Acres Commercial Realty Corp (ACR) 2014 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third-quarter 2014 Resource Capital Corp. earnings conference call. My name is Adrian and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Jonathan Cohen, President and CEO of Resource Capital Corp. Please go ahead.

Thank you and thank you for joining the Resource Capital Corp. earnings conference call for the third quarter ended September 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 under the report titled 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 obligations to update any of those 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, AFFO, were $0.18 per share. Book value per share was $5.21 as of September 30, 2014. Through October 31, 2014, we have originated over $641 million of commercial real estate loans, inclusive of future funding commitments, an increase of approximately 150%, $256 million, of 2013 origination, through 10-31 from last year. In addition, there are approximately $95 million of loans in process that are anticipated to close in the coming weeks, which will bring total originations for 2014 to $735 million.

To help fuel this growth in loan originations, on October 31, 2014, we modified and upsized our Wells Fargo commercial real estate term facility to $400 million from $250 million and also extended the current term to August 2016 while maintaining two one-year extensions at our option, which carries the final maturity of the Wells Fargo facility to August of 2018.

On September 18, 2014, our middle-market lending group, Northport Capital, closed its syndicated credit facility with $125 million of commitments in place as of September 30, 2014, which will help us increase volume and return on equity of that portfolio. This business, which is approximately one year old, has originated $169 million of loans year-to-date. Our increased originations helped increase our net interest income by 11% sequentially over the quarter ended June 30, 2014, and 33% year-to-year over the quarter ended September 30, 2013.

We paid a dividend of $0.20 per share for the quarter. We currently anticipate that 2015 AFFO will be approximately $0.70 to $0.80 per share. With those highlights out of the way, I will now introduce my colleagues.

With me today are Dave Bloom, head of Real Estate, David Bryant, our Chief Financial Officer, and Purvi Kamdar, our Vice President of Investor Relations.

In the third quarter, we earned $0.18 of AFFO, closely matching our dividend of $0.20. Our book value was $5.21, virtually unchanged from June 30, 2014.

Our real estate team has done a tremendous job in both growing commercial real estate loan originations and accessing the securitization market at substantially lower spreads than have previously been seen in this market. Our most recent securitization closed in July with a weighted average cost of funds of LIBOR plus 129 basis points. Our ability to access the securitization market and secure low-rate term financing has enabled us to continue to generate solid midteens returns on equity on our CRE lending.

We are well on our way to exceeding the high end of our 2014 guidance of $600 million to $700 million, including commitments of commercial real estate loans closed in 2014. That would reflect over 100% increase over 2013 originations and approximately 300% more than we originated in 2012. We have accomplished this impressive growth without sacrificing credit quality, which remains excellent as confirmed by our stellar securitization results.

As I mentioned earlier, we have also seen the terrific launch of Northport Capital. Just about a year ago, we started to focus our commercial finance business on the middle market corporate segment. In that period of time, we have already originated almost $230 million of loans and expect to fund at least another $60 million by the end of the year and we have over $350 million in our pipeline.

While growth is important, we are even more focused on maintaining credit quality, and we have done so. Our real estate watchlist is shrinking. We currently maintain a general reserve of $4 million. This is in line with our recent charge-off history, 0.31% on trailing three years, and reflects our strong focus on originating commercial real estate loans with very strong credit profiles.

Our liquidity remains strong. We had approximately $163 million of unrestricted cash as of September 30.

Now I will ask Dave Bloom, head of Real Estate, to review our real estate activities.

Thanks very much, Jonathan. Resource Capital Corp.'s committed commercial mortgage and CMBS portfolio has a current balance in excess of $1.6 billion and a diverse and granular pool. The underlying collateral base securing RSO's commercial mortgage portfolio continues to be spread across the major asset categories in geographically diverse markets with a portfolio breakdown of 41% multi-family, 18% office, 20% hotel, 16% retail and 5% other such as mixed-use properties. The commercial mortgage portfolio is comprised of 70 individual loan positions with an aggregate committed balance of approximately $1.3 billion and is comprised of 94% self-originated whole loans, 5% mezzanine loans and 1% B-notes.

