Acres Commercial Realty Corp (ACR) 2012 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q2 2012 Resource Capital Corp Earnings Conference Call. My name is Joe 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 now like to turn the call over to your host Mr. Jonathan Cohen, President and CEO of Resource Capital Corp. Please proceed sir.

Thank you. Thank you for joining the Resource Capital Corp. conference call for the second quarter ended June 30, 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.

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 the 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 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 ended June 30, 2012 were $22.2 million or $0.26 per share diluted. We paid a dividend of $0.20 per common share for the quarter or $17.3 million in aggregate on July 26, 2012 to stockholders of record as of June 29, 2012.

Our book value increased to $5.44 per share this quarter from $5.38 as of December 31, 2011. Our GAAP net income for the three months ended June 30, 2012 was $16.4 million or $0.20 per share diluted as compared to $9.2 million or $0.13 per share diluted for the three months ended June 30, 2011.

Total operating revenues increased by $3.9 million or 18%, and $8.6 million or 20% as compared to the three and six months ended June 30, 2011. Cash on hand of $110.2 million at June 30, 2012, a decrease of $125.6 million from $235.8 million at 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 Bryant, our Chief Financial Officer; and Purvi Kamdar, our Director of Investor Relations.

In my opinion, Resource Capital performed extremely well in the second quarter. Our credit quality was good, we kept our debt levels relatively low and opportunity to expand the franchise and the company remain ever present.

From a cash perspective, we earned 130% of what we distributed as our dividend. Our Adjusted Funds From Operations, or AFFO, was $0.26 per share diluted and GAAP net income was $0.20 per share diluted, an increase of 10% for both over the first quarter. Both GAAP net income and AFFO increased over 13% from the first quarter. We paid a sizable and sustainable dividend of $0.20 for the quarter and our book value per share increased to $5.44 per share from $5.38 per share as of December 31, 2011.

Our liquidity remains excellent and we had approximately $110 million of cash, including $32 million of unrestricted cash as of June 30 even after making considerable investments during the quarter.

You may notice that our cash has declined significantly from over $235 million last June. This reflects meaningful new investment activity, much of it in June, which has helped fuel growth in operating revenues.

Our portfolio of loans continued to earn nicely. Over the last six months we grew our real estate loan portfolio by over $80 million. We expect this trend to continue as Dave Bloom and his real estate debt team continue to find good opportunities to lend money against good real estate.

You will notice in our press release, Schedule 2, that annualized earnings from our two real estate CDOs is up sharply. We also expect this trend to continue in the next quarter as we add significant low production into those vehicles through June.

Our Syndicated Bank Loan portfolio continued to perform well. Credit improved substantially across the Company. This trend has continued over the last few quarters. Our leasing joint venture continues to grow and improve its portfolio and near profitability. 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 the growth in our businesses. As compared to the quarter ending June 30, 2011, this quarter we recorded revenues of $25.3 million versus $21.5 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. Now, I will ask Dave Bloom to review our real estate activities.

Thanks very much, Jonathan. Resource Capital Corp's commercial mortgage and CMBS portfolio has a current balance of approximately $908 million in a diverse and granular pool. During the second quarter of 2012 through today, we closed five new self-originated whole loans totaling 72 -- $75.2 million and we have fully underwritten issue term sheets on eight additional loans totaling approximately $90 million with terms on five more loans totaling $68 million in active negotiation.

We are still underwriting a consistent forward pipeline of $250 million on average and are seeing ample opportunities to make loans secured by strong real estate to well capitalized sponsors. That said, while overall sale and financing volumes continue to increase as commercial real estate fundamentals improve and additional markets recover, we have noted that acquisitions are taking longer as the Bid-Ask discrepancy has returned in healthier markets. As a result, certainly fully negotiated applications for new loans need to be refreshed as acquisition terms change, were scrubbed altogether as certain deals fall apart over time.

