Acres Commercial Realty Corp (ACR) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2014 Resource Capital Corp. earnings conference call. My name is Darren and I am your event manager.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. And now I would like to turn the call over to Jonathan Cohen, President and CEO. Please proceed, sir.

Thank you and thank you for joining the Resource Capital Corp. earnings conference call for the second quarter ended June 30, 2014.

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 on the form 10-K reported under the title Risk Factors. Listeners are cautioned not to place undue reliance on any of 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 from the quarter.

Adjusted funds from operations were $0.19 per share. During the quarter we funded $181 million of new commercial real estate loans. These loans will have future funding of $33 million, thereby totaling $214 million of new loan commitments. This is a 138% increase as compared to $90 million in the same quarter last year, and an 83% increase over our first quarter production.

On July 30, RSO successful completed a $354 million commercial real estate securitization in which we issued term notes in the amount of $235 million to outside investors at a weighted average spread of 1.29%. And on which we expect to earn a return of equity in excess of 15%.

On June 10, RSO completed the issuance of its new 8.625% Series C preferred stock. Demand was strong and we issued 4.8 million shares of our new preferred stock for net proceeds of over $116 million. We, of course, paid a dividend of $0.20 for the quarter.

With those highlights out of the way, I will now introduce my colleagues. With me today are Dave Bloom, head of real estate; Dave Bryant, our Chief Financial Officer; and Purvi Kamdar our Vice President of Investor Relations.

In the second quarter, we earned $0.19 of adjusted funds from operations closely matching our dividend of $0.20. Our book value was $5.24, having earned $0.11 this quarter, as compared to $0.05 earned in the similar quarter in 2013. We are making progress bridging the gap between AFFO and net income. We expect this gap to continue to close as we put proceeds from our perpetual preferred deal to work and continue to leverage our balance sheet to appropriate levels.

Our real estate team has done, in my opinion, a tremendous job of both growing the commercial real estate business and getting access to the securitization market at substantially lower spreads than have been previously seen in this market. During this quarter, we closed commercial real estate loans with commitments of $214 million, 83% increase over last quarter, where we originated $117 million of loans.

Our ability to access the securitization markets and secure low rate, term financing has enabled us to continue to generate solid mid-teens return on equity on our CRE lending. Our most recent securitization closed last week and our weighted average cost of funds, as I said before, was LIBOR plus 129 basis points. An excellent execution that reflects, we believe, the market's positive view on our asset quality.

We are well on our way to completing our goal of $600 million to $700 million of commercial real estate loans originated for 2014 with almost $300 million funded in the first six months, and future funding commitments on those loans of nearly $42 million. We have funded almost $500 million during the 12 months ended June 30, 2014, with future funding commitments of over $48 million. This is tremendous growth and we plan on sequentially growing our originations during the year.

As I stated on last quarter's conference call, we anticipated using the investment cycle to better leverage our balance sheet to appropriate and reasonable levels. Our access to the real estate securitization market for the second time in eight months gives us the ability to do so. We are now a leader in the securitization market and have access to $450 million of financing after paying down our commercial real estate term facilities at the close of our second CRE CLO with a continued focus on future securitizations.

Since the end of the quarter, the Company has closed, or has received applications in the process of closing, seven commercial real estate loans totaling $185 million. The Company has an ongoing pipeline of new CRE loan opportunities in various stages of negotiations.

During the second quarter we reached a milestone of holding $1 billion portfolio of CRE loans, 92% of which are whole loans. During the second quarter of 2014, Resource Capital Corp. made over $291 million of high-quality diversified investments in both commercial real estate and commercial finance. Our commercial finance pipeline is focused on the middle-market corporate segment and our origination machine is just getting going. We have over $400 million in our pipeline and expect to fund at least $100 million more by the end of the year.

We have always invested a portion of our capital into the corporate loan space and we have successfully transitioned to a middle-market lending emphasis. Our middle-market lending business, called Northport Capital, is growing and has deployed $160 million of capital. We have a full team in place to grow this business meaningfully.

The Company also made approximately $46 million of new investments during the second quarter of 2014 in one of the remaining leveraged loan vehicles, Apidos Cinco, which had a return of equity of over 40% in 2013. This redeployed nearly all available capital before the rate reinvestment period end closed in May, taking advantage of the low cost of financing to provide significant returns for the shareholders.

