Acres Commercial Realty Corp (ACR) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter Four Fiscal Year Ended 2012 Resource Capital Corp. Earning Conference Call. My name is Kathy 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 of Resource Capital Corp. Please proceed, sir.

Thank you. Thank you for joining the Resource Capital Corp. conference call for the fourth quarter and fiscal year ended December 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.

Thank you, Jonathan. 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 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 8K, 10Q and 10K, and in particular, item 1A on the form 10K 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, AFFO, was $0.22 for the three months and $0.97 per share diluted for the year ended December 31, 2012.

We paid a dividend of $0.20 per common share for the three months and $0.80 per share for the year ended December 31, 2012. Our book value to common shareholders increased to $5.61 per share at December 31, 2012, as compared to $5.48 at December 31, 2011.

Our GAAP net income for the three months and year ended December 31, 2012 was $14.1 million or $0.14 per share diluted, and $63.2 million or $0.71 per share diluted, respectively, as compared to $400,000 or $0.01 per share diluted and $37.7 million or $0.53 per share diluted for the three months and year ended December 31, 2011, respectively.

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, 2012 was a great year at Resource Capital Corp. We accomplished a lot both financially and operationally. We increased the size and diversification of the Company while paying a sizable dividend. We expanded our liquidity sources to include preferred stock in various debt facilities, while still maintaining extremely low leverage, in my opinion.

We increased our commercial real estate originations to over $63 million in the fourth quarter, while adhering to the under-writing standards and quality standards that we have established here as our bedrock. We increased book value to $5.61 from $5.48 while paying a dividend rate of over 14% of book value. As a manager and significant shareholder, I myself am very pleased with these accomplishments and I hope you are as well.

We believe we have a lot of work cut out for us in 2013. We will focus on increasing originations in our commercial real estate business, adding new commercial finance investments where we can achieve yield and total return in doing so while maintaining the credit discipline that has served us well. We will also continue to look for good real estate investments and to capitalize on those investments we have already made, such as our investment in LEAF Commercial Capital, the leasing concern.

As additional opportunities to make similar investments come our way, we will pursue those that can help us build long-term book value. We will keep seeking flexible and accretive sources of financing and will continue to utilize debt and equity capital in a disciplined manner.

Our credit quality is stable and improving and other than the legacy loans we sold in our syndicated bank loan facility, we feel like the credit environment for us is excellent. We took a modest provision on real estate loans in fourth quarter of $400,000.

However, all 43 of our outstanding real estate loans are performing and we see a trend of improving property performance underlining these loans beginning in 2011 through the year-end 2012 and continuing into 2013. That is, our real estate watch list is shrinking.

The balance of the provision increase of $8.6 million came in our bank loan portfolio, our syndicated bank loan portfolio. Of that increase, $3.8 million relates to sales of loans with previous credit concerns that primarily settled after year-end. We increased reserves on one previously impaired position by $1.1 million during the quarter.

We also increased general reserves by $3.5 million on the general pool of syndicated bank loans and most of that increase, or $2.7 million, relates to a newly purchased, not originated, CLO where there were some legacy credit issues that we inherited upon acquisition.

However, with respect to the bank loan portfolio, credit is actually very benign when you consider that we only have four delinquent loans out of many, many hundred loans totaling $4.5 million on a pool of over $1.25 billion, a very manageable 35 basis points. We have removed most of the poor bank loan credit and expect continued strong performance and a very nice return on equity from this portfolio in 2013.

With our credit quality being fairly good, we have kept our debt levels relatively low and opportunities to expand the franchise and the company remain ever present.

Our liquidity remains excellent. We had approximately $180 million of cash including $94 million of unrestricted cash as of December 31, even after making considerable investment during the quarter. Stay tuned for more investments.

Our portfolio of real estate loans continued to perform well. During 2012, we have grown our real estate loan portfolio by over $175 million. We expect this trend to continue as Dave Bloom and his real estate team continue to find out good opportunities to lend money against good real estate. We have generally strived to grow our origination channel and we believe that the investments we have made in our team and systems will start to pay off or have started to pay off and will continue to start to pay off.

