Acres Commercial Realty Corp (ACR) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2013 Resource Capital Corp. earnings call. My name is Jo and I will be your operator for today.

At this time, all participants are in a listen-only mode. We will, however, conduct a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, the call is being recorded for replay purposes.

I would out like to turn the call over to Mr. Jonathan Cohen, President and CEO of Resource Capital Corp.

Thank you. Thank you for joining the Resource Capital Corp. earnings conference call for the second quarter ended June 30, 2013. I am Jonathan Cohen, President and CEO of Resource Capital Corp.

Before I begin, I would like to ask Purvi Kamdar, our Vice President 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 those 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 8-K, 10-Q and 10-K, and in particular Item 1-A in 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 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 were $0.16 for the three months ended June 30, 2013. Book value to common shareholders was $5.55 per share at June 30, 2013. We paid a dividend of $0.20 per common share for the three months ended June 30, 2013.

We originated during the quarter $91 million of new commercial real estate loans, an increase of nearly 50% over the past quarter. And as you will hear from David Bloom, we expect this kind of trend to continue.

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 Vice President of investor relations.

While this quarter saw a lower adjusted funds from operations number than we expected, it was related to three items -- first, dilution from the April offering of $150 million; second, lower revenue from the deleveraging CLOs holding syndicated bank loans; and third, the speed of payments of legacy loans on the commercial real estate side, which was offset by the tremendous origination of $91 million of loans in the quarter.

Do not fear. We are confident that we will earn in excess of a dividend in terms of AFFO for the second half of the year of 2013. Therefore, we are guiding to a $0.40 dividend for the second half of 2013.

This confidence is driven by, first, our ability to originate commercial real estate loans at slightly higher rates and larger size than we have been; second, our shifting away from CLO structures on the corporate credit side of the business to a more direct middle-market approach of origination; third, our focus on securitizing our commercial real estate portfolio in the near future, which we believe will lower our debt cost and releverage our portfolio; fourth, our signing of a $200 million Deutsche Bank facility to augment our $250 million facility with Wells Fargo; and fifth, the continuation of the benign credit environment that we find ourselves in. Once we invest the remaining capital, which we think this should be completed in the fourth quarter, sometime in October hopefully, we should be in good shape.

On the upside, we have numerous investments which we made in low cash flowing are no cash flowing assets or businesses which we are in the process of harvesting over the next two to 12 months. Two examples. First, we made an investment in a value-add multi-family apartment building almost two years ago with a current basis of approximately $20 million that we believe we will sell at a price nearing $36 million by the end of the third quarter.

Second. We are continuing to build our equipment leasing joint venture with Eos Partners. It has turned profitable and continues to build a business in its profitability. We have approximately $40 million on our books invested in the participating preferred security, and we believe, with some good fortune, that this will be worth significantly more than this number. Stay tuned. Not only will these investments build book value, but they will also allow us to have access to more cash for more book building or dividend growing activities.

One of the most significant developments for the quarter is momentum in commercial real estate loan origination. We increased originations to over $91 million in the second quarter, which reflects almost a 50% increase from the first quarter. We expect this to continue to grow on an annual basis.

We also believe that repayments of existing loans will slow down as rates have risen in the CMBS world. This will help us build a larger portfolio faster. While we always continue to maintain careful focus on credit quality, we have escalated our loan originations and are seeing a robust pipeline with lots of opportunities for Resource Capital Corp. David Bloom will comment on this during his presentation here.

Our ability to increase originations is bolstered by our ability to obtain new financing. In the first quarter, we expanded our facility with Wells Fargo from $150 million to $250 million. And during this quarter, we put in place a $200 million facility with Deutsche Bank. These lines dramatically expand our capacity to deploy our equity capital into an increasing loan pool. As the securitization market and commercial real estate is returning, we expect to take advantage of that as soon as later this year. This gives us the ability to competitively originate high-quality loans and hold them on our balance sheet.

We remain focused on our balance sheet and have done an excellent job at deleveraging the Company. Because of loan payoffs in the more recent past and our ability to buy back our debt at a substantial discount than in previous years, we believe that we are actually slightly under-leveraged at this time. Utilizing both DB and Wells lines, we will be able to add some more leverage slowly but surely, but of course without overdoing it.

In the beginning of this quarter, we raised a significant amount of new capital in April. As we fully deploy our capital, modestly increase leverage, and as some of our lower coupon legacy loans repay, we believe overall returns will increase.

Our leveraged loan business continues to perform very well, and we are actively exploring ways of continuing to benefit from the strong CLO market and our expertise in it with a world-class team. Through our subsidiary, Resource Capital Asset Management, RSO earned almost $3 million in fees in the first six months of 2013.

We have shifted our focus to direct origination of middle-market loans with low leverage. As the CLOs roll down, expect to see a larger book of directly originated middle-market loans.

