Acres Commercial Realty Corp (ACR) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter and year ended December 31, 2013, Resource Capital Corp. earnings conference call. My name is Shaquana and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of this conference. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, President and CEO, Jonathan Cohen. Please proceed, sir.

Thank you. Thank you for joining the Resource Capital Corp. earnings conference call for the fourth quarter and fiscal year ended December 31, 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 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 its reports on forms 8K, 10Q, and 10-K and in particular Item 1A under the Form 10-K report under the title Risks Factors. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of 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 $0.74 per share and $0.14 per share for the year ended and quarter ended December 31, 2013 respectively. Late last year, we successfully completed a $308 million commercial real estate securitization, in which we issued term notes in the amount of $261 million to outside investors at a weighted average spread of 1.86%, and on which we expect to earn a return on invested equity of approximately 20% per year. We expect to revisit the securitization market in the next few months and we expect the result to be even more favorable.

During 2013, we more than doubled commercial real estate loan originations. With $344 million in loans closed compared to $163 million in 2012, we expect to double this number again in 2014. Our fourth quarter annualized run rate is near $400 million of originations. We completed a $115 million, 6% convertible senior notes offering in October. We paid a $0.20 dividend for the quarter and $0.80 per share for the year.

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.

We earned over 10% on book equity during this quarter, a decline from our previous levels but still decent. We calculate this return by dividing AFFO, adjusted funds from operations, by book value. This decline was caused primarily by a decrease in net interest earned, net interest earned from our commercial loan obligations, CLOs, and from an abundance in cash still remaining in our books through December 31, 2013 mostly from our convertible notes offering that we completed in the fourth quarter. For 2013, our return on book value -- book equity was 13.7%, pretty good. These results are after all costs and management fees. From this point, we expect AFFO to increase sequentially each quarter until we reach our current dividend rate of $0.20 in the third or fourth quarter.

We expect to earn AFFO this year, 2014, of $0.75 to $0.80, and net income of close to $0.60. We anticipate leaving 2014 with a run rate that is in excess of our current dividend. In addition, we expect to grow book value through the sale of investments that are not producing current income, such as our $40 million investment in LEAF Commercial Capital. We are very optimistic in this regard.

The driver for this expected growth in quarterly AFFO is the machine that Dave Bloom, our head of Real Estate, and his colleagues are running. As stated before for 2014, we expect to originate close to $700 million in commercial real estate loans. Our ability to turn our loan origination production into good returns for our shareholders was proven, it was demonstrated clearly late last year as we completed our first commercial real-estate securitization since 2007 for approximately $308 million, in which we retained about $47 million in junior notes and equity positions. We expect to earn a yield of approximately 20% on this invested capital as I stated before. We are pleased by this execution of this transaction and the validation of our commercial real-estate strategy that it demonstrates.

Our commercial real-estate origination platform is not the only part of our business that showed market progress late last year. We have always invested a portion of our capital under the corporate loan space. As our legacy portfolios of syndicated bank loans have run off -- and boy did this hurt us -- from $1.2 billion in assets to less than half of that amount. It is approximately $580 million. We have transitioned to a middle market lending emphasis in the corporate space. We think that this is an area replete with good opportunities for Resource Capital Corp. Currently our middle market lending business is growing, and has approximately $80 million of funded loans and commitments. We expect that business to have deployed $115 million by the end of the first quarter of 2014. We have a full team in place to expand the growth of this business. We continue to seek opportunities to generate solid returns on quality credit-related products to supplement our commercial real-estate lending business.

These assets are directly offsetting the loss of net interest income that we were earning from the CLOs previously mentioned. As this portfolio grows and cash disappears from our balance sheet, it should add a significant boost to our earnings and our AFFO. Through the end of February where we are now, we are seeing it happen.

Between the ramp of our commercial real-estate originations and the ramp of our middle market lending portfolio, we expect to be fully invested by the end of May. As that occurs, we expect to add leverage to our portfolio until it is appropriately leveraged for a specialty finance REIT.

Our credit quality continues to be very, very solid. Our real-estate watch list is shrinking. Our provision for loan losses was $3 million as of December 31, 2013, as compared to $16.8 million during the previous year, a very significant reduction. Our liquidity remains outstanding. We believe that we will end March 31, 2014 with only $100 million of cash, and most of that will be consumed by origination as early as late May. Once that is done and the cash is invested, we should see our return on equity return to historic levels.