Notwithstanding this timing dynamic, our pipeline of high quality deals has returned to levels we experienced through 2007 before the credit crisis. Although at new basis valuations that take into account the broad re-pricing that has occurred across the market. We remain optimistic about meeting prior peak production levels of approximately $500 million of new loans per year and ultimately surpassing these numbers as we scale our well established national origination platform.

While we see many lending opportunities, we continue to be keenly aware of credit, value 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.

As I mentioned on previous calls, 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 reached its reinvestment cut off in June of this quarter and this vehicle was also fully invested at that time.

With both of our CDOs having reached the end of their respective reinvestment periods, we now utilize the $150 million term facility we put in place in late February which is designed specifically to fund our established bridge lending business.

The addition of leverage with the term facility will greatly increase net interest margins with leverage yields on new loans targeted between 14% 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 lineup additional prudent leverage as we continue to grow our commercial mortgage portfolio.

RSO's commercial mortgage portfolio is comprised of 47 individual loans with an aggregate committed balance of approximately $728 million. The underlying collateral base continues to be spread across the major asset categories and geographically diverse markets with a portfolio breakdown of 35% multifamily, 15% office, 20% hotel, 18% retail and 12% others such as research and development and mixed use. The portfolio is in components as follows -- 88% whole loans, 10% mezzanine loans, and 2% B notes.

Notwithstanding the starting coupons that we have realized to date that average approximately 6.8% on a floating rate basis, as CMBS 3.0 has taken hold with fixed rate coupons close to 5%, and banks and insurance companies continue to be more aggressive on the high quality assets that we lend against, we have seen a tightening in pricing. Regardless, we see the opportunity set for our traditional floating rate bridge loans continuing to broaden as more than $1 trillion of scheduled maturities are reached over the next three years, and the capacity of established balance sheet lenders, especially those who focused on loans between $10 million and $30 million in size like RSO, trailed the vast opportunities that continue to develop.

Credit across the portfolio continues to improve, move upward and we note good metrics across all asset classes. The majority of the property securing our loans continue to realize improved cash flow on a year over year basis and are trending in the positive direction.

The very small number of legacy transactions that continue to require extra asset management attention, grow smaller each quarter as assets are recapitalized or sold and paid off. We remain extremely focused and proactive in the resolution of these situations.

In our other commercial real estate activities, we continue to utilize our $100 million CMBS credit facility, as well as an additional CMBS repurchase facility to buy highly rated CMBS bonds and deploy meaningful amounts of capital into AAA investments for very healthy risk adjusted returns of approximately 15%.

In addition to our whole loan origination and CMBS bond activities; we continue to take advantage of opportunities to own properties. RSO's primary equity portfolio continues to consist of four properties; three multifamily properties totaling 1,154 units and one 30,000 square foot office building, all of which continue to perform at or above expectations.

RSO, along with an institutional partner, also owns a portfolio of 17 non-performing loans in distress to multifamily properties. These assets were acquired at substantial discounts and currently represent a total investment of approximately $136 million. RSO participates in up to 25% of the profits as these investments are realized, and has already booked gains from early resolutions of a small portion of the ventures transactions. RSO continue to invest in both value-add and distress real estate transactions that provide opportunities for significant value creation and capital appreciation. With that, I'll turn it back to Jonathan and rejoin for Q&A at the end of the call.

Thanks, Dave. Now I want to review our Syndicated Bank Loan portfolio. Resource Capital Syndicated Bank Loan portfolio has a carrying value of approximately $1.2 billion at amortized cost. Overall, I believe that our portfolios remain in excellent condition and little has changed since last quarter.

As of June 30, 2012, we have specific reserves of $2.1 million and general reserves of $3.1 million as compared to specific reserves of $2.5 million and general reserve of $2.6 million for the first quarter. We continue to forecast a very benign outlook in corporate credit for the next year or two.

The default rate for the last 12 months was 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 when we bought the rights to manage five other CLOs. During the six months ended June 30, 2012 we have received $3.7 million in fees and received $1.8 million in fees this quarter alone. A very good transaction. Now, I will ask Dave Bryant, our CFO to discuss our financials.

