Acres Commercial Realty Corp (ACR) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2013 Resource Capital Corp. earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Jonathan Cohen, President and Chief Executive Officer of Resource Capital Corp. You may begin.

Thank you for joining the Resource Capital Corp. earnings conference call for the third quarter ended September 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 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 8-K, 10-Q, and 10-K, and in particular Item 1A on the Form 10-K reported 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, AFFO, were $0.24 for the three months ended September 30, 2013. Book value to common shareholders was $5.56 per share at September 30, 2013. We paid a $0.20 per common share dividend for the three months ended September 30, 2013. We originated almost $250 million of new commercial real estate loans during the nine months ended September 30, 2013.

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 Vice President of Investor Relations.

With the end of 2013 in sight, we are pleased with the return on capital achieved during 2013, with an annualized return of approximately 15%, net of expenses, as determined by AFFO divided by book value.

As we model our business into 2014, we are now happy to guide our shareholders that we currently expect to pay a $0.20 per quarter dividend throughout 2014, or $0.80 for the year. These projections are based on our expectations of robust originations at our commercial real estate lending business and good capital allocation and returns from our other businesses. This guidance comes even in the face of declining --- severely declining, might I add -- revenue and profit from our syndicated loan business with the runoff of legacy CLOs. This runoff has affected the second and third quarters and will affect the fourth quarter of 2013 as well.

Two of our legacy CLOs, Apidos I and Apidos III, together have seen a decline of $143.3 million in investment assets combined since year end 2012. This has reduced cash flow by $3.2 million versus the comparable nine months in 2012.

Our Whitney CLO was called in early September 2013 and was substantially liquidated during Q3. And this selloff will remove cash earnings of $1.3 million received over the nine-month period in 2013.

Lastly, Apidos VIII was called and liquidated in October 2013 and had net cash flow of $4 million during the first nine months of 2013. This business has been an excellent investment for RSO and its shareholders. Our overall returns have been stellar, 15% to 25%, in excess of that one some of the CLOs.

And as we transition our corporate lending to a middle-market lending emphasis, we continue to seek opportunities to generate solid returns on quality credit-related products to supplement our commercial real estate lending business. However, we expect to move past this negative trend during the first quarter of 2014 with the ramp-up of our commercial finance business and its new middle-market loan focus, as well as the ramp in commercial real estate business that I am about to discuss.

It has been an exciting quarter for Resource Capital Corp., and we are actively driving our business forward. We are now originating commercial real estate loans at approximately double the pace of last year. We expect this to continue to grow.

Additionally, as repayments of existing loans slow down, we can build up a larger portfolio faster. Although we always continue to maintain our most critical focus on credit quality, we have escalated our loan originations and are seeing a robust pipeline with lots of opportunities for Resource Capital Corp.

Also, as previously discussed, Resource Capital is contemplating a nonrecourse securitized term financing for a portion of our CRE -- commercial real estate -- whole loan portfolio. And we anticipate completing this in the fourth quarter of 2013. We expect to take advantage of the ability to originate high-quality loans and hold them on our balance sheet at very competitive financing costs.

In September 2013, we sold a 504-unit multifamily property located in Texas for $37 million. We had purchased this in 2011 -- August of 2011 -- for $18 million and invested another approximately $4 million in capital expenditures to improve the building. This sale results in an IRR of 75.6% for Resource Capital Corp. We are fortunate to have more equity investments on our books, and we look forward to harvesting them in the future.

In October, we closed on a total of $115 million of senior convertible notes with a 6% coupon. This capital will allow us to fund our commercial real estate business pipeline, rather inexpensively, in our opinion. As we look into 2014, we expect to originate between $600 million and $700 million in commercial real estate loans. This offering should allow us to efficiently fund those originations and grow our businesses without returning to the capital markets.

In commercial finance area, our leasing venture moved along nicely. Leaf Commercial Capital, LLC, joint venture between Resource Capital Corp. and Eos, the private equity concern, the small-ticket leasing business in which the company has made a senior participating preferred investment, continued to build its business. Its lease and loans originations for the year to date through September 30, 2013, were $237.4 million compared to $180.2 million for the same period in 2012, a 31.7% increase. Its lease and loan portfolio as of September 30, 2013, was $503.2 million compared to $340.7 million as of September 30, 2012, a 47.7% increase.

On September 26, it closed its largest term securitization deal to date for $325 million. Led by Credit Suisse, this securitization was well received and had improved capital structure, lower loss proxy, and reduced spreads compared to the term deal that closed in 2012. Again, we expect to realize great value in our investment here when it matures.

Since the quarter ended, we added another specialty financed investment. Last week we closed on the purchase of Primary Capital Advisors, a residential loan and mortgage origination business. The purchase price is approximately $8.4 million, relatively small.