During the third quarter of 2014, RSO closed new loans with commitments totaling $144.3 million, bringing total new loan originations through the third quarter of 2014 to $475 million. In addition, in October alone, we closed new loans with commitments totaling $166.7 million. The aggregate balance of RSO's 2014 new loan originations through today is over $641 million, inclusive of future funding commitments.

We are also in the process of closing additional new loans with an aggregate committed balance of approximately $95 million. And provided that everything in process closes, RSO's new loan production activity through the first 10 months of 2014 will stand at $735 million as we begin November, which has historically been our top month for loan production.

RSO's origination activity to date of $735 million compares to $348 million for all of 2013, which is a 111% increase over that full year. We are well on track to exceed the high range of our initial new loan origination guidance for 2014, which was between $600 million and $700 million.

As we look to our forward pipeline, it remains strong and continues to grow. We currently have approximately $500 million of new lending opportunities with applications issued and under negotiations, quoted or through preliminary screening and in underwriting and structuring. While we have seen significant growth in our new loan production, we remain extremely focused on credit and property values and are holding to the strict valuation metrics, sponsor experience, asset quality, and diversity standards that have been the hallmark of our traditional bridge lending program.

As Jonathan mentioned, we continued to support the growth in our new loan originations. Last Friday, we closed an upsized extension and modification of our term financing facility with Wells Fargo Bank. The size of the facility was increased from $250 million to $400 million. The current term was extended through August of 2016 with two one-year extensions at RSO's option, and our borrowing costs and debt yield requirements were reduced to reflect our cost of funds in our two securitizations and the market in general. Our Wells Fargo term facility now has a fully extended maturity date in August of 2018, which in addition to our $200 million term facility with Deutsche Bank provides RSO with $600 million of term facilities issued by our banking partners.

In addition to financing new loan originations, we will also continue to utilize our lines of credit to leverage the approximate future funding obligations of our loans. Optimal match funding of our loans and maximum returns on invested equity are realized when the commercial real estate -- when we access the commercial real estate CLO market as we did in December of 2013 and again in July of this year. Given the velocity of our new loan originations and the broad acceptance that RSO has gained as an issuer, we anticipate accessing the CRE CLO loan market more frequently.

As demand for our floating-rate bridge product and other customized financing solutions continues to be robust, we have been adding personnel and growing our long-established national direct origination platform. In addition, we continue to look at adding other products to our platform as we continue to expand and look to be a total solution debt provider for our borrowers.

We continue to see improving metrics across all asset classes with the majority of the properties securing our loans continuing to trend in a positive direction. The upward performance of our portfolio is a daily reminder that validates our keen focus on the credit first and market centric approach we apply to our origination process. We are very particular about the markets in which we lend and while additional markets continue 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, we are lending on lightly transitional properties. We still continue to target properties with stabilized projections that stand up to rigorous stressed underwriting and verification, day one cash flow coverage and meaningful sponsor equity. We note improving credit metrics in all asset classes represented in our commercial loan portfolio. The majority of the properties securing our loans are continuing to realize improved cash flow with borrowers' plans for value creation well on track. I am once again pleased to report that the entire commercial real estate portfolio is performing with no defaults.

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

Thank you Dave. Now I will ask Dave Bryant, our CFO, to discuss our financials.

Thank you Jonathan. Resource Capital Corp. declared and paid a cash dividend for the third quarter of $0.20 per common share, bringing the year-to-date total to $0.60 per share. Our adjusted funds from operations, or AFFO, for the quarter was $24.3 million, $0.18 per common share diluted.

In determining AFFO for the third quarter, there were several non-cash adjustments that net to approximately $9.6 million and cash adjustments of $8.1 million. Year-to-date, our AFFO comes in at $0.57 per share diluted.

We passed all of the interest coverage and over collateralization tests in each of our securitizations that require such tests, including two legacy real estate CDOs and three bank loan CLOs. Please note our two most recent real estate securitizations are not subject to such tests.