While our portfolio increased by only $23 million for the quarter due to repayment from three loans that we paid at the end of the quarter for $35 million, which were all originated at the beginning of the recovery in the real estate origination markets, the portfolio increased by $77 million on a net basis for the year. We are picking up pace and expect this portfolio to grow tremendously in the next few quarters. Dave Bloom will elaborate on this and the real estate portfolio momentarily.

Our leasing joint venture continues to grow and improve its portfolio. We continue to be excited about its prospects. We also continue to explore additional opportunities to diversify and invest capital to provide current return and long-term growth, and good risk management.

The growth in our business has been exciting. As compared to the quarter ending December 31, 2011, this quarter we recorded revenues of $33 million versus $25 million a year ago, a tremendous achievement given the steadfastness of our debt to equity levels.

In addition, the revenue growth came from both real estate loan segment as well as the syndicated bank loans side of the business. Now I will ask Dave Bloom to review our real estate activity.

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. RSO's commercial mortgage portfolio is comprised of 43 individual loans with an aggregate committed balance of approximately $683 million.

The underlying collateral base continues to be in geographically diverse markets, spread across the major asset categories with a portfolio breakdown of 29% multi-family, 17% office, 23% hotel, 19% retail and 12% other such as research and development, and mixed use.

The portfolio is in components as follows, 86% whole loans, 12% mezzanine loans, and 2% B notes.

During the fourth quarter of 2012 through today, RSO closed seven new loans totaling $78.2 million, with four more loans in process totaling another $105 million. Currently, RSO has issued applications on 5 new loans totaling approximately $108 million, is in negotiations on an additional $198 million of new lending opportunities and is actively underwriting additional loans totaling approximately $500 billion.

While we see many lending opportunities, we remain keenly aware of credit, value and deal structure. And although we are lending on lightly transitional properties, we continue to focus on loans with day one cash flow coverage and meaningful sponsor equity.

New loans that are being financed on RSO's $150 million term financing facility with Wells Fargo Bank and we are in the late stages of discussions with Wells Fargo to upsize and extend this term financing facility. The Wells Fargo term facility is specifically designed to fund our long-established bridge lending business. Targeted returns on new loans utilizing the Wells Fargo facility are between 13% and 18% which will increase the return on equity and overall profitability of RSO's direct origination platform.

In addition, we are actively planning long-term securitized financing options to more efficiently fully match fund our commercial mortgage portfolio.

We are pleased to see that the majority of the access specific business plans across the portfolio are on track and progressing towards the realization of the borrowers plans for value creation. We note improving metrics across all asset classes with the majority of properties securing our loans realizing improved cash flow on a year-over-year basis and continuing to trend in an 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 and other structured finance solutions for borrowers on a nationwide basis. Even though there are a number of capital sources in the market to make new loans, our platform's reputation is well established with the same senior team remaining intact since inception.

With certainty of execution at a premium, the fact that our professionals and process are well known to borrowers, intermediaries and other market participants provides us with a distinct advantage.

We are actively underwriting between $250 million and $500 million of transactions at any given time and are confident in our ability to continue to grow new loan originations in an impactful manner.

We remain optimistic about meeting prior peak production levels of approximately $500 million to $600 million of new loans per year and ultimately surpassing these numbers as we continue to grow our national origination platform and add new loan programs to our product offerings.

As John mentioned, credit across the portfolio continues to trend in a positive direction with improving metrics across all asset classes. We look forward to setting new loans origination while maintaining the credit quality, structure of pricing and diversity of our current portfolio while continuing to grow our loan platform and expand our product offerings.

In other commercial real estate activities, RSO's CMBS portfolio is now approximately $225 million in the aggregate. We continue to utilize our CMBS credit facility as well as the CMBS repurchase facility to buy highly rated CMBS funds and deploy meaningful amounts of capital into AAA investments for healthy risk adjusted returns.