This acquisition gives us the ability to leverage PCA's expertise in the residential mortgage origination space, which is growing. This is the type of strategic new product development that we have discussed. With a modest capital investment, we have acquired a solid, credit-oriented real estate business that we can scale as opportunities present themselves.

We have brought in a talented team, led by Anthony Coniglio, a specialty finance and mortgage specialist, to run this business in conjunction with the current CEO of the business, George Phelps, and his team. We look forward to growing this business and welcome aboard the team from PCA.

Our credit quality continues to be very solid. Our real estate watchlist is shrinking. Our provision for loan losses was $541,000 as compared to $7.8 million during the nine months from a year ago, a significant reduction by all accounts.

Our liquidity remains outstanding. We had approximately $260 million of unrestricted cash as of October 31, including the proceeds of the $115 million of convertible notes offering. We expect to end the year with approximately --- with under $200 million of unrestricted cash.

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

Thanks very much, Jonathan. Resource Capital Corp.'s commercial mortgage and CMBS portfolio has a current balance of approximately $1.25 billion in a diverse and granular pool. RSO's commercial mortgage portfolio is comprised of 62 individual loans with an aggregate committed balance of approximately $911 million.

The portfolio is in components as follows -- 90% whole loans, 8% mezzanine loans, and 2% B notes. The underlying collateral base continues to be in geographically diverse markets spread across the major asset categories, with a portfolio breakdown of 34% multifamily, 17% office, 18% hotel, 20% retail, and 11% other, such as mixed-use and research and development.

During the third quarter of 2013 through today, RSO has closed eight new loans totaling $108 million, with six more loans in process for fourth-quarter closings, totaling another $96 million. In addition, as there are always year-end transactions, we have the potential for an additional three to five loans totaling more than $75 million in advanced stages of negotiations, all or some of which could close by year end as well.

RSO currently has applications issued for eight more loans totaling approximately $150 million, is in negotiation on $310 million of new lending opportunities, and is actively underwriting a forward pipeline in excess of $300 million, which has been the norm for several quarters running.

Through today, RSO has closed $271 million of new loans in 2013. And with only the minimum anticipation of the $96 million in process for closing by year end, 2013 would represent an approximate 100% increase over our new loan originations in 2012.

The steady increase in lending opportunities that fit our credit profile continues to increase, with loan production growing consistently on a quarter-over-quarter basis. Based on the number of loans in process and in advanced stages of negotiation, we are tracking towards annual loan production between $600 million and $700 million for 2014.

As demand for our floating-rate bridge product and other customized financing solutions continues to be robust, we have been actively adding personnel and growing our long-established national direct origination platform. While we see many lending opportunities, we remain extremely focused on credit, value, and deal structure.

And although we are lending on only lightly transitional properties, we continue to lend on properties with business plans that stand up to rigorous underwriting investigation and with day-one cash flow coverage and meaningful sponsor equity.

We note improving metrics across all asset classes, with the majority of the properties securing our loans realizing improved cash flow on a year-over-year basis and continuing to trend in an upward direction. In addition, we are pleased to see that the majority of the asset-specific plans across the portfolio are well on track and progressing towards realization ultimately of the borrowers' plans for value creation. And the entire portfolio remains performing with no defaults.

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

To briefly address other real estate activities, RSO still maintains a CMBS portfolio that is now approximately $330 million in the aggregate. We continue to use 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 optimize properties owned. RSO's primary equity portfolio currently consists of four properties -- two multifamily properties totaling 650 units; one 30,000-square-foot office building; and one full-service hotel and resort, all of which continue to perform well and are expected to be sold for gains, as we did this quarter in the disposition of the multifamily property that Jonathan described.

While continuing to expand its debt platform, RSO will also pursue opportunities to invest in both value-add and/or distressed real estate transactions that provide opportunities for significant capital appreciation and the ability to build book value.

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

Thanks, David. Now I will also review our corporate loan portfolio. Resource Capital's syndicated bank portfolio has a carrying value of approximately $939 million at amortized cost. Overall, our portfolios remain in excellent condition.

As of September 30, 2013, we have specific reserves of $1.9 million and general reserves of $1.1 million, as compared to specific reserves of $3.4 million and general reserves of $936,000 for the second 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 under 1% at 0.46%. In addition to our portfolio of syndicated bank loans, we also collect management fees from our acquisition of the right to manage three others CLOs, on which during the quarter we earned net fees of $1.2 million.

As I mentioned earlier, we are also beginning to make some direct investments in middle-market loans. We have now built up a portfolio of approximately $25 million and expect to originate our first direct loan within the next few weeks. We hope to expand our allocation to middle-market corporate lending going forward.