Overall, our business has become simpler. We are focused on increasing originations in our commercial real estate business, adding new commercial finance investments where we can achieve yield and total return and doing so while maintaining our emphasis on credit quality that has served us well.

We will also continue to evaluate different investments in new lines of business. 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 we will continue to utilize debt and equity capital in a disciplined manner.

Our credit quality is stable and improving. Our real estate watchlist is shrinking. Our provision for loan losses this quarter decreased our operating expenses by over $1.2 million. We have removed most of the (inaudible) bank loan credits as evidenced by the strong reduction of the provisions this period, and expect continued strong performance and a very nice return on equity from this portfolio in 2013.

With our credit quality being good, we have kept our debt levels relatively low and the opportunities to expand the franchise and build out existing and new platforms remain ever present. Our liquidity remains excellent. We had approximately $146 million of unrestricted cash as of July 31. Expect this number to dwindle over the next few months.

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

Thanks, Jonathan. Resource Capital Corp.'s commercial mortgage and CMBS portfolio has a current balance of approximately $1.05 billion in a diverse and granular pool. RSO's commercial mortgage portfolio is comprised of 57 individual loans with an aggregate committed balance of approximately $852 million. The current committed balance of the commercial mortgage portfolio has increased by $120 million since our last call on May 8, which takes into account $25 million of loan payoffs since that point.

The underlying collateral base continues to be in geographically diverse markets spread across the major asset categories with a portfolio breakdown of 33% multi-family, 13% office, 21% hotel, 21% retail, and 12% other such as mixed-use and research and development. The portfolio is in components as follows -- 89% whole loans, 9% mezzanine funds, and 2% B notes.

During the second quarter of 2013 through today, RSO has closed nine new loans totaling $106 million with six more loans totaling another $108 million in-process. RSO currently has applications issued for seven more loans totaling approximately $152 million, is in negotiations on an additional $310 million of new lending opportunities, and is actively underwriting a forward pipeline in excess of $300 million.

We have seen a steady increase in lending opportunities that fit our credit profile and are increasing loan production on a quarter-over-quarter basis with consistency. The loans that we currently have in process, combined with the number of applications issued and the loans and negotiation, exceeds prior peak production levels of approximately $600 million a year. We are pleased with the way that loan production is tracking and look forward to directly originated long production continuing to increase on a quarterly and annual basis.

As Jonathan mentioned, in addition to our $250 million term financing facility with Wells Fargo, RSO now has an additional $200 million term financing facility with Deutsche Bank and has ample credit and terms to support the demand for our well-established bridge loan program while we aggregate collateral and plan for our next structured term financing execution. During this ramp period, we are financing new loan production on our bank facilities and utilizing prudent leverage and achieving returns between 13% and 18%.

As I discussed in the last call, RSO is continuing to use its strong balance sheet and capital market expertise to provide larger loans than we typically hold in portfolio. With demand for lower levered senior loans very strong, RSO's ability to originate and fully principal larger loans is a compelling opportunity. The sale of a senior loan to one of our bank trading partners provides RSO with access to the high-yield mezzanine loan space on a self-originated basis while still retaining control over the structure and pricing of the transaction as well as the direct relationship with the borrower. We are actively underwriting and quoting larger transactions and anticipate growing this aspect of our lending business and adding new product offerings as we continue to scale our origination platform.

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, and we are seeing borrowers' plans for value creation on or ahead of budget. Once again, I am pleased to report that the entire portfolio is performing with no defaults.

As assets are recapitalized or sold and paid off, the very few legacy positions that require extra asset extra asset management attention grows smaller each quarter, and we remain extremely focused on the ultimate resolution of these situations. These few remaining loans are seeing business plans executed at or above originally underwritten levels. And we anticipate successful outcomes.

We are very particular about the markets in which we lend, sponsor quality, and asset specific business plans. And the resilience of the assets I just described are a daily reminder that validates our keen focus on the credit-first approach to our business.

To briefly address other real estate activities, RSO maintains a CMBS portfolio that is now approximately $202 million in the aggregate, including our net securities-linked borrowings. We continue to utilize moderate leverage to finance our CMBS portfolio that provides the opportunity to invest in AAA investments and earn returns of approximately 15%.

In addition to our whole loan origination and CMBS bond activities, we continue to take advantage of properties that we own. RSO's primary equity portfolio consists of five properties, three multi-family properties totaling 1154 units, one 30,000 square-foot office building and one hotel, all of which continue to perform well and are expected to be sold for gains as plans for value creation are realized.

RSO's venture with an institutional partner that owns a portfolio of nonperforming loans and distressed multi-family properties had 20 properties representing an investment of approximately $160 million at its largest point. There have been significant resolutions in the portfolio and RSO has booked gains through its 25% profit participation as the portfolio has been harvested.

