Acres Commercial Realty Corp (ACR) 2013 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the quarter one, 2013 Resource Capital Corp. conference call. My name is Sheena and I will be your operator 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. Now, I'd like to turn the call over to Mr. Jonathan Cohen, President and CEO of Resource Capital. Please proceed, sir.

Thank you and thank you for joining the Resource Capital Corp conference call for the first quarter ended March 31, 2013. 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, 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 including the reports on Forms 8-K, 10-Q, and 10-K and in particular, Item 1A on the form 10-K report under the title Risk Factor. Listeners are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereto. The Company undertakes no obligation to update any of these forward-looking statements.

With that, I'll turn it over to Jonathan.

Thank you, Purvi.

First a few highlights. Adjusted funds from operations, AFFO, were $0.20 for the three months ended March 31, 2013. Book value to common shareholders was $5.60 per share at March 31, 2013. Total revenues increased by $1.9 million, or 6.4% as compared to the three months ended March 31, 2012. We paid a dividend of $0.20 per common share for the three months ended March 31, 2013, and during that period, we originated $61.4 million of new commercial real estate loans. 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 of course, Purvi Kamdar, our Director of Investor Relations.

Probably the most significant development for the quarter was the momentum we are seeing in commercial real estate loan originations. We increased the originations to over $61 million in the first quarter, while we believe adhering to our solid underwriting and quality standards. That momentum has certainly carried over to the second quarter, where we expect to originate substantially more than the first quarter. This growth in origination has been met by our ability to obtain new financing. During the quarter, we expanded our facility with Wells Fargo from $150 million facility to $250 million and are in conversations to obtain an additional line of credit from another major financial institution for $150 million to $200 million more. The ability to finance our long-term originations combined with the nascent or [reborn] securitization markets for our products means that we can competitively originate high-quality loans and hold them on our balance sheets. The dynamics, in my opinion, are very conducive to our core business.

To augment the debt side of the balance sheet, during the quarter, we raised over $45 million of common and preferred equity capital. After the quarter ended, we did a public offering of 18.7 million shares of common stock and received net proceeds of $114.5 million. We are growing into a stronger Company. In my opinion, we are becoming a greater force to be recognized in the commercial mortgage market for transitional loans. Proof of this is the $44 million loan we originated in March. Dave Bloom, our Head of Real Estate, will review this with you when he speaks. We also decided to sell down another legacy loan for $34 million and reinvest those proceeds in the new more dynamic loans. This decision, although it shrunk our net production, demonstrates our continued focus and dedication to asset quality and real estate fundamentals.

Our business has indeed become simpler. We are focusing on increasing originations in our commercial real estate business, adding new commercial finance investments where we can achieve yield and total returns, and doing so while maintaining our emphasis on credit quality that has served us so well. We will also continue to evaluate different investments as opportunities to make such 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. Our real estate watch list is shrinking. The balance of the provision increase of $1 million this quarter came from one previously impaired position by $1.3 million during the quarter.

Bank loans reduced provisions by $219,000 during the quarter, and with respect to the bank loan syndicated bank loan portfolio, credit is actually very benign when you consider that we have only four delinquent loans out of many, many hundreds totaling $3.9 million with a pool of over $1.1 billion, a very manageable 35 basis points. We have removed most of the core bank loan credit as evidenced by the reduction of the provisions this period and expect continued, strong performance and a very nice return on equity from this portfolio in 2013. We, again, thank Gretchen Bergstresser. With our credit quality being good, we have kept our debt levels relatively low and opportunities to expand the franchise and build out existing and new platforms remain ever present. Our liquidity remains excellent. We had approximately $162 million of unrestricted cash as of April 30, which includes the proceeds from our most recent common stock offering, even after making considerable investments during the last four months. We expect to be fully invested within the next four to six months.