Thank you, Jonathan. RSO's board declared a cash dividend for the first quarter of $0.20 per common share or approximately $17.3 million. Our Adjusted Funds From Operations, or AFFO, was $22.2 million for the second quarter or $0.26 per common share diluted. AFFO was impacted by several non-cash adjustments totaling $5.8 million and to a lesser extent cash items of approximately $860,000. This represents an AFFO payout ratio of approximately 78% and demonstrates our ability to cover the dividend from cash flow.

We continue to pass all of the critical interest coverage and over collateralization tests in our two real estate CDOs and four bank loan CLOs through June. Each of these structured financings performed well and have generated stable cash flow to us in 2012. The CRE CDOs produced over $13.4 million and bank loan CLOs generated approximately $14.7 million of cash flow during the six months ended June 30. This compares favorably with the same six month period in 2011 when these structures generated $9.9 million and $13.5 million from real estate and bank loans respectively. This reflects both improved credit as well as our ability to get the restricted cash balances from 2011 put to work. In addition, in April we received an initial $1.1 million from our newest deal, Apidos CLO VIII.

As of June 30, we have an excess of $75.3 million of restricted cash in these structures combined comprised of approximately $74.5 million and $775,000 in our bank loans and real estate deals respectively. Of these balances, $18.2 million and $775,000 are available for reinvestment in our two available CLOs which we expect will provide very attractive spreads over the cost of the associated debt which is currently a very low weighted average rate of 1.63%.

The reduction of the real estate restricted cash balance from first quarter of $44 million reflects our getting fully invested as Dave Bloom mentioned in the 2007 real estate CDO.

Of the Q2 provisions for loan losses of $4.2 million, approximately $800,000 is related to bank loans and $3.5 million for real estate loans. Regarding our bank loan portfolio, we increased our general reserves by $500,000 to account for a relatively minor credit deterioration. The balance of $300,000 was on several positions later sold at a loss.

On our real estate loans, $300,000 represents adjustments for two separate loans. Approximately $800,000 was added to reserves for a previously impaired whole loan, and $2.4 million was added to reserves for a loan under a pending sale agreement which was written down to the expected sale proceeds. Overall, I continue to characterize our credit as stable to improving and notably all of our real estate loans are current and keep on performing.

Our leverage stands at 3.7 times at June 30. When we treat our troughs issuances which have a remaining term of over 24 years as equity, our leverage is 3.2x. Our leverage decreased from December 31 primarily due to pay downs and run-off of CLO debt and of CRE CDO debt, as well as equity raised through the preferred offering and through our dividend reinvestment program and improvements in the mark-to-market indications on our available for sale securities portfolio.

I'd like to point out that we began selling preferred shares through our at-the-market agreement filed in June and have sold approximately 240,000 shares at a weighted average price of $24.26 for net proceeds of $5.7 million through July 31. Of note this ATM program has levered our weighted average effective cost on our preferred stock to 8.91%, down from 9.04%, on our initial preferred stock offering in June.

Focusing on real estate leverage, we began 2010 approximately 2.3 times levered on our real estate CDOs. We end the second quarter a very conservative 1.5 times levered on our entire real estate portfolio. We ended June 2012 with GAAP book value of $5.44 per share, up from year-end 2011 and down slightly from $5.46 at March 31. The $0.02 decline from March 31 resulted primarily from lower mark-to-market valuations on a combination of our available for sale securities, both CMBS and AVS, and our cash flow hedges. At June 30, 2012, our equity is allocated as follows -- commercial real estate loans in CMBS, 64%; commercial finance 30%; and 6% in other investments. With that, my formal remarks are completed and I'll turn the call back to Jonathan Cohen.

Thank you. With that I will open the call for any questions.

(Operator Instructions)

Please standby for your first question. First question comes from the line of Lee Cooperman from Omega Advisors. Please proceed.

Thank you and good morning everybody.

Hi Lee.