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 $1.2 billion in a diverse and granular pool. RSO's commercial mortgage portfolio is comprised of 67 individual loans, with an aggregate committed balance of approximately $915 million.

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, 17% office, 19% hotel, 21% retail, and 10% other, such as research and development and mixed-use deals. The portfolio is in components as follows -- 91% whole loans, 7% mezzanine loans and 2% B-notes.

During the fourth quarter of 2013, RSO closed seven new loans, with commitments totaling $98 million. Total new loan production for the full year of 2013 was approximately $350 million. By the end of 2013, our new loan originations had ticked up to a pace of approximately $400 million a year, representing year-over-year loan production growth of over 100%.

Since the beginning of the first quarter of 2014, we have closed two new whole loans, with commitments totaling $30 million, and two mezzanine loans, with commitments totaling approximately $4.4 million. In addition, we're in the process of closing five more new whole loans with commitments totaling $126.3 million, all of which are expected to close by the end of the first quarter. As of today, new loan production for the first quarter of 2014 is anticipated to be approximately $161 million.

If the new loans in process and slated to close in the first quarter of 2014 stay on schedule, RSO will have again grown loan production significantly, but this time on a quarter-over-quarter basis. While we have seen significant growth in our quarterly new loan production, we remain extremely focused on credit quality and property values, and are holding to strict valuation metrics, sponsor experience, asset quality, and diversity standards that have been a hallmark of our traditional bridge lending program.

We note that our continued attention to credit quality and diversity was rewarded in our recent CRE notes offering, with 85% of the $308 million pool rating A or higher, which drove our ROE on the transaction to approximately 20%. As we look beyond the first quarter of 2014, RSO currently has a $7.5 million loan in process and scheduled to close early in the second quarter, applications issued for five more loans totaling approximately $154 million, is in negotiations on an additional $260 million of new lending opportunities, and is actively underwriting a forward pipeline in excess of $300 million to $400 million, which has increased by about $100 million over the last several quarters.

Based on the number of loans in process and advance stages of negotiation, we're tracking towards annual loan production of between $600 million and $700 million for 2014, volume predictions we obviously hope to exceed. RSO's increased loan production will continue to drive earnings, as we utilize our $450 million of term financing facilities, provided by our commercial banking partners, with maximum returns on invested equity being realized as we access the CRE notes securitization market with greater regularity and optimally match fund our portfolio of loans.

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. We continue to see improving metrics across all asset classes, with the majority of the properties securing our loans continuing to trend in an upward direction. We're again pleased to report that the entire RSO commercial mortgage portfolio is performing with no defaults.

We're very particular about markets in which we lend. While additional markets continued to recover, the depth and breadth of a given market, sponsor experience, and asset-specific business plans all play heavily in our underwriting process. In addition, although we are lending on lightly transitional properties, we continue to target properties with stabilized projections that stand up to rigorous stress underwriting and verification with day one cash flow coverage and meaningful sponsor equity.

The positive performance of our portfolio is a daily reminder that validates our keen focus on credit-first and market-centric lending approach we apply to our origination process. With that I'll turn it back to Jonathan and rejoin you for Q&A at the end.

Thank you, Dave Bloom. Now I will ask Dave Bryant, our Chief Financial Officer, to discuss our financials.

Thank you Jonathan. Resource Capital Corp. declared and paid a cash dividend for the fourth quarter $0.20 per common share, approximately $25.5 million. Our adjusted fund from operations, or AFFO, for the quarter was $17.2 million or $0.14 per share diluted. In determining AFFO for the fourth quarter there were several non-cash adjustments in a net amount of $19.5 million, the largest of which relates to a $16 million non-cash loss on a deconsolidation of Apidos CLO VIII, which I characterize as an accounting anomaly that I'll discuss in detail in a minute.

As highlighted earlier, in late December we closed on our newest real-estate securitization, which provided us with additional leverage and very attractive returns. This allowed us to substantially repay one of our real-estate term facilities, which in turn provided us with available leverage to grow real-estate loan origination business. We ended 2013 with $419.3 million combined availability when our existing term facilities to help fuel our anticipated growth in 2014.

