Acres Commercial Realty Corp (ACR) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter Three 2012 Resource Capital Corp Earnings Conference Call. My name's Dave. I'll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question and answer session toward the end of this conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I'd 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 third quarter ended September 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, believed, 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 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 Form 8-K, 10-Q and 10-K and, in particular, Item 1A on the Form 10-K report under the tile, 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. First, a few highlights. Adjusted funds from operations, or AFFO, for the three months ended September 30, 2012, were $0.26 per share diluted. We paid a dividend of $0.20 per common share for the quarter on October 26, 2012 to stockholders of record as of September 28, 2012. Our book value increased to $5.51 per share this quarter from $5.38 as of December 31, 2011 and $5.44 as of June 30, 2012.

Our GAAP net income for the 3 months ended September 30th, 2012 was $18.2 million, or $0.20 per share diluted, as compared to $14.9 million, or $0.20 per share diluted, for the three months ended September 30, 2011. Total operating revenues increased by $3 million, or 13%, and $11.7 million, or 18%, as compared to the 3 and 9 months ended September 30, 2011. Cash on hand was $169.5 million at September 30, 2012.

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.

In my opinion, the third quarter was another terrific quarter for Resource Capital. We achieved what every company in our sector would like to achieve. First, we paid a sizeable cash dividend. Second, we covered that dividend by a margin of 30%; or, said a different way, we earned 130% of what we distributed as a dividend.

Third, while paying the sizable dividend, we also increased book value. And while doing all of this, we raised additional common capital at 110% of book value per common share to diversify and grow our already-solid portfolio.

On top of the common capital raise, we also raised relatively cheap capital for ourselves by issuing over $40 million of preferred stock, with an average coupon of approximately 8.35%. While this is the morning before Halloween, trust me when I say that this is no masquerade.

Our credit quality was good. We kept our debt levels relatively low. And opportunities to expand the franchise and the Company remain ever present. Our liquidity remains excellent, and we had approximately $170 million of cash including $113 million of unrestricted cash as of September 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, which has helped fuel growth in operating revenue. The cash, of course, is also increased due to the common stock and preferred offerings, which allows us to grow our portfolio, diversify it, and increase book value through accretive offerings.

Our portfolio of loans continued to perform well. During 2012, we have grown our real estate loan portfolio by over $150 million, net. We expect this trend to continue as we continue to find good opportunities to lend money against good real estate. We have greatly strived to grow our origination channel in real estate, and we believe that the investments we have made in our team and systems will start to pay off.

While our portfolio stayed constant for the quarter due to repayments from a legacy $28 million loan -- legacy meaning made before the crisis -- and another $6.5 million loan made in 2011, we underwrote and funded a series of, in my opinion, very attractive loans. We are picking up pace and expect this portfolio to grow tremendously in the next few quarters, net of payoffs. Dave Bloom will elaborate on this in the real estate portfolio momentarily.

I do want to mention that the revenues from our real estate CDOs as noted on Schedule Two of this press release continue to grow. For example, we received cash distributions of $22.3 million in the 9 months ended September 30, 2012 from these two real estate CDOs, versus $22.4 million for the entire year of 2011; a great achievement by the team.

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, LEAF, continues to grow and improve its portfolio. We expect that venture to turn profitable later this year. We expect it sometime in November or December, on a monthly basis.

We continue to be excited about its prospects. We also continue to explore additional opportunities to diversify and invest capital to provide current return, long-term growth, and do so with good risk management.

The growth in our business has been exciting. As compared to the quarter ending September 30, 2011, this quarter we recorded revenues of $26.5 million versus $23.4 million a year ago. This trend will continue -- 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, our head of Real Estate, 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 $894 million and a diverse and granular pool.

RSO's commercial mortgage portfolio is comprised of 48 individual loans with an aggregate committed balance of approximately $717 million. The underlying collateral base continues to be geographically diverse, spread across the major asset categories, with a portfolio breakdown of 33% multifamily, 15% office, 21% hotel, 18% retail, and 13% other, such as research and development and mixed use. The portfolio was in components as follows -- 87% whole loans, 10% mezzanine loans, and 3% B-notes.

Through the third quarter of 2012, RSO has originated new debt positions with an aggregate balance of $115.4 million at a weighted-average starting coupon on a floating- rate basis of 6.9%, including origination fees.

During the third quarter of 2012 through today, we closed three new self-originated whole loans totaling $34.9 million, with four more loans totaling another $51 million in process. In addition, we have terms on eight more loans, totaling approximately $154 million, in active negotiation.

While we see many lending opportunities, we continue to be keenly focused and 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.

With our two structured finance vehicles, our CDOs -- totaling $845 million, having been fully deployed at the expiration of their respective reinvestment periods -- we now utilize a $150 million term-financing facility that we put in place with Wells Fargo Bank earlier this year.