Good morning Jon. I guess, could you elaborate a little bit on the sale of the preferred which is costing you close to 9%, what those dollars that are coming in at 9% enable you to do and what kind of return you are going to earn on that money?

We generally, from an equity perspective just to give you an example, whether it's in the bank loan sector or in the real estate sector where we make senior loans with about 65% leverage, it's really since it's perpetual preferred and equity substitute. So it's substituting for expanding the portfolio with common stock and our returns typically are in the sort of 12% to 15% or even 16% range. So we're getting some nice leverage for the common stock.

So you think you could earn more than the 9% on the money you're putting out your leverage?

Yeah. We typically earn 12% to 15%.

Okay, thank you. Good luck. Thank you very much.

Thank you. The next question comes from the line of Steve DeLaney of JMP Securities. Please proceed.

Hi everyone.

Hi Steve. How are you doing?

I'm doing well. Jon, congrats on a very positive quarter. It's obvious to see the improvement in the co-operations both quarter to quarter and year over year.

Thank you.

The growth in the CRE, that's what you guys have been talking about the pipeline building and it's obviously starting to come through and I guess this is a high quality problem, the kind you'd like to have. But it would seem that while you've got $130 million remaining on your line with that pipeline that Dave Bloom described, including term sheets that are being negotiated, it looks like you've got about $150 million. So I guess if you would, just kind of what's your view if we look out from now to the end of the year in terms of your capacity to be able to fund the pipeline with the line, but also understanding that the advance rate is not 100%. I guess, where do you see yourself kind of hitting the wall to where you might need new equity capital beyond the preferred stock that you're adding?

We're pretty well - from a liquidity standpoint - we always try to be a little bit ahead of the game which is why we utilize the preferred program which we're now selling preferred at like 8.8% or something like that. And we have $32 million of unrestricted cash, and we still have some reinvestment opportunities.

So, we feel like we're at least through the next like three to six months, unless we see opportunities to really expand the production which and things come our way a little quicker which might happen. Then we feel like we're fairly well capitalized, although as Dave said, the origination is heating up much quicker which is a good problem to have.

We also have excellent relationships with multiple banks where we're expanding those lines, but we certainly think that we can build the portfolio nicely with what we have today. But if we see an opportunity-- you're seeing revenues go up, you're seeing our net interest margin go up. So, we have an opportunity to do that accretively to shareholders and start to think about the dividend over time moving up. That's something that we're putting ourselves in position for.

Is there - I think the press release mentioned about $11 million in the preferred issuance to date. Is there a target or a goal? How big could that program get, and maybe as a percentage of your total equity.

I think that we would - we're obviously cognizant of keeping it as low leverage for our equity. Right now we're about $500 million of equity and only $11 million in preferred. So we have a long way to go, although we do have $50 million of trust preferred as well. So although that's relatively inexpensive, LIBOR plus 375 I believe. So I would say at least another $40 million to $50 million, maybe even more.

Okay. So maybe total somewhere $50 million to $75 million possibly would be a reasonable total?

Yeah. And obviously as we grow we'll grow the preferred proportionately-

With the common. Okay, and just one final thing for me just on financing. You're using term bank loans for these bridge loans, but is there anything going on more in terms of structured finance as this market evolves where your whole loans where you might be able to do something more of a permanent structure as far as sort of a senior sub structure or even - is there even chatter out there about a CDO 2.0 concept?

Yes, Steve. Absolutely. We've been in contact- really there's been some starts and stops over the last six months to a year. But we're in contact with people who want to structure, and sell. Whether you call it CDO or a structured finance vehicle that securitizes those loans and when we're ready we have no doubt that we'll be able to do that. It's just a matter of how much leverage you want and what it's going to cost you. It's not whether or not you could get it done or not.

Got it. Okay.

And I think that we're seeing right now that it's very, very close to something that's very appetizing for companies like Resource Capital. And I want to add that Dave Bloom and the team here, Dave Bryant and Jeff Blomstrom and everybody here, have set us up because we have a very nice line of credit at Wells. Plus we have a lot of senior loans in CDO 1 which eventually will deleverage to a point where we want to add them into a package and be able to securitize the package as a whole.