We continue to seek opportunities to generate solid returns on quality credit related products to supplement our commercial real estate lending business. As this portfolio grows it should add a boost to our earnings and our AFFO.

Our credit quality continues to be very solid. Our real estate watch list is shrinking. We currently maintain a general reserve of $4 million. This is in line with our recent charge-off history, and reflects our strong focus on originating commercial real estate loans with strong credit profiles. Even as we are increasing our origination capacity, our primary focus remains credit quality.

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

Thanks, Jonathan.

Resource Capital Corp.'s committed commercial mortgage and (technical difficulty) has a current balance in excess of $1.3 billion in a diverse and granular pool. RSO's commercial mortgage portfolio is comprised of 65 individual loans with an aggregate committed balance of approximately $1.1 billion and is comprised of 92% self originated whole loans, 7% mezzanine loans and 1% B notes.

The underlying collateral base continues to be spread across the major asset categories in geographically diverse markets, with a portfolio breakdown of 38% multifamily, 20% office, 16% hotel, 18% retail and 8% other, such as mixed-use deals.

During the second quarter of 2014, RSO closed new loans with commitments totaling approximately $214 million, bringing total new loan origination for the first and second quarters of 2014 to $330.7 million. On a trailing 12 month basis, RSO's aggregate loan origination volume is $518.1 million.

Since the beginning of the third quarter, we have closed new whole loans with commitments totaling $40.5 million, bringing 2014 originations to date to $371.2 million, as compared to total annual production for 2013 of $348.2 million.

In addition, we're in the process of closing additional new loans with an aggregate committed balance of approximately $144.8 million. Provided that everything in process closes, RSO's new production for 2014 will stand at $516 million, and that's just one month into the third quarter. So as Jonathan mentioned, RSO is well on its way to meeting our targeted annual production of between $600 million and $700 million of new originations.

As we look at our forward pipeline, it remains strong. With new loan originations totaling $137.8 million under application and final negotiation and an additional $450 million of new lending opportunities, either quoted or past preliminary screening and deep into underwriting.

With the closing last week of RSO 2014 CRE 2, our second securitization, our term lines of credit were cleared which provides us with $450 million of borrowing capacity that we will again utilize while we are aggregating collateral for our next securitization.

In addition to financing new loan originations, we will also utilize our lines of credit to leverage the approximate $44.4 million of future funding obligations that remain outstanding on the loans contributed to our recent securitization. Optimal match funding of our loans and maximum returns on invested equity will be realized when we again access the commercial real estate securitization market which we anticipate doing more frequently based on the velocity of our new originations.

In addition, although the average call protection of the loans in RSO 2014 CRE 2 is a very healthy 16 months, a new structural feature in our recent securitization is the ability to contribute funded future commitments in the event of prepayments of any of the loans in the securitization during their initial term, which in all but one case is three years.

This is an innovative structure that was introduced to the market for the first time in our securitization. And as a benefit to both investors in the securitization and RSO by keeping the weighted average life of the deal as close to the stated term as possible.

We are seeing borrowers achieving their asset-specific business plans on or oftentimes ahead of pro forma. So, as we look at the timing of the drawdown of future funding commitments, we anticipate the majority of these amounts will be drawn within the next 9 to 12 months, if not sooner.

We also note improving credit metrics across all asset classes represented in our commercial real estate portfolio. The majority of the properties securing our loans are continuing to realize improve cash flow with borrowers' plans for value creation well on track. I am once again pleased to report that the entire commercial real estate loan portfolio is performing with no defaults.

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

Thank you, Dave. 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 second quarter of $0.20 per common share. Our adjusted funds from operations, or AFFO, for the quarter was $24 million, $0.19 per common share diluted. Determining AFFO for the second quarter, there were several non-cash adjustments that net to approximately $6.1 million. And cash adjustments of $7 million of which $3.1 million comes from the recognition of cash gains on the extinguishment of debt and $3.9 million from realized gains on the sale of real estate.

We passed all of the interest coverage and over collateralization tests in our securitizations. Each of these financing structures performed well and generated strong cash flow to us in Q2 2014. We ended the quarter with approximately $320 million of real estate loan collateral posted on our term facilities. And when we closed our second real estate securitization, since late 2013, we were able to fully pay off our real estate term facilities, thereby providing plenty of runway for our real estate loan pipeline that will fuel our expected growth.