Each of our financing structures performed well and generated strong cash flow to us in the third quarter. We had one and expect a second legacy CLO to liquidate in Q4 and early 2015 respectively. The capital returned to us will be recycled into newly underwritten loans. We closed our latest real estate CLO in July and fully paid off our CRE term facilities, and we ended Q3 with approximately $56 million of real estate loans on our term facilities.

The expansion of a real estate term facility from $250 million to $400 million was enhanced by a simultaneous rate reduction of approximately 25 basis points on most of this credit facility's borrowings. This increase in borrowing capacity will provide plenty of runway for our real estate loan pipeline, as outlined by Dave Bloom, and the rate reduction will help fuel our net interest income and cash flow from real estate operations.

In Q3 2014, we had a net increase of $1.4 million in provisions for loan losses. There was $803,000 taken on real estate loans, approximately $600,000 of which was for a legacy loan where the underlying collateral sold at a loss. The balance was taken on a mezzanine position that has been previously impaired but remains current with respect to debt service.

We also took a $236,000 provision on a loan related to a leasing fund that we took a preemptive write-down on and provisions of $427,000 on bank loans. We ended the period with $4 million in real estate allowances, $464,000 in bank loan allowances, and $936,000 on commercial finance loans. Overall credit has been excellent, and I continue to characterize our loan portfolio credit as very good.

Two bank loans for $2.3 million are delinquent out of a portfolio of $712 million, just 32 basis points. And all of our 65 real estate loans totaling $1.1 billion are current.

Our leverage stands at 1.7 times at September 30, 2014. When we treat our TRUPs issuances, which have a remaining term of approximately 22 years as equity, our leverage is 1.6 X.

With regard to real estate leverage, we ended Q3 at 1.77 times on our entire real estate portfolio, which includes cash earmarked for new real estate loan originations. Although our leverage came in at 1.7 times overall for both September 30 and December 31 of last year, we saw changes in the components of leverage. Net borrowings increased from our new real estate securitizations and real estate term facilities that helped fund that loan origination business. We also had increased borrowings from the consolidation of a new CLO, our new middle-market syndicated credit facility, and to a lesser extent from borrowings for our CMBS and RMBS assets. These increases to leverage were offset partially by paydowns and run-off of legacy CLO debt, legacy real estate CDO debt, and our 2013 real estate securitization.

In terms of equity, we continue to put to work the $116.2 million of net proceeds from our preferred C offering in June. Overall our weighted average effective cost on our three series of preferred stock is 8.75%.

Overall, our weighted average cost of capital as of September 30 on all sources of capital, including borrowings, derivatives, preferred and common stock, came in at 6.69%.

In terms of liquidity, after paying the third-quarter common and preferred stock dividends in late October, we have approximately $80 million of unrestricted cash as of October 31. We also have approximately $90 million available to fund our middle-market investments in the Q, and after expanding the real estate origination facility to $400 million, we have in excess of $470 million of financing available to fund a very stout pipeline of real estate loan originations that are in process.

We ended September 30 with GAAP book value of $5.21 per share, down slightly from $5.24 per share at June 30. At September 30, our equity is allocated as follows: commercial real estate loans and CMBS, 61%; commercial finance, 38%; and 1% in other investments. I note that we expect our real estate and CMBS equity allocation to rebalance next year to a range of 70% to 75%, which is our historical benchmark for that portfolio. We had one of our legacy CLOs liquidated last week, expect another to liquidate in December, and another in 2015. That combined with the continued ramp up of our real estate lending platform will increase our net equity allocated to that portfolio.

With that, I'll turn the call back to Jonathan Cohen.

Thanks, Dave, and thank you all. As 2014 is winding up with two more months left, we believe that it has been a year in which we have accomplished our principal business objectives -- first, to grow our real estate debt origination business while also maintaining excellent credit quality, thus generating a strong return on equity that provides our shareholders with a solid dividend and a total return. We continue to seek opportunities to generate solid returns on quality credit related products to supplement our principal commercial real estate lending businesses.

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

(Operator Instructions). Steve DeLaney, JMP Securities.

Thanks. Good morning, everyone, and thank you for taking the question. Jonathan, I'd like to start on the Northport middle-market lending activity. On Page 2 in the table, you show your originations, but you also show loan sales of $16 million. And educate me if you would. We are familiar with like some of the SBA programs where you originate and then maybe sell off a guaranteed portion. Is that what is going on here? Can you help me understand sort of the aspect of sales out of the middle-market portfolio?