As I've said on previous calls, the Wells Fargo term facility is specifically designed to fund our long-established bridge lending business. The addition to the leverage from the term facility will greatly increase net interest margins with leverage yields of new loans targeted between 13% and 18%, which will increase the return on equity and overall profitability of RSO's, real estate, direct origination 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 addition, we are actively exploring long-term securitized- financing options to more efficiently match-fund our commercial mortgage portfolio. We are still underwriting a consistent forward pipeline of $250 on average, and are seeing ample opportunities to make the 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 and refinancings are taking longer to come to fruition as a bid-ask disparity returned in healthier markets, with sellers feeling slightly stronger about holding-pricing levels and terms, and buyers and borrowers looking to price to perfection.

As a result, certain fully negotiated applications for new loans need to be refreshed as acquisition terms change over time or uphold altogether as certain deals are cancelled. Regardless of this timing phenomenon that we noted in the last two quarters, the number of year-end transactions has picked up dramatically in the last 30 to 45 days.

In addition, we see deal flow for our traditional floating-rate bridge loans continuing to broaden as more than $1 trillion of scheduled maturities are reached over the next 3 years, and the capacity of established balance sheet lenders, especially those who focus on loans between $10 and $30 million in size, like RSO can not -- not being able to accommodate the vast opportunities that continue to develop.

We remain optimistic about meeting or exceeding prior peak-level production levels of approximately $600 million of new loans per year as we continue to grow our well-established national origination platform and add new loan programs to our existing product offerings.

Credit across the portfolio continues to trend in a positive direction, with improving metrics across all asset classes. The majority of the properties securing our loans are continuing to realize improved cash flow on a quarter-over-quarter basis. And the entire portfolio remains performing with no defaults.

As assets are recapitalized or sold and paid off, the few legacy positions that require extra asset-management attention grows smaller each quarter, and we remain extremely focused on the ultimate resolution of this limited number of situations.

In our other commercial real estate activities, RSO's CMBS portfolio is now approximately $177 million in the aggregate. We continue to utilize our CMBS credit facility with Wells Fargo Bank and an additional CMBS repurchase facility to buy highly rated CMBS bonds and deploy meaningful amounts of capital into AAA investments or very healthy risk-adjusted returns exceeding 15%.

In addition to our whole-loan origination and CMBS bond activities, we continue to take advantage of opportunities to own properties. This quarter, RSO converted a whole loan on a well-located, four-diamond hotel and spa to an equity position. RSO's primary equity portfolio now consists of 5 properties; 3 multifamily properties totaling 1,154 units; one 30,000-square-foot office building; and 1 hotel -- all of which are performing at or above budget.

Also, RSO, along with an institutional partner, owns a portfolio of 17 non-performing loans in distressed multifamily properties. These assets, acquired at substantial discounts, 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 the resolution of some of the venture's assets.

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 at the end of the call.

Thanks, Dave. Now I will also review our syndicated bank loan portfolio. Resource Capital's syndicated bank loan portfolio has a carrying value of approximately $1.1 billion at amortized cost. Overall, I believe that our portfolio has remained in excellent condition and little has changed since last quarter.

As of September 30, 2012, we have specific reserves of $2.1 million and general reserves of $3 million, as compared to specific reserves of $2.1 million and general reserves of $3.1 million for the second 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 0.43%, or less than 0.5% -- great job by Gretchen Bergstresser and her team. 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 from our acquisition of the right to manage five other CLOs. During the 9 months ended September 30, 2012, we received $5.4 million in fees. This has been a very good transaction.

I also want to mention that we lowered our investment in investment- trading securities from $44.2 million to $25.8 million after we bought distressed CLOs, subordinate tranches, starting in 2010. We sold much of it in the 9/30 quarter. We realized returns during that period far in excess of 50% compounded per year; a great transaction by our team.

I just wanted to thank our employees who were involved for such an amazing investment returns once again.

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 third quarter of $0.20 per common share, or approximately $19.9 million in the aggregate. Our adjusted funds from operations, or AFFO, was $23 million for the third quarter, or $0.26 per common share diluted. AFFO was impacted by several non-cash adjustments, totaling $4.2 million, and to a lesser extent, cash items of approximately $425,000. This represents an AFFO payout ratio of approximately 86%, and demonstrates our ability to cover the dividend from operating cash flow.

I would also like to point out that included in our AFFO are realized gains from sales in the trading portfolio that Jon just mentioned, where we monetized significant valuation improvements in that portfolio. The realized gains in that portfolio were $6.2 million before associated income taxes of $3.1 million and other expenses of $600,000. Thus, even if we removed those gains, net of those associated expenses of $2.5 million were approximately $0.03 per common share from AFFO -- we'd still have AFFO of $0.23 per common share.