In the second quarter 2014, we saw a net increase of $782,000 in provisions for loan losses. There was a $700,000 provision on a loan related to a leasing fund that we took a preemptive write-down on, $60,000 on real estate loans and $26,000 on residential mortgage loans held for investment, which was offset by a small decrease in provisions of $5000 on bank loans. We ended the period with $5.8 million in real estate allowances, $668,000 in bank loan allowances and $700,000 allowance on other commercial finance loans.

Overall, real estate credit has been excellent, and I continue to characterize our bank loan portfolio of credit as very benign. Only one bank loan for $1.6 million is delinquent out of a portfolio of $765 million. And again, all of our real estate loans totaling $1,000,043,000 are current.

Our leverage stands at 1.7 times at June 30. When we treat our TruPS issuances, which have a remaining term of approximately 22 years, as equity our leverage is 1.6 times. With regard to real estate leverage, we ended Q2 at 1.45 times levered on our entire portfolio, which includes cash earmarked for new real estate loan originations.

Although our leverage came in at 1.7 times for both June 30 and the end of 2013, we saw changes in the components of leverage. Net borrowings from our real estate term facilities increased and that helped fund our real estate loan origination business. We also had increase borrowings from the consolidation of the Moselle CLO and to a lesser extent from borrowings for our mortgage backed securities. These increases to leverage were partially offset by pay downs and runoff of CLO and CRE debt.

In terms of equity, we had $116 million of net proceeds from our Series C preferred stock issuance in June, augmented by $22.3 million through our at-the-market preferred stock program and $14.6 million from our common stock dividend reinvestment plan. Overall, our weighted average effective cost on net proceeds from all three series of preferred stock is 8.76%, an efficient cost of capital for RSO.

In terms of liquidity, after paying the second quarter common and preferred stock dividends in late July, we have $156.3 million of unrestricted cash at the end of July with several additional real estate loans and middle-market loan originations in process intended to invest this equity. We ended June 30 with a GAAP book value per share of $5.24. At June 30, our equity is allocated as follows: commercial real estate loans and CMBS, 68%; commercial finance, 31%; and 1% in other investments.

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

Thank you, Dave and Dave.

With that, before I open the call for questions, I wanted to reiterate our guidance of approximately $0.40 of AFFO for the next six months. We also reiterate our dividend guidance of $0.20 per quarter during 2014.

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

Thank you. (Operator Instructions). Jade Rahmani, KBW.

Good morning, and thanks for taking the question.

Can you provide some color on the types of loans you're originating and can you give a sense for the range of yields and other credit metrics, LTVs, that service coverage ratios? Specifically, how those trended over the past quarter?

Sure, Dave Bloom can handle that.

We're still making loans that have positive cash flow. We're looking at debt service coverage going in at a minimum of about 1.2. I think at this point we're still maintaining a weighted average starting coupon of around 5% as we blend all of our production together, which is very consistent with where we've been and where we were in our last securitization.

And what's the range around that 5%? What would be --?

This is Jon. For a multifamily, lower levered that we love, that rounds out a nice securitization, it would be in the mid 4% to 4.75%.

And what would be at the high end?

The high end probably would be 6.5% to 7%, and that would be still a relatively low lever but that might be in a retail or hotel situation or an office situation with a lease up component.

Okay. Are you still seeing around 50% of your originations from existing borrowers?

I would say that number probably is about a third. Only because -- a third to 50%. It depends how you really look at it in terms of number of loans or total dollars. Some of the bigger loans that we've made recently have been to borrowers that are either new or have borrowed a long time ago. We wouldn't say they're repeat; they may have borrowed in another form or another PE fund that they worked at.

Okay. And just over the last couple of weeks, have you seen any -- has any of the volatility in the market lead to higher loan yields or the loan market hasn't had much reaction?

No, I wouldn't say the loan market, in this case, I would say in the middle-market lending corporate side we've seen a little bit of that. But not in the real estate side.

Okay. Additionally, on the CLOs that you're issuing, is the typical duration about 16 months, which I think you cited? Or is it a little longer than that?

No. I apologize if I confused you with the comment. The average call protection is 16 months. For the AAAs, the weighted average life is 2.88 years.

But these -- it's term finance, so if these loans go five years then the bonds go five years.

Right, but when they pay -- when loan repayments are received they pay off the senior security so the structure deleverages.