Sure. And there will be fewer and fewer sales as we go on.

Okay.

Just in starting the business, those are broadly syndicated loans, mostly wider margin first liens as well as some second liens that we buy in the syndicated market. And occasionally, if prices rise or occasionally if we want to be defensive, we will sell those loans. And that's all that really refers to. As we get bigger, most of our origination is self-originated direct loans, and those will be held to maturity.

Got it. And of course, your new $125 million facility also helps in that regard too, I would expect.

Yes, absolutely.

Bigger picture on Northport, you guys had a great run with the syndicated bank loan market for many years. As you're creating this business with your new operating team there, is it your vision, Jonathan, that this operation will stay within RSO for the long-term, or is it possible that it will gain such scale that it would make sense for that to be a freestanding entity?

Sure Steve. First of all, it's not something -- we've been doing it with this team for well over a year now.

Yes.

And the team is first class by all regards. Second, we will see is the answer. As this thing grows, if it needs its own identity and its own balance sheet, it may do better on its own, and it also may do better within the context of a bigger specialty finance REIT.

Yes, okay. So we'll --

But we are certainly excited about it, given, especially given what's going on in CLOs where we think the new rules, as they take place, as they take hold over the next 18 months to two years, will create a lot of opportunity for these types of companies.

And that's a great segue to my next question. So, you put your $125 million syndicated facility in the middle-market just like you have Wells supporting your on an interim basis for CRE. Is there -- and I think you may have answered it. I was going to ask if there was an ABS or some type of securitization long-term take out for these middle-market credits.

Typically, we are only going to leverage these things 30% to 50%.

Okay.

So, typically we will keep them on a line. The line will grow as we grow, and then eventually we will access for instance the longer-term yield markets.

Got it, okay, just from a corporate financing standpoint.

Yes, exactly.

Got you. Okay. And then lastly, thank you for the -- you gave us some 2015 outlook for AFFO.

Yes.

I'm just curious if you can say anything about, given the structure there, the $0.70 to $0.80, is there anything you can say about the board's view with respect to the current $0.20 dividend rate?

Not really, but we will be providing dividend guidance in December as 2015 becomes even clearer.

Okay.

We gave a relatively tight range of $0.70 to $0.80, which is a 13.5% return on book value to about a 15.2% return, and both of which we think are very strong dividends. That being said, as everybody knows, my inclination has always been to hand out what we earn. So if AFFO is closer to $0.80, then we will be at the $0.80 level. If it is closer to $0.70, we will be closer to the $0.70.

That's great. Jonathan, thank you for the color.

Jade Rahmani, KBW.

This is actually Ryan Tomasello on for Jade. Thanks for taking my question. I was wondering if you guys could discuss the recent market volatility, the competitive outlook, and whether you've seen any spread widening or increase in yields and all in if you view this as an opportunity that RSO can take advantage of.

I'll really let Dave Bloom address that from the real estate standpoint.

The recent spread widening, there was two weeks of fairly significant uncertainty not impacting the floating-rate market as much. We always get the best spread that we possibly can. We are not in a position where, because everything floats, where we are going to adjust as rapidly, but yes. We did see a pull-back from CMBS and we did see a tick up and people coming to us based on that volatility. Things have settled down. I think, in the secondary market, that ripple effect hasn't really taken place yet, but things appear to be a lot more stable, but we are still seeing record transaction volumes and keeping our spread relatively high compared to peers.

I just might also add that I would say our lending is really a very safe senior secured high quality property lending, kind of lightly transitional. Therefore -- and with some size. So, we do compete against a couple of people, but we have incredibly good relationships with borrowers where we have been with them for five years, 10 years, three years, on five properties, two properties, one property, etc. So, we are not -- they are not necessarily nickel and diming us on the direct side. So it's a very happy place to be.