As of the end of the second quarter, the joint venture's portfolio was comprised of seven assets which represent a total current investment of approximately $57 million. While continuing to expand its debt platform, RSO will also pursue opportunities and invest in both value-add and distressed real estate transactions that provide opportunities for significant capital appreciation and the ability to build book value.

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

Thanks, Dave. Now, I will also review our corporate loan portfolio. Resource Capital's syndicated bank loan portfolio has a carrying value of approximately $1 billion at amortized cost. Overall, our portfolios remain in excellent condition. As of June 30, 2013, we had specific reserves of $3.4 million and general reserves of $936,000 as compared to specific reserves of $2.6 million and general reserves of $5.2 million for the first quarter of 2013.

We continue to forecast a good outlook in corporate credit for the next couple of years. The default rate for the last 12 months was 0.16%. This has been a great 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 other CLOs on which during the quarter we earned fees of $1.5 million. As I mentioned earlier, we are also beginning to make some direct investments and directly originate those investments in middle-market loans. We have committed $8.1 million of capital under these loans so far through the end of July and hope to expand on that going forward.

Now, I will ask David Bryant, our CFO, to discuss our financials.

Thank you, Jonathan.

RSO's board declared a cash dividend for the second quarter of $0.20 per common share, or approximately $25.4 million. Our adjusted funds from operations, or AFFO, for the second quarter was $19.6 million, or $0.16 per common share diluted. AFFO for the second quarter was impacted by several non-cash adjustments netting to $11.2 million and to a lesser extent net cash inflows of approximately $1.3 million. We plan to grow AFFO for the second half of 2013 as we deploy liquidity into our CRE loan origination pipeline and monetize unrealized gains on certain equity real estate investments held on our balance sheet.

We again passed all of the critical interest coverage and over-collateralization tests in our two real estate CDOs and five bank loan CLOs as of June 2013. Each of these financing structures continued to perform well and to generate stable and even improving cash flow to us in 2013. The real estate CDOs produced approximately $28 million, including a return of principal of $16.5 million and our ownership of the RREF 2006 senior note class, which we again intend to reinvest in new loan originations.

Bank loan CLOs generated approximately $16.6 million of cash flow for the six months ended June 30. These amounts compare favorably to the same period in 2012 when they generated $13.4 million and $14.7 million from real estate and bank loans respectively. This cash flow improvement reflects a noncredit environment as well as our ability to invest recycled capital.

As of June 30, we have in excess of $94.3 million of restricted cash in these structures comprised of approximately $78 million and $16.3 million in our bank loans and real estate deals respectively. Of these balances, $29.3 million is available for reinvestment in two of our CLOs, which we expect to provide meaningful spreads over the inexpensive cost of the associated debt, which is a current weighted average rate of 1.44%. The real estate principal cash balances are designated to repay senior notes when the two real estate CDOs, as of course the reinvestment period on those CDOs has expired.

I remind you that we own a meaningful amount of those notes so that, as the underlying real estate loan collateral pays off, principal is returned to us, a portion of which represents cash gains on the extinguishment of debt. Of course, this unrestricted cash becomes available for reinvestment, as is the case with the $16.5 million returned to us this period.

In the second quarter, we had a net reduction of provisions for loan losses of approximately $1.2 million of which $1.9 million was removed for provision for bank loans and $688,000 added real estate loans through a previously impaired loan.

Regarding our bank loan portfolio, we decreased reserves on our portfolio, reflecting improved credit conditions on our general pool of loans. This was partially offset by increased reserves for positions that were sold for credit reasons. Overall, real estate credit has been excellent. And to reiterate Jonathan's point, I characterize our bank loan portfolio credit as improving.

Five bank loans totaling $12.6 million are delinquent out of a total portfolio of $1.1 billion. And remarkably, all of our 49 real estate loans are current and performing. Our leverage stands at a very modest 2.0 times at June 30, which is a historic low for RSO.

When we treat our [trupps] issuances which have a remaining term of over 23 years as equity, our leverage is 1.8 times.

Focusing on real estate leverage, we ended the second quarter a very conservative 0.85 times levered -- 0.85 times levered on our entire real estate portfolio, which includes unrestricted cash earmarked for new CRE loan originations.

Our overall leverage continued to decrease from December 2012 primarily due to pay-downs and runoff of CLOs debt and real estate CDO debt, as well as from equity raised from our common stock offering in April of $114.6 million and, to a lesser extent, our dividend reinvestment program.

We also continue to sell preferred shares through an aftermarket program and sold 1.9 million shares at a weighted average price of $24.86 through this program during the six months ended June 30 for net proceeds of $47.4 million at a weighted average rate of 8.4%. Overall, our weighted average effective cost on net proceeds from both series of preferred Stock is 8.46%, a very attractive cost of capital for RSO.