Our portfolio of real estate loans continue to perform well. During the last 12 months, we have grown our real estate loan portfolio by over $223 million on a gross origination basis. We expect this trend to continue as our real estate debt team continues to find good opportunities to lend money against goodwill states. We have greatly strived to grow our origination channel and we believe the investments we have made in our team and systems will start to pay off. While our portfolio decreased by $17 million for the quarter due to repayments from three loans that we paid during the quarter, for $44.8 million, of which one was originated in 2007 and two were originated at the beginning of the recovery in the real estate origination markets, the portfolio nonetheless increased by $44 million on a net basis over the last year. We are picking up pace and expect this portfolio to grow tremendously in the next few quarters.

Our leasing joint venture continues to grow and we remain excited about its prospects. We also continue to explore additional opportunities to diversify and invest capital to provide current return, long-term growth, and good risk management. LEAF, our leasing venture, achieved profitability in the much of March and we anticipate that trend to continue in future periods. The growth in our business has been exciting, as compared to the quarter ending March 31, 2012, this quarter, we recorded revenues of $30.6 million versus $28.7 million a year ago, a tremendous achievement given the softness of our debt-to-equity level. In addition, the revenue growth came from both the real estate 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.

Research Capital Corp's commercial mortgage and CMBS portfolio has a current committed balance of approximately $1.032 billion in the diverse and granular pool. RSO's commercial mortgage portfolio is comprised of 56 individual loans, with an aggregate committed balance of approximately $732 million. The underlying collateral base continues to be geographically diverse, spread across the major asset categories, with the portfolio breakdown of 24% multi family, 12% office, 23% hotel, 28% retail, and 13% other such as research and development and mixed use. The portfolio is in components as follows, 84% whole loans, 14% mezzanine loans, and 2% B-notes. During the first quarter of 2013 through today, RSO closed six new loans totaling $88.8 million with eight more loans in process totaling another $80 million.

Currently, RSO has issued applications on four new loans totaling approximately $53 million with negotiations on an additional $107 million of new lending opportunities and is actively underwriting additional loans totaling approximately $300 million. We note improving metrics across all asset classes with the majority of the properties securing our loans realizing improved cash flow year-over-year and continuing to trend in an upward direction. In addition, we are pleased to see the majority of the asset specific business plans across the portfolio are well on track and progressing towards the realization of borrowers' plans for value creation and the entire portfolio remains performing with no defaults. While we see many lending opportunities, we remain keenly aware of credit, value, and deal structure. Although we are lending on lightly transitional properties, we continue to focus on business plans that stand up to rigorous underwriting and verification and on loans with day one cash flow coverage and meaningful sponsor equity.

As Jonathan mentioned, RSO increased and extended our existing $150 million term financing facility with Wells Fargo Bank. So, now the facility is $250 million with a revolving period that goes through 2015 and extension options that carry the facility comfortably into 2017. New whole loans are being financed on RSO's term financing facility with Wells Fargo and we are in the process of documenting an additional $150 million to $200 million term financing facility with another major financial institution. RSO's term financing facilities are specifically designed to fund our long-established bridge lending business, with targeted returns on new loans utilizing these facilities between 13% and 18%. Ultimately, the loans that are being financed on the facilities are being aggregated, as we again make plans to access the securitized financial markets and optimally match fund our assets. Which will increase the return on equity and overall profitability of RSO's real estate direct origination platform, while at the same time managing recourse financing exposure.

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, we 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 over many other lenders, who 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 a meaningful way. 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 well-established national origination platform and add new loan programs to our product offerings. While not a new program, RSO will continue to drive high-quality loan production by utilizing our strong balance sheet combined with our extensive capital markets experience to continue to provide customized financing solutions to our borrowers who seek loans larger than we typically hold in portfolio. The ability to originate in principal larger loans provides RSO with access to the high-yield mezzanine loan space on a self-originated basis, while still retaining control over structure and pricing of the transaction, as well as the direct relationship with the borrower, all hallmarks of our direct origination platform.