We passed all of the interest coverage and over collateralization tests in our legacy securitizations, including our two real-estate CDOs and three remaining bank loan CLOs. Each of these financing structures performed well and generated strong cash flow to us in 2013. The real-estate CDOs produced approximately $47.7 million, which includes a return of principal of $28.1 million from our ownership of the 2006 CDO, senior note class, which we have recycled into new real-estate loan originations.

Bank loan CLOs generated approximately $56.7 million of cash flow, which includes a return of $33.5 million from two CLOs that liquidated during the calendar year 2013. This strong cash flow reflects the strength of our credit businesses, and presents us an opportunity to invest recycled capital which has begun in earnest.

As of December 31, we had an excess of $61.4 million of restricted cash in these structures, comprised of approximately $53.8 million and $7.6 million in our bank loans and real estate deals respectively. Of these balances $27.5 million is available for reinvestment in one of our CLOs, which we expect will provide a significant spread over the very inexpensive cost of the associated debt at a weighted average rate of 0.77%. The $7.6 million in the real estate securitizations is designated towards future funding on existing loans.

During the fourth quarter, our investment in Apidos CLO VIII was called, and the securitization was substantially liquidated. This reduced our bank loan assets by approximately $335 million, and debt by approximately $320 million, and all of our invested equity was returned upon final liquidation. Note that the transaction was cash-flow positive for the company and we received back all of our capital. Nonetheless, as a result of the CLO liquidation, under GAAP, we were required to accelerate original issue discount on the outstanding notes and deferred debt issuance, costs which resulted in a non-cash interest expense of in excess of $16 million in Q4 2013.

As is too often the case, the accounting roles were complicated. Put simply, we consolidated the CLO and treated the other equity holder as a borrowing with an imputed interest rate below their share of earnings in cash flow. This anomaly has resulted in our earnings exceeding our proportionate share with the CLO from inception through liquidation in October. Of course, we excluded such excess in determining adjusted funds from operations. However, because of the liquidation and deconsolidation in Q4, we must essentially derecognize those GAAP earnings through net income for the items I cited, the OID and deferred deal costs. This is only an accounting requirement. Substantively, we received 100% of our original $15 million investment plus profits of nearly $6 million in a little over two years' time, a very solid 19% IRR on this investment. Technical issues such as these are widely utilized AFFO to provide our stakeholders with what we regard as the most reflected measure of our operation.

In Q4 2013, we added $2.5 million to provision for loan losses, of which $1.8 million is related to provisions for bank loans. Most of this increase resulted from the sales of a few positions for credit reasons, which required us to increase reserves before those sales were consummated.

We added 700,000 to our real estate loan reserves, primarily for our previously impaired loan. Overall, real estate credit has been excellent and I characterize our bank loan portfolio as very benign. Three bank loans totaling $3.6 million are delinquent out of a portfolio of $580 million, and all 57 of our real estate loans are current and performing.

Our leverage stands at a very conservative 1.7 times at year-end. When we treat our trust issuances, which have a remaining term of approximately 23 years as equity, our leverage is 1.5 times. With regard to real estate leverage, we ended 2013 at a conservative 1.13 times on our real estate portfolio, which includes unrestricted cash earmarked for new loan originations.

Our overall leverage continued to decrease from 2012 year-end due to pay downs and runoffs of CLO debt, CRE debt and the CDOs, and from a mortgage payoff from the associated sale of the real estate property as well as from equity raised to our common stock offering in April and to a lesser extent our dividend reinvestment program. We also used our at-the-market preferred stock program and sold 2.4 million shares at a weighted average price of $24.56 through this program during 2013, for total proceeds of $56.8 million at a weighted average rate of 8.25%. Overall, our weighted average effective cost on net proceeds from both series of preferred stock is about 8.5%, a very attractive cost of capital for RSO.

In terms of liquidity, after taking into account the significant proceeds from the mid-October convertible note offering, and after paying the fourth quarter common and preferred stock dividends in late January, we have $199 million of unrestricted cash at the end of January, with several real estate and middle market loan originations in process and intended to invest this equity. We ended December 31, GAAP book value of $5.41, down $0.15 from the $5.56 at September 30, 2013. At year end, 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 turn the call over to Jonathan Cohen.