In addition to our whole loan origination and CMBS bond activities, we continue to take advantage of opportunities to own properties. RSO has converted whole loans on a well located four diamond hotel and spa to an equity position, as well as multi-family properties in a portfolio that now consists of three properties totaling 1,154 units and an additional 30,000 square foot office building, all of which continued to surpass budget expectations.

RSO's venture with an institutional partner that owns a portfolio of non-performing loans and distressed multi-family properties that have significant realizations and now consists of just 7 assets and currently represents a total investment of approximately $60 million.

RSO participates in up to 25% of the profits as these investments are realized and has booked gains from the resolution in many of the venture's assets. RSO will continue to expand its debt platform and 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 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 $1.3 billion at amortized cost. Overall, I believe that our portfolios remain in excellent condition and little has changed since last quarter.

As of December 31, 2012, we have specific reserves of $3.2 million and general reserves of $6.5 million as compared with specific reserves of $2.1 million and general reserves of $3.0 million for the third quarter.

We continue to forecast a very, very benign outlook in corporate credit for the next year or two. The default rate for the last 12-months was 0.38%. 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 year ended December 31, 2012, we received $7 million in fees. This has turned out to be a very good transaction at this point.

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 of $0.20 and $0.80 per common share or approximately $21 million and $75.1 million in the aggregate respectively.

Our adjusted funds from operations or AFFO for the fourth quarter and year was $22.3 million and $86.2 million or $0.22 and $0.97 per common share diluted respectively. AFFO for the year was impacted by several non-cash adjustments netting to $15.9 million. Also REIT tax planning adjustments of $6.8 million and, to a lesser extent, net cash outlays of approximately $750,000. This represents an AFFO payout ratio of approximately 82.4% for the year and demonstrates our ability to cover the dividend from operating cash flow.

During the period we took steps to ensure compliance with the 75% REIT gross income test. First, we reduced our non-qualifying net income from bank loans by making a temporary election to treat two CLOs as taxable for the period November '12 ending on December 31, 2012. Second, we further reduced our non-qualifying income by selling two credit impaired positions that were trading below our tax basis.

We expect to cover the gross income test in 2013 with significant growth in gross income from real estate owned, as well as from growth in our real estate loan portfolio, and do not consider these fourth quarter tax planning items to be part of our normal operations.

We passed all the critical interest coverage and over-collateralization tests in our two real estate CDOs and five bank loan CLOs through December 2012. Each of these structured financings performed well and continues to generate stable and even improving cash flow to us in 2012 and continuing into 2013. The CRE CDOs produced over $28.3 million and bank loan CLOs generated $33.6 million of cash flow during the year-end in 2012.

This compares very favorably to the same period in 2011 when we generated $22.4 million and $27.6 million from CRE and bank loans respectively. This cash flow improvement reflects a better credit environment as well as our ability to invest recycled capital.

As of December 31, we had an excess of $90 million of restricted cash in these structures, comprised of approximately $89.3 million and $800,000 in our bank loans and real estate deals respectively.

Of these balances, $29.1 million is available for reinvestment in two of our CLOs which we expect to provide very attractive spreads over the cost of the associated debt which is a very inexpensive rate of 1.49%.

The real estate restricted cash balances are now designated to repay the senior notes on the two real estate CDOs as the reinvestment period on those CDOs has ended. I point out that we own a meaningful amount of these senior notes so as the underlying real estate loan collateral pays off, principal will be returned to us and become unrestricted cash available for reinvestment.

Of the fourth quarter provision for loan losses of approximately $9 million, $8.6 million is related to bank loans and $400,000 is for real estate loans. Regarding our bank loans portfolio, we increased reserves for positions sold for credit and tax reasons and also increased our general reserves primarily related to a CLO acquisition in the quarter as mentioned by Jonathan.