As John mentioned in the first quarter of 2013, we closed a $44 million loan secured by a well-located shopping center and plan to sell the A-note to a strategic partner while retaining a $13 million controlling mezzanine loan at a premium spread to that which would be available had we purchased it rather than originated the position. We are actively underwriting and recording other transactions similar to this one and anticipate growing this aspect of our lending business. We look forward to steady, new loan originations while maintaining the credit, quality, structure, pricing, and diversity of our current portfolio and continuing to grow our loan platform and expand product offerings.

With that, I'll turn it back to Jonathan and rejoin for Q&A at the end of the call.

Now I will -- thanks, Dave.

Now I will quickly review our 10-K bank loan portfolio. Resource Capital syndicated bank loan portfolio has a carrying value of approximately $1.2 billion at amortized cost. Overall, our portfolios remain in excellent condition. As of March 31, 2013, we have specific reserves of $2.6 million and general reserves of $5.2 million, as compared to specific reserves of $3.2 million and general reserves of $6.5 million for the fourth quarter of 2012. We continue to forecast a good outlook in corporate credit in the future. The default rate for the last 12 months was 0.18%, 18 basis points. This has been a great business line for Resource Capital and we will continue to allocate capital for the corporate credit world. 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 last three months, we received $1.4 million in fees.

Now I will ask Dave Bryant, our Chief Financial Officer, to discuss our financial's.

Thank you, Jonathan.

RSO's Board declared a cash dividend for the first quarter of $0.20 per common share, or approximately $21.6 million. Our adjusted funds from operations, or AFFO, for the first quarter was $21 million or $0.20 per share per common diluted, respectively. AFFO for the period was impacted by several non-cash adjustments netting to $5.6 million and to a lesser extent, net cash inflows of approximately $3.1 million. We passed all of the critical interest coverage in over-collateralization tests in our two real estate CDOs and five bank loan CLOs as of March 2013. Each of these financing structures performed well and continue to generate stable and even improving cash flow to us in 2013.

Commercial real estate CDOs produced approximately $22 million, including a return of principal of $16 million on our ownership of the RREF 2006 senior note class. Bank loans CLOs generated approximately $9 million of cash flow during the three months ended March 2013. These amounts compare favorably to the same period in 2012 when we generated $6.3 million and $6.7 million from real estate and bank loans respectively. This cash flow improvement reflects a better credit environment, as well as our ability to invest recycled capital. As of March 31, we have in excess of $107.6 million of restricted cash in these structures, comprised of approximately $107 million and $729,000 in our bank loans and real estate deals, respectively. Of these balances, $35.7 million is available for reinvestment in two of our CLOs, which we expect to provide attractive spreads over the cost of the associated debt, which is a very inexpensive weighted average rate of 1.46%. The balance is primarily being used to pay down notes outstanding and deleverage our balance sheet.

All of the real estate principal cash balances are designated to repay the senior notes on the two real estate CDOs as the reinvestment period on those have expired. I reiterate that we own a meaningful amount of those senior notes. So that as the underlying real estate loan collateral pays off, principal is returned to us and becomes unrestricted cash available for reinvestment, as is the case with the $16 million return to us this period. Of the Q1 provisions or loan losses of approximately $1 million, $1.2 million is for real estate loans, and there was a reduction of $219,000 for bank loans. Regarding our bank loan portfolio, we decreased reserves on our portfolio reflecting improved credit conditions on our general portfolio, offset a bit by increased reserves for a few positions sold for credit reasons. On our real estate loans, we added $1.2 million in reserves for our previously impaired whole loan.

Overall, real estate credit has been excellent. As John mentioned, we have continued to reduce our exposure to the legacy portfolio, which is evidenced by a reduction of 19% from the March 2012 period. I characterize our bank loan portfolio, credit, as very benign and improving. A mere four bank loans with an amortized cost of $3.9 million are delinquent out of the $1.2 billion portfolio. Notably, all of our real estate loans are current and performing. Our leverage stands at a very modest 2.5 times at March 31. When we treat our trust issuance's, which have a remaining term of over 23 years, as equity, our leverage is 2.3 times. Focusing on real estate leverage, we ended Q1 a very conservative 1 times leverage in our entire real estate portfolio, which is a reflection of our deleveraging and pay-down of those CDO notes I previously mentioned. Our overall leverage continued to decrease from December 31, primarily due to pay-downs and runoff of the CLO debt, the real estate CDO debt, as well as from equity raised from our common stock dividend reinvestment program.