Thank you, Dave Bryant. As Dave explained, our investment that caused a $16 million loss this quarter was a non-cash item caused by accounting requirements and timing. In fact, in total, this investment was quite good, netting out a 19% IRR over two years. As I have mentioned before, it is my opinion that we will achieve the goals that I set forth here for 2014 and maintain our dividend at $0.20 per quarter during 2014, or $0.80 for the entire year. With that, I will open the call for any questions.

(Operator Instructions). And your first question comes from the line of Steve DeLaney representing JMP Securities. Please proceed.

Thank you. Good morning everyone.

Hi, Steve.

Hey. John, step back for a minute and just help me understand from a macro level why the syndicated bank loan business is winding down? What we are seeing with these repayments, is this just contractual maturities? That's part of the question. And why are new loans, if a loan is maturing, why your new syndicated loans not being refinanced and put on so that those structures and that business model can continue? Thanks.

Sure. These are legacy CLOs that were structures that we did in 2005, 2006, 2007 area, and they allow you to, the structure issued notes, just like a securitization for anything would, and bought assets. And then at a certain point in the case of most of these, it was a five-year, I believe investment period, five to seven year investment period, so that starting in 2012, to take an example of the ones in 2006 and 2007, those investment periods were over. So as corporate issuers all around the world started to refinance their own debt or pay off their own debt with different, like a private equity company going public or something like that. Once our investment period was over, we were no longer able to reinvest. All proceeds from a refinanced loan or a pay down would go to paying down debt.

Right, the senior notes.

The senior notes, and then the junior notes. And then eventually it will become unprofitable, not that leveraged and the deals will be called by the equity owners of the transactions. These deals were fantastic. We probably earned between 25% and 40% compounded return from 2004 to 2012, I mean so these have been a really wonderful transactions for Resource Capital. And of course --

Since these were priced at such a low spread over LIBOR back in the day and as you say the 2005 to 2007, I think what I am hearing is even if there was demand for these loans and even if loans were available.

I am sorry, there is great demand for loans. These companies are issuing loans but at 4% not at 5% or 6%, and the borrowings for these loans are let's say at 250 basis point not at 50 basis points.

Even though you could replicate -- yes, go ahead. I am sorry.

When we actually looked at replicating that, the returns on CLO equity might be in the low-teens 10%, 11%, rather than 40%, and they are very highly levered. We prefer to originate our own middle-market loans that are lowly levered and earned in the mid-teens on that basis which is why we started the middle-market lending program.

And that's where I was going next. Thank you. So, the new middle-market program, will that still be managed by the same team, Gretchen's team, that was doing the bank loan -- the syndicated loans? Or is that a different team?

No, we have our own team internally that has a tremendous amount of experience, a bunch of people from GE, from other, from BDCs, from credit shops that have been doing this a long time that we built over the last year or so. And we started to originate, we have about $80 million that we have originated. We expect to end the first quarter at $115 million, and it's starting to replace the losses from the lost net interest income that we are losing from the CLOs.

And lastly, as you get to certain scale $300 million, $200 million, $300 million whatever you need -- is there a structured financing that you'll be able to put on that portfolio?

Well, like the BDCs, it's a very lowly levered pool of assets. So we would imagine that it would not have tremendous amounts of leverage.

Okay. So you are just going to price the loans, it'll be priced such that you get your return there without a lot of leverage.

Exactly, and there we're looking for mid-teens total return to RSO.

Well, thanks for that. Sorry that was tedious, but thanks, that helps me.

Yes, and it was really highlighting, obviously we've been as these things have accelerated, as the credits markets have accelerated and paybacks have come more rapidly, the lowering of net interest income and return from those CLOs and in fact the pay off of one Apidos VIII that Dave mentioned -- even though these were tremendous returns for us, it means that we have to rebuild from this low point of 10%-11% ROEs back to the 14%. But we've got plenty of capital and plenty of origination. You're going to see that in the first quarter what we're putting on the books and I think everybody will be quite happy.

Thank you. And one final quick thing, we noticed that from September to December you reclassed one of your REO properties about $25 million for sale. Can you just comment on what type of property that is? And I know in the past you've been able to actually get recoveries greater than your carrying value. Do you have an expectation that that particular property you might be able to have a good outcome on? Thank you.

Yes. We actually -- Steve, this is Dave Bloom.

Hi Dave.

That's resort hotel in Coconut Grove, Florida, and yes we would absolutely see sale there for again over our basis.

Thanks for the time this morning, gentlemen.