In terms of liquidity, after taking into account paying the second quarter common and preferred stock dividends in late July, we have $146 million of unrestricted cash with several real estate loan originations, as enumerated by Dave Bloom, in process and intended to continue to invest this equity. We ended the June 30 quarter with GAAP book value of $5.55, down $0.05 from $5.60 at March 31.

At June 30, our equity is allocated as follows -- commercial real estate loans in CMBS, 77%; commercial finance, 18%; and 5% in other investments.

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

Thanks, David. Now, with that, I will open the call for any questions if there are any.

(Operator Instructions). Sir, you have no questions at this time. (Operator Instructions). Jade Rahmani, KBW.

Good morning. Thanks for taking the question. I wanted to find out if you could comment on loan pricing and the impact, if any, that you could point out following the recent volatility in rates.

I will say I will give you my two bits and then I will hand it over to Dave Bloom. I would say that we have slightly widened, but not considerably, but that we think that there's a bigger pipeline because of it. So I would say volumes that we expect to be -- to increase dramatically as you heard Dave Bloom speak. Rates I would say are modestly increased 25 bips, 50 bips. But we are not seeing any kind of -- anything like the CMBS market in terms of total rate blowout.

I would follow exactly on what Jonathan said. I mean, the LIBOR has stayed relatively flat and it actually went down. We have been at a point where we are seeing more deals. We are getting incremental pricing on deals that have been around for a little while longer, but basically flat with our borrowing costs remaining the same and really getting those same returns.

And are you seeing any changes in borrower behavior, whether it be their underwriting assumptions or anything sector specific perhaps relative to, say, multi-family? Anything that would cause their eagerness to take a loan to change?

Our underwriting assumptions are certainly taking into -- are taking into account an increased takeout cost, which we always do when we stress assets. We are seeing more borrowers saying that they are going to create more value in transitional loan lend until there's firming and more certainty in the CMBS world. So, no, I mean it's I think playing well for us, but I think it is a trend that will continue just sort of based on the lull of maturities and deals that people still are committed to and will put more cash into to add to value before selling or putting permanent financing on.

Great. Thanks a lot.

Gabe Poggi, EJF Capital.

Good morning. You may have gone through this, Dave Bryant. I just wanted to double check. How much do you guys have of let's call it newly originated CRE product that you are currently carrying on your two lines? In other words, what do you have right now that could eventually go into a securitization?

And, Jonathan, you talked on the last conference call about a forward origination. I don't want to call it guidance, but you threw out a number. I think it was in the $400 million ballpark of what you think you could do from a new origination perspective for the year. If you could just put some color around that, that would be great.

Well, I can start with question two. I think that we are starting to look at numbers that are much higher given the dynamics in the marketplace with CMBS more expensive, et cetera. So I would revise that guidance up from given our almost $100 million that we did this quarter and the pipeline that we are closing into in the third quarter, I would say we are starting to look at numbers between $500 million and $600 million in terms of origination. And I think Dave might be even more bullish than that, but in some sort of area like that. And so, Dave, do you want to take the first question?

Sure. Between what we have on the line and what is currently in closing and some that we are holding unlevered where we are roughly about $280 million, sort of the $462 million as issued under negotiation, even assuming a one- third hit rate on them, and that is just now. It goes up by the day. That is an additional $152 million, which really puts us where we need to be to get it taped together and, as John said, go out as early as the end of the third, beginning of the fourth quarter.

Perfect. Thanks, guys.

Thank you. There are no further questions, so I would like to turn the call over to Jonathan Cohen for closing remarks.

Yes, I want to say just one more thing to Gabe which is that you see in the marketplace a bunch of other companies coming out with securitizations in our space; pricing looks good. It is getting tighter. We think that there is a lot of appetite here for certainly for the AAA bonds. You see guys leveraging up to 75%, 76% all the way down to BBB pluses that are out in the marketplace. That bodes very attractively, given where we are leveraged today on an overall basis in our CRE portfolio as well as where we borrow on our two lines. So hopefully this works out tremendously well for us. We have been waiting to get some size rather than doing a little deal which is exciting. Also, you are also seeing in these deals ramp periods even if they are short, six to 12 months, maybe even 18 months, which is very attractive rather than borrowing on a line at $225 million, $250 million, $275 million if you can borrow on a securitization at $180 million, $190 million, $200 million, or less, depending on the structure, that's really just tremendous. So it bodes well for the future of Resource Capital, driven mostly by the CRE origination which we are seeing here.

So, with that, I will thank everybody for attending the call. And hopefully these comments, although long, were detailed and helpful. We look for to speaking to you either during the quarter or on the next quarterly conference call. Thank you.

Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect. Have a good day.