We continued to pass all the critical interest coverage and overcollateralization tests in our two real estate CDOs and four bank-loan CLOs through September of 2012. Each of these structured financings performed well and continues to generate stable, or even improving, cash flow to us in 2012.

The CRE CDOs produced over $22.3 million, and bank-loan CLOs generated approximately $24.5 million of cash flow during the 9 months ended September 30. This compares favorably to the same period in 2011, when they generated $15.1 million, and $20.1 million from CRE and bank loans, respectively. This reflects both improved credit, as well as our ability to deploy restricted cash balances.

As of September 30, we have in excess of $54.8 million of restricted cash in these structures, comprised of approximately $54 million and $800,000 in our bank loans and real estate deals, respectively. Of these balances, $15.7 million is available for reinvestment in two of our CLOs, which we expect will provide very attractive spreads over the cost of the associated debt, which is a very low weighted-average rate of 1.61%.

The CRE restricted cash balances are now designated to repay the senior notes on two real estate CDOs, as the reinvestment period on those CDOs has expired. Note that we own a meaningful amount of these senior notes; so that, as underlying CDO collateral pays off, principal will be returned to us and become unrestricted cash available for reinvestment, at which should be higher returns on equity.

Of the Q3 provisions for loan losses of approximately $1.4 million, $366,000 is related to bank loans and $1 million for real estate loans. Regarding our bank loan portfolio, we slightly increased reserves for positions sold at losses, and decreased our general reserves as we see modestly improving credit conditions in the balance of that portfolio.

On our real estate loans, $494,000 was added to reserves for a previously impaired whole loan, and $511,000 was added to reserves for a loan subject to a modification agreement, for which we provided protective advances on the collateral held in our CDOs. Overall, I continue to characterize our credit as stable- to-improving; and, as Dave Bloom cited, all of our CRE loans are current and keep on performing.

Our leverage ratio stands at a very modest 2.9 times at September 30. When we treat our TruPS issuances, which have a remaining term of over 24 years, as equity, our leverage is 2.6 times. Focusing on real estate leverage we end Q3 2012 a very conservative 1.3 times levered on the entire real estate portfolio.

Our leverage continued to decrease from December 31, 2011, primarily due to pay-downs and runoff of CLO and CDO debt, as well as equity raised in a common- stock offering in September also capital from our dividend reinvestment program and improvements in mark-to-market indications on our available-for-sale securities portfolio, as well as two preferred stock offerings.

As part of our capital-markets efforts, we began selling preferred shares in June through an aftermarket program, and have sold approximately 411,000 shares at a weighted-average price of $24.25 per share for net proceeds of $9.8 million through September 30. Overall, our weighted-average effective cost on net proceeds of both series of preferred stock outstanding is 8.66%.

In terms of liquidity, after paying the third quarter common-stock dividend last Friday, we have a total of $174 million, comprised of $99 million of unrestricted cash and $75 million of restricted cash.

We ended the September 2012 quarter with GAAP book value per share of $5.51 up from $5.44 at June 30. The $0.07 change resulted primarily from improved mark-to-market valuations on a combination of our available-for-sale CMBS and ABS portfolios, and from the net proceeds generated by an accretive common-stock offering. At September 30, our equity is allocated as follows -- commercial real estate loans and CMBS, 70%; commercial finance, 28%; and 2% in other investments.

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

Thanks, Dave Bryant. And now, with that, I open the call for any questions.

(Operator Instructions)

Please stand by for your first question which comes from Steve DeLaney at JMP Securities. Please, go ahead.

Good morning, and congratulations, on a strong quarter.

Thanks, Steve.

I guess this is addressed to David Bloom. David, you ran through the pipeline in some detail. And I apologize, I was writing as fast as I could, but couldn't quite keep up.

I believed you said -- and correct me if I'm wrong here -- that you continue to look at a long-term forward pipeline of about $250 million in potential funding. But could you tighten it down, maybe, for the next 2 quarters, say, for fourth quarter of 2012 and first quarter of '13, and give us a tighter sense for what you really expect to see in closings for the next two quarters?

Well, sure, Steve. I mean, as I noted, there's a lot of moving parts, but as far as deals in process for the fourth quarter, it's another $51 million.

How many loans was that?

[That's] four.

Four loans for about $51 million, okay.

That's four. Past being [prologue] as we continue to ramp, I'm saying $50 million again in the first quarter.

Okay, very good. Okay, so the $50 million kind of --?

Steve, this is Jonathan. Obviously, you know that it's a lumpy business. Sometimes these loans can take 3 weeks, 6 weeks, 8 weeks to close because you're waiting for the transaction to close as well. And sometimes they can be $24 million, and the next one $7 million.