And I guess one of the key advantages would be in any structure like that you'd be looking to do something that would be non-recourse, right?

Yes.

All right. Thanks so much for the time and the color this morning. Appreciate it.

Thank you, Steve.

The next question comes from Gabe Poggi of FBR Capital Markets. Please proceed.

Hi. Good morning guys.

Hi Gabe. How are you doing?

Good. How are you?

Good.

I wanted to piggyback on Steve's comment about structured financing and toggle over to the CLO side. Are you guys seeing opportunities to potentially do more there? I know you obviously have to deal with retest et cetera, but just kind of from an Apidos perspective, is there more oomph potentially to do more there?

Oh yes. We think that certainly Apidos and this new venture with CBC and Resource America will be a lot more CLOs and it's just a matter of timing until we do another one and that's timing as you said to - that market is extremely wide open. Returns are good. Credit is benign. We obviously have a deep experience. We did do Apidos VIII which closed - when did it close?

It closed last October I believe.

Last October and was fully ramped by the end of the year or early part of the year. So, we're now starting to earn pretty good returns out of that as well. We bought those loans at a deep discount to par and Gretchen Bergstresser and the team there did a great job helping us put that together and there's lots of opportunity more of that. It's just a matter of growing our real estate portfolio at the right rates. Dave Bloom and the team have started to put up some real loans, real high quality loans, grow the portfolio.

You can see in the schedule in the press release, I forget which schedule. It's schedule one I think, or no schedule, let's see, whatever schedule it is, that we're starting to really add net to our bottom line in terms of both the revenue. But also in terms of netting loans as opposed to originating $50 million, and selling or being paid back $40 million, so we have net $10 million.

You're now seeing three months, six months, 12 months of really adding to our portfolio. And I think that that number is going to be considerably higher going forward because the last six months to 12 months have been really doing loans in the old CDOs that have extended those out three years or 18 months or five years or longer so we can hold on to those liabilities longer. And so the things that were coming due are sort of out of the way and I think we're going to see some substantial asset growth there.

Right. That's very helpful. One quick question. You guys mentioned the new first mortgages that you've done were at 6.9% all in rate. Can you just remind me? I know that Dave talked about that you guys have seen some tightening, but just kind of generally how much tightening you've seen just so I can have a gauge on the market. Because obviously even with the line you guys have getting 14%, 15% ROE is still very attractive, but just wanted to know if that 6.9% where it is relative to the existing book so to speak.

You know what? It's certainly come in from when we started. Our earlier loans were closer to 7.5%. We've really seen things tighten by about a point. But again, you need to remember we take a point origination fee and a point exit fee which is meaningful. That initial point is spread out over the first two years which is the initial term. So we're really doing loans sort of effectively even at 6.5%. That's really an effective 7% and like you said high quality loans on the line are strong returning assets.

And I just want to remind you, Gabe, that this means that like certain classes, let's say retail or even if we did a small hotel loan or something low leverage, we'd be maybe closer to 8% and a multi might be 6.25%. So we happen to originate things that were very, very safe, very, very good loans we believe and try to play in that area of hey, I don't want to go to CMBS, I want to be with these guys for two to five years. And we look at that and we amortize our fees over that and say this is like 7.5%, 8% and we're borrowing at 2.5% and we're getting 70% leverage. And that obviously looks very nice in the mid to upper teens.

That's good. What's the LTV on - just kind of generally speaking, where are you guys just as a reminder targeting today's LTV in the 75ish?

Yeah, it could be - again it depends on the asset class but it could be anywhere from [55], [60] to [80] to even [85] in multi where we're very comfortable. We valued and we just get paid for it.

Okay, fair enough. Thanks guys. Great quarter.

Thank you. Sir, you have no further questions at this time.

Well, we really thank everybody for your support and we look forward to continuing to build our company with you. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and enjoy the rest of your day.