On our real estate loans, we added to reserves for a previously impaired whole loan and to cover legal costs for loans held for sale which had settled in January. Overall, real estate credit has been excellent and other than two loans sold as part of our tax planning and a few legacy credit issues related to a CLO acquisition during the fourth quarter, credit in our bank loan portfolio is very stable. Four bank loans totaling $4.5 million are delinquent out of a portfolio of $1.25 billion. And notably, all of our 43 real estate loans are current and performing.

Our leverage stands at a very modest 2.9 times at year end 2012. 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 ended the fourth quarter a very conservative one times levered on our entire real estate portfolio. Our overall leverage continued to decrease from December of 2011 primarily due to pay downs and run off of CLO debt, and CRE, CDO debt as well as equity raised through a common stock offering and new capital from our dividend reinvestment program.

We also saw improvements in mark-to-market indications on our available for sale securities portfolio and completed two preferred stock offerings. We began selling preferred shares through an active market program in 2012 and sold a total of 538,000 shares at a weighted average price of $24.40 through this program, for total proceeds of $12.9 million. Overall, our weighted average effective cost on these proceeds from both series of preferred stock is 8.64%, an attractive cost of capital for RSO.

In terms of liquidity, after paying the fourth quarter common and preferred stock dividends in January, we have $99 million of unrestricted cash as of the end of February with several loan originations in process intended to put this cash to work. We ended the December 2012 quarter with GAAP book value per share of $5.61, up from $5.48 at December 31, 2011. The $0.13 change resulted primarily from improved mark-to-market valuations on a combination of our available for sale portfolios and from the net proceeds generated by an accretive common stock offering.

At December 31, 2012, our equity is allocated as follows -- commercial real estate loans and CMBS 83%, commercial finance 15%, and 2% in other investments.

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

Yes. With that I will open the call for any questions.

(Operator Instructions). Your first question comes from the line of Gabe Poggi, FBR.

Hi, Gabe.

Jonathan, you guys talked about really ramping origination in 2013, are there any numbers that you want to put around that from a net perspective whether you have any kind of an internal target per quarter? Obviously there is closing nuances and there is timing gaps etcetera, but is there kind of an internal RSO goal for what you would like to originate in 2013?

And then piggy backing on that, is there an amount of origination or a size that you would like to get to for new originations that then you could then securitize?

Yes. I mean we are not so far off of -- first of all, thanks for bringing up the securitization market because that is obviously a very important part of what can drive earnings and dividends here at Resource Capital. And that market is becoming much more accessible, much cheaper and it enables us to really ramp our portfolio aggressively while maintaining great credit and being able to provide our borrowers with good loans.

As far as origination is concerned, we did $53 million last quarter and we clearly think that origination on a sort of annual basis can get to the $350 million to $500 million range within a very short period on a run rate basis. We are ramping up our abilities, our people and we are finding that we are in great transactions.

One of the reasons that we have been staying a little bit more liquid in terms of our balance sheet is because we are now starting to look at $20 million, $30 million, $40 million, $50 million loans that we can take down just in cash, selling A note or eventually sell the mezz piece and then securitize the A note. And having liquidity to do so I think is very important.

So the numbers themselves, if in fact we hit on some of these bigger loans that could be $450 million to $500 million would be usually achievable. If we stay with mostly in $10 million to $20 million, I would put it at the $350 million number.

Great. That's helpful. Thanks again.

Thanks, Gabe. Dave Bloom, do you want to add anything to that?

Thank you.

David Bloom. Yes. I think that's exactly right. I mean we are certainly hitting on some of the larger loans but I think on a blended average you are right on.

Thanks.

Thank you for question, sir. You have no questions at this time. (Operator Instructions).

Are there any other questions?

There are no more questions.

Well, I wanted to thank everybody for joining the call. I hope that you found the information that we gave, which I know was extensive, to be helpful. We are available for any calls, either Purvi Kamdar, Dave Bryant, and of course you can call anybody else at our company, including Dave Bloom and others or myself. So please let us know if you have any questions and we look forward to a great 2013. Thank you.

Thank you for joining today's conference. This concludes the presentation, you may now disconnect. Good day.