We also continued to sell preferred shares through an active market program established last year and sold 1.1 million shares at a weighted average price of $24.82 through this program in Q1 2013 for proceeds of $26.9 million at a weighted average rate of 8.44%. Overall, our weighted average effective cost on net proceeds of both series of preferred stock is 8.5%, an attractive cost of capital for RSO. In terms of liquidity, after taking into account the receipt of $114.5 million of net proceeds from our follow-on common stock offering, and after paying the first quarter of common and preferred stock dividends in late April, we have $162 million of unrestricted cash as of April 30, 2013, with several real estate loan originations in process intended to put this cash to work. We ended December 2012 -- I'm sorry, we ended the March 2013 quarter with GAAP book value per share of $5.60, down slightly from $5.61 at December 2012. At March 2013, our equity is allocated as follows, commercial real estate loans and CMBS 75%, commercial finance and other -- I'm sorry, commercial finance 15%, and other investments 5 -- I'm sorry, 10%.

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

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

(Operator Instructions)

Steve DeLaney, JMP Securities.

Jonathan, congratulations on a solid quarter. It's pretty obvious, just looking at the trend back two or three quarters, that the quality of earnings is improving in terms of the recurring nature. It's encouraging to see that progress. Especially the loan loss provision of only $1 million.

Thank you.

That was great to see. So, a couple things.

I guess, the new -- I really appreciate the press release on these large originations. That's helpful for modeling and just to keep the story going. I like the idea of the structure where you are going to sell off that A-note and hold the mezz.

The press release didn't talk about loan coupon. Could you comment maybe just on a general loan -- a range of what you would expect your -- once the loan is structured and the A-note is sold, on your retained mezz piece, what type of target yield would you be looking for, there?

Well, we don't like to talk about loan coupons just because it doesn't help our business for everybody to know exactly what one guy got on one property. But just in general, depending on the quality of the property, our loan coupons can range anywhere from 5.75% to 8.5%, depending on the quality of the property. This is on the whole loan.

You can think to yourself that we're borrowing somewhere between 65% and 75% on an A-note, or 60% to 70% depending on if it's a sold A-note or whether we borrowed on our line; and we borrow at 2% and change from the banks. We think that in the securitization market, that goes down. So, 1% and change. So that's the rough math.

Okay. We can back into that.

Yes, and just generally, you should know that we look at it on a levered return whether it's a mezz piece, or a whole loan that we lever -- we look at that as somewhere between a mid-teens -- 13%, 14% -- and up to 20% return, with all the fees involved, over a 2-year holding period.

Okay. Switching over to the plan to eventually do a CLO -- within your loan portfolio, obviously you've got $1 billion, but a lot of that is the legacy stuff. I'm kind of focused on the $223 million of originations in the last 12 months. I don't know if any of that is, those near-term originations have repaid.

Can you estimate what you have under your bank lines? In other words, what collateral do you have earmarked for a potential structuring with a CLO? What would be the minimum size of a collateral pool before you would find it efficient to pull the trigger?

Well, I think that it's hard to estimate. Right now, as I said in my comments, I think Dave echoed in his comments -- we did $60 million, $60 million some-odd last quarter. We are looking at a much greater number this quarter. A much greater number the quarter after that. So, with that happening, a lot of the prepayments, as I said, came from legacy loan.

Yes.

We sold a legacy loan. We had a legacy loan prepay -- which is always nice because they have pretty nice active piece as well -- and we like to move the portfolio to a newer portfolio. Then two loans that were originated very close to the start of the real estate lending market in 2009, 2010. So we often have a lot of prepayment or no prepayment clauses in the loans we originated over the last 18 months, let's say.