So, obviously for our investment portfolio, the sooner the better because we have the cash and we like the -- so we'd rather do $75 million in the second quarter and if -- $75 million in the last quarter and $25 million in the next quarter. Of course, we don't want to do $25 million, but you get the point that we're on all cylinders, but we're not going -- no matter what we do here, we're not going to move our underwriting standards. And so, we're being very particular.

Okay. And your loan yield, with fees, would indicate maybe an average loan coupon of something in the [6.5%] range. Have you guys seen -- as the volume has picked up, we're seeing spreads tighten in all the sort of institutional quality stuff -- the CMBS and insurance-company loans. Are you seeing any pricing pressure in your segment of the market?

Yes. I mean, I would say that if you want to remain as conservative as we are, and really be underwriting what we think is institutional-level properties -- things that we actually like -- you're going to see some tightening. At the same point, the returns, given our leverage ratios on our line and where we borrow, are in the 15%, 16% range, typically.

So in terms of the loans that we've seen, the $50 million per quarter may be over the next 2 quarters. What would you estimate the range of coupons on that $100 million might be?

Well, I would still probably say right around what we've been underwriting, but I would say we underwrote a lot of multifamily during the last 6 months -- 9 months. Now we're seeing an opportunity to do other asset classes. So it may be the same, but not in what we consider to be the safest of all classes.

Okay. And then the final question I have, Jonathan -- there have been a couple announcements -- two or three in the last couple of weeks -- about these permanent financings. A couple people call them CLOs. One person called theirs a CMBS. I guess that's just a fine point in structure.

But could you comment maybe as to beyond the obvious non-recourse permanent-financing aspect of that? Do you see actually a funding-cost advantage versus your Wells Fargo line? And, do you think it's possible that you'll actually enhance your ROE on the equity if you can put it in one of those structures?

Yes. I mean, I think you're right, Steve, that at some point, depending on how much you want to borrow, you're going to find an advantage to go to the securitized market. It's not there yet, at the same leverage ratio we can borrow from Wells Fargo or on the line. But the permanent aspect of it is very attractive. And we're seeing those spreads on the AAA and even coming down to the AA on new-issue-type CRE-CDO looking structures be very comparable to where we're borrowing.

All that being said, there haven't been very many [deals]. Each deal is different. It's hard to tell what's in each deal. So when we prepare ourselves -- which we will be preparing in the next 3 to 6 months to do something more permanently -- we're very hopeful that rates will be even lower, and this will be a very accretive transaction for us.

It seems like you've got the flexibility with the availability on the Wells line and your other liquidity to kind of let that market evolve. And you only get one shot at locking up your loan collateral, so maybe this opportunity to just kind of watch that market tighten up or --

Yes, we're going to watch, but it definitely is coming, and I think it's coming our way.

Yes. Okay. Thank you for the comments.

Thanks, Steve.

Thank you. The next question comes from the line of Zachary Tanenbaum at MLV. Please, go ahead.

Thanks. Good morning, everyone.

Good morning, Zach.

I just wanted to ask -- and I think I might have missed some of this earlier. The $9.8 million gain on investment-securities trading in the quarter -- can you give us the breakout of what was in that? And I think, Dave Bryant, you walked through some math around some expenses associated with it, so can you just maybe just give a little more color on that?

Sure, Zach.

Sure. Dave Bryant can do that.

Go ahead, Dave.

Okay, Jon. So of the $9.8 million, Zach, the breakdown that I gave was that $6.2 million of that had been realized. So we actually sold and monetized some of those significant gains in the portfolio.

The expenses associated with the $6.2 million of realized gains were income taxes and other expenses combined, of about $3.7 million. So the net was about $2.5million. And the point I was making is that when you take out the $2.5 million from adjusted FFO, we're still at $0.23 a share.

So of the balance of the $9.8 million, the other $3.6 million was marks on that trading portfolio, which, of course, are going through the income statement; and on securities that we continue to hold.

Got it. And those realized gains were on some CLO debt that you had bought. Is that right?

Yes, we had made a concerted effort. I mentioned it, Zach, in the end of my comments, of buying distressed subordinate CLOs starting really in the early 2010 period. And we really just made a tremendous amount of money. The market was red hot and we -- even though we could have kept earning on them, we determined to sell them and realize the gains.

And so, you'll see that our investment trading securities -- which is where those fall -- have fallen from $44 million to about $25 million, and probably going to be a little bit flat for a little bit as we find new opportunities.

Great. Thanks a lot. That's helpful.

Thank you.

Sir, you have no further questions at this time.

(Operator Instructions)

We have no further questions, sir.

All right. I want to thank everybody for listening. And those of who read the transcript, I want to thank you for your support. We're available for any questions from anybody, so let us know. Have a good day.

Thank you very much. I would like to apologize sincerely for the technical difficulties at my end. And once again, thank you for joining today's conference. This concludes the presentation. You may now disconnect. Have a very good day.