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 $25.4 million.

Our adjusted funds from operations, or AFFO, for the third quarter was $30.8 million or $0.24 per common share diluted, respectively. AFFO for the third quarter was impacted by several noncash adjustments, netting to $6.5 million, and more importantly, net cash inflows of approximately $16 million. This represents a payout ratio of 83% for the quarter and 98% for the three- and nine-month periods, respectively.

We passed all of the interest coverage and overcollateralization tests in our two real estate CDOs and five bank-owned CLOs as of September 2013. Each of these financing structures performed well and generate strong cash flow to us in 2013. Through September, the CRE CDOs produced approximately $43.3 million, which includes a return of principal of $27.4 million from our ownership of the RREF 2006 senior note class, which we intend to recycle into the new CRE loan originations described by Dave Bloom.

Bank loan CLOs generated approximately $29.6 million cash flow during the nine months ended September 30. This improved cash flow reflects a very benign credit environment, as well as our ability to invest recycled capital.

As of September 30, we have in excess of $53.7 million of restricted cash in these structures, comprised of approximately $53.3 million and $400,000 in our bank loans and real estate deals, respectively. Of these balances, $16.7 million is available for reinvestment in one of our CLOs, which we expect will provide a significant spread over the very inexpensive costs of the associated debt. The real estate CDO cash balance will be used to repay the senior notes on the two real estate CDOs.

Since we own a meaningful amount of these notes, meaningful cash is returned to us when the underlying real estate collateral pays off. I remind you that a portion of this cash returned represents realized gains on the extinguishment of the debt. Of course, this capital becomes available for reinvestment, as is the case with the $10.9 million returned to us this quarter.

During Q3, our investment in the Whitney CLO was called and the securitization was substantially liquidated. This reduced our bank loan assets and debt by over $100 million each. And we expect to have our equity investment substantially returned upon the final liquidation of the CLO. As a result of this liquidation, we accelerated original issue discount on the outstanding notes, which represented a noncash interest expense of in excess of $2.5 million during 2013.

Also, in October 2013, our investment in Apidos VIII was called and the securitization was fully liquidated. This will reduce our bank loan assets and debt by approximately $335 million and $318 million, respectively, in Q4. As a result of this liquidation, we expect a noncash loss on the deconsolidation of $2 million to $2.5 million, after giving effect to an income tax benefit. More importantly, we receive all of our original $15 million investment, plus a $0.5 million cash profit on the liquidation of the assets at slightly above par.

Year to date for 2013, we've had a modest addition to provision for loan losses of approximately $0.5 million, of which $1.5 million is a reduction --- is related to a provision for bank loans, and $2 million was added for real estate loans for a previously impaired loan.

Regarding our bank loan portfolio, we decreased reserves, reflecting improved credit conditions on our general pool of loans, partially offset by some increased reserves for positions sold for credit reasons.

Overall, real estate credit has been excellent, and I'd characterize the bank loan portfolio credit as very benign. Three bank loans totaling $3.6 million are delinquent out of a portfolio of approximately $940 million. And remarkably, all of our real estate loans are current and performing.

Our leverage stands at a very conservative 1.8 times at September 30. When we treat our TRuPS issuances, which have a remaining term of approximately 23 years, as equity, our leverage is 1.6 times.

With regard to real estate leverage, we ended Q3 at 0.84 times on our entire real estate portfolio, which includes unrestricted cash earmarked for new real estate loan originations.

Our overall leverage continued to decrease from 2012 year end, primarily due to paydowns and runoffs of CLO debt, payoffs of CRE CDO debt, and from a mortgage payoff from the associated sale of the underlying real estate property, as well as from equity raised from our common stock offering in April and, to a much lesser extent, our dividend reinvestment program.

We also used our Aftermarket Preferred Stock Program and sold 2.1 million shares at a weighted average price of $24.80 during the nine months ended September 30 for total proceeds of $51.1 million at a weighted average rate of 8.25%. Overall, our weighted average effective cost on net proceeds from brokered series preferred stock is 8.46%, an attractive cost of capital to RSO.

In terms of liquidity, after taking into account the proceeds from our mid-October convertible note offering with a coupon of 6% and paying the third-quarter common and preferred stock dividends, we have $260 million of unrestricted cash as of October 31, with many real estate loan originations in process and intend to continue to invest this equity.

We ended September 30 with GAAP book value of $5.56, up $0.01 from the $5.55 at June 30. At September 30, our equity is allocated as follows -- commercial real estate and CMBS, 78%; commercial finance, 18%; and 4% in other investments.

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

Thank you. And thank you to all of our shareholders for supporting us during this quarter and to David and Purvi and to Dave Bryant for their comments.