At the same time, we've had a lot of support and I commend Dave Bloom and his team for their great relationship, given -- with Wells Fargo and others, because we did see rates on the Wells Fargo line come in about 25 basis points. And of course, we are rewarded in the securitization market by having rates come in significantly from our first securitization or second securitization, and I think we're going to continue to see that.

Okay, great. Thanks. That's really helpful. And then switching gears, in the past few periods, you've reported some paper gains from the reissuance of debt that you've bought back over the past few periods. And I was wondering if you could give any color as far as how much more debt that there still is to be sold, and how we should think about forecasting any additional gains coming from that.

You really should think about it in terms of when we get repaid loans from -- that pay back bonds that we bought in our securitization, which we previously took into GAAP income. So, they are in our net income; they are in our book value. They simply at that point are recognized as cash gains. So, I don't know how much is slated for 2015, but I would assume -- coming to AFFO now, maybe $5 million? It's not a huge number.

It might not be a huge number next year unless there's an opportunity --

Yes, I'm saying 2015.

And is that thinking already baked into your AFFO guidance, or --

Yes, the natural pay off -- so for instance, if we have a loan that's in our REF CDO 2006 and we have bonds that we know will be paid off because of that loan, and we get a certain amount of that that's baked in and I think it's a relatively de minimis number at this point.

That's right.

Okay, great. Thanks for that color. And then just one last question. I know you guys walked through the increase in the provision this quarter, but I was just wondering if you could quickly touch on that again. And would you guys expect an increase in the provision going forward due to any more assets that are on watchlist?

We don't really have that sort of expectation. The one big adjustment this quarter was we had written down a Loan last quarter that settled in Q3. And when it settled, it settled for slightly less than we thought it would. There were some costs of the property actually transacting, and that collateral came in at about $600,000 less than we expected. We have no other such loans that are slated to be liquidated at losses. We did take some provisions on bank loans for one of the legacy CLOs that liquidated and prices came in slightly less than what on our books were, but we have no definite expectation there. We are looking at loans where we are worried about collectability.

Okay. Great.

I just wanted to add just on what's included in 2015, we have not included any of our sales of what we call book builders, things that we've invested the equity in, we've funded a business or we funded a specialty finance portfolio where we think we have gains. So those are not embedded in those numbers, so we expect those numbers to come through not only AFFO but also through net income. But as of now, they are not embedded in what I gave you.

Okay, great. Thank you.

Richard Eckert, MLV.

Thank you for taking my call. Just a quick question. The allocation to commercial real estate, 61%, seems to me that's well below your targeted range. And if I recall correctly, that was 80% to 85%, and now you're talking 70% to 75% for next year. Does this mark some kind of shift in strategy or shift in thinking?

No. And I think we are probably being pretty conservative being at the 70% to 75%. I would think of it as closer to 80%-plus. And it just may be the shift of when assets come on that are changing that number. It's not a shift in strategy at all.

Okay. So, when can we expect to see it tilt back toward commercial real estate? Fourth quarter?

I think it's already tilting. And for instance, in the first month of October, we put on I think close to -- what was the number?

$166-some-odd million of --

$166 million of new real estate, so --

And that's actually been funded?

Yes, that's actually been funded in October. October is over.

Okay.

So, it's funding back. It really just had to do the quarter end and where we ended. But I would expect that number to be north of 75% with the hope of being north of 80%.

Okay, thank you very much.

Matthew Stovall, Pyro Capital Management.

Hey guys. Great job on the origination front. So, it seems like, given your robust origination levels, it would be favorable to adjust your dividend payout ratio so that you have increased capital to fund this origination growth. What are your thoughts on this?

As I mentioned before, Matthew, I think the board will be looking at this over the next two months as we get closer to 2015. And if we need capital, then that will be certainly part of the discussion.

Okay. Because it seems like your 2015 AFFO guidance, as you sort of alluded to, you could still pay an attractive dividend relative to your peers while retaining some cash to grow. At least, that would be our take.

Yes, that's correct.

Okay, great. Thank you guys, appreciate it.

(Operator Instructions). Sir, you have no more questions at this time, so I'd now like to turn the call back over to Jonathan for closing remarks.

Okay. Thank you very much and we really appreciate the support. Let us know if you have any questions and we are available.

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