So, I would say, we probably need a portfolio to start marketing over $125 million or so and we'll go to work somewhere around $150 million, $200 million range on the line. We ended last quarter, probably with $65 million to $75 million, up to $93 million, I think, by now.

What Jon is saying there, Steve, is that $93 million is the total loans on that facility.

I was talking about the borrower.

Borrowing is the outstanding piece.

So we are hopeful to get that ramped up. We are putting loans in April and in May. We have looked at that market accordingly.

Now, the difference really, is that it frees up our lines. We don't really need to free up our lines because we have a decent amount. We expanded our relationship with Wells, which we are grateful for. We also have -- we're close to a new line that we are going to sign with another major financial institution. But it will help with the borrowing -- the rate. So we are excited for that, as well.

It certainly sounds like you've got enough funding capacity that you can approach the CLO market where you don't necessarily just have to be a price taker; you can be sort of a -- (multiple speakers).

All of the prices are starting to feel -- the prices on the AAAs are starting to feel pretty good, so we may be a price taker. I just want to add that you can see by the fact that we are opening up another facility and expanding well, our take on our business -- you know, where it's going on what we need to accomplish that over the next 12 months.

With respect to the origination volume outlook?

Yes. Exactly.

And just one final thing and I will drop off.

I noticed, no gain on debt extinguishment this quarter after, obviously, a big item in fourth quarter of $11 million. Would you say that, in terms of their projecting and expectations, would you say that trade -- where we are now, with spreads tightening and everything -- is that trade about done? And we should just focus on --

The trade is not done. As we look to refinance some of those older CDOs, as they get down in terms of size, I think there will be a discount that we can refinance them at. But we will only probably be looking to do that upon refinancing, not as an opportunistic buy. So for example -- let's say that the AAAs are at 94, 95 or 96. Let's say the AAs are at 92 or 93 -- it's really not that interesting to us.

Right.

But if we knew we were going to refinance and pay off all the bonds, we might try to get as much of that as we could a month before we knew we were refinancing it.

Got it. When you say refinance, you mean like a clean up call or something?

Yes. We cleaned it up and put the collateral either on our line or generally into a new CLO.

Thanks for the time and the comments.

Okay. Thank you.

Matthew Stolzar, Pyrrho Capital.

You spoke about accessing the securitization market and potential sizing. But was wondering, from a timing perspective, what you guys are thinking and just the general trend you've been seeing over the past few months?

Well, there haven't really been -- thanks for the question -- there really haven't been that many deals, because everybody is re-upped. The deals that needed to get done or people were willing to be price takers, as Steve just said, got done in different structures. Now people are really ramping the next group of originations. There are probably three or four of us that are doing that. And I would expect to see more deals in the next three to six months.

But as far as any color on it -- maybe Dave, you have some?

The deals that were done early were permutations of old CDOs. The deals that are coming around where we are starting to see the features that -- as prudent managers in the past, that we should have the opportunity to get in the future, which is a ramp facility, an active reinvestment period. As we start seeing those more and more in the market and our collateral remains of this quality, that's really what we plan to go out with. But as Jon said, there's been a very limited universe, a bunch of small deals. But we would be, I think, one of the larger deals looking for the types of structures that we had in the past.

Got it. And the way to think about timing, I guess, is -- you had said in the previous question, you are at $93 million-ish of collateral that could go into a CDO. You think it probably has to be $125 million to $150 million range?

What I was talking about -- and Matthew, I was talking about how much debt would be issued, not total collateral. I think total collateral, you'd like to have $200 million-ish and have $125 million borrowed on your line. It's not that we are starting to market these things, but to get seriously involved and start to think about really what the market looks like and spend two months working on it -- I think that, that's the level we would want to be at. It's coming very soon.

Okay. Great.

Thank you for your question. We have no further questions at this time.

(Operator Instructions)

We have no further questions. Therefore, I would like to turn the call over to Mr. Jonathan Cohen for closing remarks.

Well, we thank you for your support and we look forward to continuing to hear from you on a regular basis. Thank you.

Thank you, sir.

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Please have a very good day.