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

(Operator Instructions) Steve DeLaney, JMP Securities.

Congratulations, folks, on the progress that you're making. It's obvious that there's a transition underway, but you seem to have a vision of where you can be in a couple of quarters.

Jon, a couple things. I'm sorry, could you repeat what you've stated --- I understand you sold the multifamily real estate property. Could you repeat what you said about what your return on investment on that transaction was?

Thanks, Steve. It was around 75.5%.

Wow. Okay. And I believe the comment that Dave Bloom made, that the other four properties --- did I get the impression that you're going to hold those, try to find the right time to sell, and are you suggesting that if those four were sold over the next year or two that they would likely be in a gain position as well?

Yes, we believe they are substantially in a gain position. Whether or not they get sold or not is not in our forecast. But it's great for our shareholders to know that they are sitting on things that are on their books for X, but we all believe that they're worth a lot more.

Okay. And as far as the transition, I mean, obviously, you're making great progress in the CRE whole loans, but kind of fighting this headwind. And if I heard things correctly, we had about $900 million of the syndicated bank loans at 9/30 but $300-and-some million of those were held for sale, I guess, pending one of the liquidations. And then I think Dave Bryant said that overall in the fourth quarter, we will go down by about -- something over $600 million. So, should we be thinking that by the end of this year that bank loan portfolio will be down to no more than about $300 million?

Actually, Steve, I think you're double-counting. The $335 million held for sale, or $330 million or so held for sale at September 30 is the one loan that was liquidated in October. The other CLO was substantially liquidated by the end of September, and there's just a little bit left that will go away in Q4, and we will get the rest of our equity back.

Got it.

By the way, just for historic sakes, the CLO that was liquidated, Apidos VIII, although from a GAAP perspective it was, from where it was on our books, it was a loss, actually, I think in the quarter, from a cash perspective it was a tremendous gain on the transaction, I think in the 30% or 40% area. I don't have the exact number with me, but it was a tremendous return for the Company over a three-year period of time.

Okay. So I was double-counting, so are we suggesting that maybe bank loans at the end of the year would be more around the $500 million level? I'm trying to -- just for --

Yes, but that doesn't include the middle-market product that we're originating, which probably will be up about $100 million.

Okay. Got it. And that product, you're basically moving from syndicated -- nationally syndicated bank loans, which I assume had been --- a lot of the return has been disintermediated away, and moving into the middle market. Go. Is your expectation, Jon, that over time that could grow to something comparable to what you did in syndicated loans?

I think over a long period of time it's possible, but right now we're going to take one step at a time. But we clearly think that the returns in an unlevered self-originated product, or slightly levered, in some cases, what we can earn in the midteens --- low to midteens we think is much more, from a credit and risk perspective, more attractive at this point than a 10% or 11% return off of a CLO equity where you're 11 times levered.

Got it. Well, listen, thanks for the comments, and good luck for the balance of the year. Thank you.

(Operator Instructions) Jade Rahmani, KBW.

Thanks for taking my question. This is actually Ryan Tomasello on for Jade Rahmani. I was wondering if you can elaborate on where you're seeing incremental asset yields, and also if you've seen a change in spreads in either first mortgage or mezzanine loans quarter over quarter.

I would say generally we've --- and we actually, it's funny you asked, because we had our weekly call yesterday with our originators. And I asked a similar question, because it's sometimes hard to see the who space. And their answer was it's been pretty much the same yield, both on first mortgages and in mezz, probably for the last six months. It went up and down a little bit with interest rates and CMBS, but it's basically in the same area. And what I think is different, though, is the securitization market is open. We're seeing those rates drop and the structures more conducive to long-term lending and higher IRRs for the equity holders.

Great. And as a follow-up, can you elaborate a little bit more on --- you talked about acceleration of closings going into the end of year, if you can just elaborate on that.

Yes, Dave Bloom?

Certainly. This is a phenomenon that is certainly not new to us. It's really been this way since 2005. But the fourth quarter is generally --- there are a number of year-end closings. So the acceleration is expected. The sort of $115 million that we know will be closed this quarter, as it's in active documentation, I'm conservatively saying it could go up. It could be $190 million, because as there's pressure to move things at the end of the year, and based on where we are in certain deals, that acceleration happens, we find ourselves at the end of the year doing three to six 30- to 45-day closings. So it's always a potential. I didn't put it in the numbers, but it's certainly there.

Great. Thank you very much.

At this time, we have no other questions in the queue. I'd like to turn the call back over to Mr. Jonathan Cohen for your closing remark.

Thank you, again, and we appreciate the support. We look forward to speaking to you after the year end and, of course, into 2014. Thank you.

Ladies and gentlemen, this concludes your presentation, and you may now disconnect.