Thanks, Steve.

Your next question comes from the line of Lee Cooperman representing Omega Advisors. Please proceed.

Hi. Good morning.

Hi, Lee.

Just had an observation, good morning John, and David. Obviously the only return the investors have gotten here is a dividend because the stock has gone nowhere for a long period of time and obviously down with the drift. And the thing that concerns me is that we're constantly issuing equity at a very high cost, which has become very difficult to put that money out without being dilutive to the distribution. Now I heard what you said, and I was comforted by the comment in the distribution of $0.80 is likely secure this year. But I would really ask you to reexamine the policy of constantly issuing equity and finding out that you don't have the ability to put the money to work in a timely basis which threatened the distribution.

Lee, just for the record, we did reexamine that equity issuance, and we actually have not issued any equity since April of 2013.

Other than preferred stock.

We have done some preferred stock, that's right.

You did the preferred (inaudible).

Yes, but that was a very small amount. But my point being that we're not issuing equity till we're fully ramped back up to where we think is a great return on equity for our shareholders, which we believe net of all cost in the 13% to 14% is quite achievable and a very good return to our investors. So you will not see us in the equity markets till we achieve that.

Yes, well, that's a very close call so if you take 13% to 14% on the $5.41 book value, it's not terribly different than the distribution so I think you have to be careful because this stock would trade directly with the distribution.

I agree with that.

Thanks. Good luck.

Thanks for your support. Thank you.

And your next question comes from the line of Richard Eckert representing MLB & Company. Please proceed.

Thank you for taking my call. Quick question of David Bloom, this past quarter's CRE loan originations of $98 million -- frankly that was somewhat disappointing, given the, I won't call it guidance, but the detail you provided in the last conference call. There was $115 million according to this transcript that we know will be closed in the quarter, and there was an upper bound given of $190 million. And the $98 million is half of that. Was there something that happened in the middle of the quarter or towards the end of the quarter? Did some of that production get pushed back into this quarter?

Yes. Actually we did have one large loan that fell out. It was an acquisition financing and the acquisition did not pan out in diligence. We were ready to go with the way that it went, the sponsor didn't move forward on the trade. We feel the numbers that I am talking about for this quarter are loans that are in process documentation being done, not pending acquisitions. Some of the forward pipeline is obviously always acquisition-related, but I think that is the one, that was the large swing in the fourth quarter.

Yes, I might also add that you have to look at it over time because this is -- we moved to, one of the reasons for instance we did the convertible note offering was that we needed liquidity to fund larger loans. So our -- while before we would have, it would take six or seven loans, at like $10 million closing, we're now having five loans closing with some of them being hoping to get to $150 million and some of them being as large as $45 million or $38 million, and these are much more complicated deals with much more equity. And therefore, they sometimes push from quarter-to-quarter, they sometimes fall.

But I think you can look at it, and we like to think that the trend is our friend. In 2012 we did $163 million, in 2013 we did about $340 million or something like that. Obviously at $98 million for the last quarter we're somewhat at right around a $400 million run rate. I think you will be able to imply a run rate well north of that in the first quarter. And obviously, the counter to that which is very productive is that we're not seeing prepayments the way that we used to see which was that we would put out 70 and we'd get back 40 and we would sell one loan for 20 and we'd net 10, that's the yesteryear 2012. I think we're feeling like we're going to add a lot of assets to the balance sheet during the next six months.

Okay and one more question of David Bryant. Operating expenses, particularly G&A, were somewhat higher that I had expected in the fourth quarter. Was there some kind of year end, and these are non-compensation expenses? These are overhead expenses. Is there some kind of year end accrual or something that might have driven those up?

Yes, Rick. There are some fourth quarter adjustments. For instance, all of our audit expense goes through or most of it anyway goes through the fourth quarter, when that work begins in earnest. And then we also had some legal expenses and acquisition costs that were expense related to our acquisition of this small resi mortgage origination business that we talked about last quarter.

Okay.

And the other thing is that now that we're consolidating that company, all their G&A is coming through our income statement and that's a labor-intensive business with a lot of, somewhere in the neighborhood of 80 to 85 employees.

Okay. Thank you very much for your time.

Thank you.

I will now like to turn the call back over Mr. Jonathan Cohen for closing remarks.

We want to thank you for supporting us during 2013 and we look forward to delivering in 2014. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.