

The second thing -- I think there is a great position in our balance sheet for a preferred or something line it in an 8% -- 8.5% coupon. Obviously, it would be very accretive even if all we did was buy back our common shares. But we have reason to believe we could put that money to work and use that to finally grow the dividend.

You're getting an advance rate probably of something like $0.70, $0.75 on the $1 on your Warehouse line? And my off-the-cuff analysis had failed to focus on the fact that you do need capital to draw that line down.

Yes, but we do have the capital. So I want to impress that we're not looking to do any kind of offerings of any kind on the common side. But we have, as I was saying -- preferred stock at that rate, obviously, would be a lot cheaper for common shareholders. And if we can find the same type of investments we're making, that would be accretive and a very productive thing for us.

The origination volume looks like it might be a little lumpy. And I guess that's because sort of the transactional nature of some of these -- the transactions underlying these loans. But would you say that run rate -- that maybe the $15 million is certainly low, but maybe the $70 million is high; and looking out over the balance of this year, do you think maybe something more in the $40 million to $50 million per quarter is more reasonable as far as what the average might be?

Steve, I think that, while it's lumpy, it's a continuously building process. And these deals -- many are acquisitions financing, so they'll close in due time. I think that a run rate of $75 million sounds comfortable. We'd certainly like to be doing more.

And I think what Dave is saying is once we get up to -- I mean it will be lumpy for the next quarter or two, but we plan on getting the originating between $250 million and $400 million a year of this product.

And, by the way, that's the Whole Loan product. That does not include mezzanine or other types of real estate finance that we might do.

Again, congrats on the good start to the year.

[Gabe Pushey].

Just so I have it straight here -- you said that you're fully filled on the second CDO -- closes in June 30 and you already have kind of commitments out in advance to have that fully filled up? And so now you're going to go and use your Wells Fargo line for additional whole-loan origination?

Yes.

Can you just remind us of what the average LTV is of the current whole-loan book and what you guys are looking to do from a go-forward perspective?

Average LTV is probably about 75% in the current whole-loan book. That's really where we're staying in our new loans -- good sponsor equity in our deals. The legacy loans, as I said, are performing well and have come back from a low point. So we say we're between 70% and 75% centric lenders.

I just want to make sure because your tax level was a little bit elevated this quarter relative to the run rates in 2011 -- are you guys over the hump with any REIT test issues? I know we had that one-time event last quarter. I just want to make sure, with the second CDO being filled up do you expect your tax rate to go back to that 1.8-ish level? Or should I assume the first-quarter run rate going forward?

The first-quarter run rate, Gabe, was affected somewhat by a really strong performance I our structured notes and trading portfolio. So I think probably closer to 2% -- 1.8% to 2% is probably a decent run rate.

We feel pretty good from a REIT test perspective for 2012, with getting that money put to work in the real estate CDOs and some other things that we expect to happen, not the least of which are some of these joint-venture gains that Dave also mentioned in his remarks.

Gabe, you might look in schedule two in the press release where we talk about cash distributions. And you'll start to see the ramp up of real estate income even within the 2006 1RREF and 2007 1RREF CDOs, which are commercial real estate loans. And you will see some of the early syndicated bank loan deals are actually coming down a little bit. So you'll see that shift from -- it was great to have that income when we needed it, but now we're shifting back to the real estate side.

Can you give me a breakout of your borrowings -- what your current repo or warehouse balance was as of 1Q, relative to your CDO --?

Well, we only really have one line that's actively being used right now, because we haven't started using the Wells Fargo line yet. These new loans are closing -- hopefully one or two on to that.

I just want to get an idea of how much you guys have put to work and then what you still have left.

At the end of March, we have about $65 million of the $100 million used on the CMBS facility. So there's about $35 million left there.

And of course we haven't touched the $150 million yet. Obviously, as Dave and others have said, we expect to start doing that some time probably this quarter.

From a transitional CRE perspective outside of your whole-loan core business -- but you had mentioned you guys now own some hard assets -- do you have a hard number for how much equity you'd like to allocate in that bucket? I know 62% of your total equity is in CRE. But does that kind of transitional, distressed -- whatever the word is you want to use -- do you have a targeted allocation for that asset class?

Yes, it's typically about 5% to 7% of our equity.

And that can change. Obviously, we were buying opportunistically as the market was very low. You'll see us probably in the near future -- have some good gains on those. And we'll have to decide is that opportunistic or not? It doesn't come with a big dividend so it's sort of a hard thing you have to balance.

(Operator Instructions)

Ma'am, are there any other questions?

There are no questions coming through at the moment.

Okay. Well, thank you very much. We're always available to walk anybody through our business. And we appreciate the support very much. Speak to you next quarter.

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