Right, that's right, although we have a very good mechanism that Dave Bloom and his team put into the deal, which allows us to take future funding commitments and essentially put them back into the deal and relever the transaction.

Okay. Just lastly on the Northport and corporate lending opportunity, how much flexibility is there under the REIT rules to grow those businesses? Can you talk about how much capital you would expect to continue to allocate?

I mean, it's opportunistic at this point, but we have a lot of flexibility if we want it.

Okay. Thanks a lot.

Thank you.

Lee Cooperman, Omega Advisors.

Thank you and good morning.

Jonathan, you used the words, we of course paid a $0.20 dividend. I always think that a dividend commitment for 2014 is meaningful in itself because of the history. In 2009, we paid $1.15, 2010 and 2011, we paid $1.00, we're currently paying $0.80. AFFO from recurring operations is less than dividend.

So, I have a simple question. When do you expect and do you expect income AFFO from recurring activities to cover distribution?

We've been right around that level the last two or three quarters, $0.19 to $0.20. We'd like to see it go higher because there always are -- a portion of our gains always have been maybe 10% to 15% -- have always been from one-time activities and that's just a portion of our business, so we'd like to see that higher to feel very comfortable with the dividend there.

Obviously we're under incredible pressure from the market in terms of keeping with our desire to keep credit quality very high and not make silly loans while being aggressively deploying capital and focused on maintaining that dividend.

I know, but that's my question, based upon your internal budgets do you expect (multiple speakers)?

Yes, we're there now. We're there at $0.19 to $0.20. We expect to be there and try to grow that a little bit from here. On AFFO.

So you believe that you'll be able to maintain the distribution beyond 2014?

That's what we believe now, but I'm always very cautious.

Secondly, if you could go through the arithmetic of raising capital, let's say $5.50 a share, take away your underwriting discount, what could you do with that money today that would be accretive to the distribution as opposed to presenting a risk to the distribution?

We have not done an offering for common stock. We've been issuing preferred stock at five -- I mean at a 8.5% which is where we think we can make money, given our securitization that we just completed had a 15% ROE. Our last securitization was north of 20%, so we've been basically focused on preferred stock. We did do a convertible -- convertible in the high 6s, which we did nine months -- a year ago. (multiple speakers) offering.

Right, okay, thank you.

Thank you.

Richard Eckert, MLV and Company.

Thanks for taking my call. A couple of quick questions. First is, there was a gain on the sale of real estate. Was that from the Florida resort property?

It was. Yes, it was.

Okay. And second, for the second quarter in a row, your capital allocation to commercial real estate has been around 70%, which seems a little low to me. Isn't it generally in the 80% to 85% range? I know you plan on being opportunistic but, it just seems like the allocation to commercial real estate is somewhat low.

Yes, we will see that get back up to about 80% within the next 6 to 9 months. It's just a matter of us -- we had $58 million of pay offs, we had properties we sold, so that number came down a little bit.

Thank you.

Matthew Stolzar, Pyrrho Capital.

Hello, guys. Can you walk us through the gain on the extinguishment of debt and how you think about -- what that gain was from and how we should think about those going forward?

That gain was from previous buybacks of bonds that went into GAAP income, but was not taking into AFFO as a gain. Those gains are taken in AFFO when we actually receive the cash from the sale of the bonds or from the repayment of loans underlying those securitizations.

So, it's really a little bit lumpy here and there but, as these things speed up and the old securitizations are paid down, we expected that to be probably an ongoing AFFO add back probably for the next couple of quarters.

Okay. And in terms of your leverage, where are you, would you say, in terms of the progress of levering up the balance sheet and how do you openly look at running this from a leverage perspective?

On the commercial real estate side, we're looking at probably somewhere in the 70% to 75% is where we're comfortable, which would imply a little less than 3 times. On the corporate lending side, it's really more of one-to-one business. I think on top of that we're comfortable having another half a turn or so of corporate leverage on top of that.

So, when we think about what your sources of capital will be going forward, I guess how do you think about making that decision?

I would look at it that we will probably be able to grow our balance sheet by another somewhat $600 million to $1 billion on the leverage standpoint.

Got it. Thank you, guys.

Thank you. We have no further questions so I'd like to turn the call back to Jonathan Cohen for closing remarks.

Well, we thank you very much for your support, both this quarter and many of you over the years, and we continue to make progress and we're looking forward to reporting next quarter. Thank you.

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