Acres Commercial Realty Corp (ACR) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 and year-ended December 31, 2014 Resource Capital Corp earnings conference call. My name [Jayman]. I will be your operator for today. At this time, all participants are in listen-only made. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder this call is being recorded for replay purposese.

I would now like to change the call over to Mr. Jonathan Cohen, President and CEO of Resourse Capital Corp. Please proceed sir.

Thank you for joining the Resource Capital earnings conference call for the fourth quarter and year ended December 31, 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 you use 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 1A on the Form 10-K report under the 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 obligation 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 fourth quarter and year ended December 31, 2014. Adjusted funds from operations, AFFO were $0.17 in the fourth quarter and $0.73 for the year per share diluted. During calendar year 2014 we originated over $775 million in new commercial real estate loans representing record production levels since inception, and an increase of approximately 123% year-over-year. This exceeded the midpoint of our 2014 guidance of $600 million to $700 million by over 20%. During the fourth quarter of 2014, we originated $302.3 million in new commercial real-estate loans including future funding commitment, our highest production level quarter on record. To help fuel our growth in commercial real-estate loan origination in October 2014 we increased our Wells Fargo commercial real estate term facility by 60% from $250 million to $400 million and extended the current term to August 2016, while maintaining to one-year extension at our option, which carries the final maturity of the facility to August of 2018. In February of 2015 we closed a $346 million commercial real-estate securitization at a weighted average cost of LIBOR plus 190 basis points. We expect to earn 17% to 19% on our invested equity over the life of this CLO.

This is our third securitization in 14 months through which we have financed just over $1 billion of mortgage assets. Our middle-market lending group Northpport Capital originated almost $218 million of loan in 2014, including a record of $88 million of originations in the fourth quarter. Book value per share was $5.07 as of December 31, 2014. We paid a dividend of $0.20 per share on January 28, 2015. We continue to anticipate that AFFO will be approximately $0.70 to $0.80 per share. In my opinion, this quarter would have been even better without the wild swings in the 10-year treasury, which hurt our residential mortgage -- our nascent residential mortgage business to the tune of almost $0.04 per share.

With those highlights all the way, I will now introduce my colleagues. With me today are Dave Bloom, Head of Real-Estate,Dave Bryan, our Chief Financial Officer and Purvi Kamdar, our Vice President of Investor Relations. Our real-estate team has done a tremendous job in my opinion. In both growing commercial real-estate loan originations and accessing the securitization market substantially lower spread that had been previously seen in this market. We exceeded the high end of our 2014 guidance of 600 million to 7 million in commercial real-estate loan closed in 2014 with over $777 million in loans. That reflects over a 123% increase over 2013 origination and approximately 326% more than we originated in 2012.

We've accomplished this impressive growth without sacrificing credit quality, which remains excellent. As confirmed by our stellar securitization results. Our increased originations helped increase our net interest income by 43% in comparison to the year-ended December 31, 2013.

Our most recent securitization commercial real-estate 2015 three close this week with a weighted average cost of funds of LIBOR plus 190 basis points. Our ability to access the securitization market and secure a low rate, non-recourse term financing has enabled us to continue to generate solid high teens returns on equity on our commercial growth in lending. In the last 14 months, we have now securitized three deals with over $1 billion and issued $770 million of highly weighted senior notes to an array -- a wide array of outside investors. We expect the weighted average return around 17% to 19% on our retained equity in these transactions. We look forward to structuring more deals and accessing the securitization market in the near future. We've also seen a terrific launch of Northport Capital, our middle-market lending group.

Just over a year ago, we started to focus at commercial -- our commercial finance business on the middle-market corporate segment. In that period of time we've already originated over $371 million of loan. While growth is important, we remain extremely focused on maintaining credit quality and we have done so. 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, 24 basis points on trailing three years and reflects our strong focus on originating commercial real-estate loans with strong, strong credit profile. Equity investments in our securities available for sale continue to benefit from sound credit fundamentals. We saw our fair values on these securities move up from an unrealized loss of 3.1 million at the end of 2013 to an unrealized gain of 15.4 million this period, an increase of 18.5 million over the year.

We expect to opportunitistically harvest some of these unrealized gains in 2015. Our liquidity remains strong. We had approximately $80 million of unrestricted cash as of December 31, 2014, and we issued 100 million of convertible notes, senior notes in early January to fuel our growing investment portfolio in 2015. As for 2015, we feel confident about our ability to generate AFFO of $0.70 to $0.80 and distribute at least $0.64 in dividend. I believe that our origination machine. It's just warming up and will power us to new levels of profitability.

Now, I'll ask Dave Bloom to review our real-estate activities.

Thank you, Jonathan. Resource Capital Corp's committed commercial mortgages and CMBS portfolio has a current balance in excess of $1.8 billion in a diverse and granular form. The underlying collateral base securing RSO's commercial mortgage portfolio continues to be spread across the major asset categories in geographically diverse markets with the portfolio breakdown of 45% multi-family, 20% office, 16% hotel, 15% retail, and 4% other such as mixed used deals. The commercial mortgage portfolio is comprised of 80 individual loans with an aggregate committed balance of approximately $1.6 billion and is comprised of 95% self-originated whole loans, 4% mezzanine loans and 1% B noted.

During the fourth quarter of 2014, RSO closed new loans with commitments totaling $303 million, bringing total new loan production for calendar year 2014 to $777 million, both of which were record production for RSO. In addition, since the start of 2015, we have closed to new loans with commitment totaling $112 million. We are also in the process of closing additional new loans with an aggregate committed balance $51 million. Provided that everything in process closes RSO's new loan production activity for the first quarter of 2015 will total $163 million, which would be at 39% increase from the first quarter of 2014.

RSO's origination activity of $777 million for calendar year 2014 compares to $348 million in 2013, which represents a year-over-year increase of 123%. Our origination pipeline remains full and continues to grow. We currently have approximately $600 million of new lending opportunities with applications issued and under negotiation quoted or through preliminary screening and an underwriting and structuring. Taking into account last year's total new loan originations and considering loans already closed and in process this year as well as our pipeline of new loan opportunities, we currently anticipate new loan originations for 2015 between 800 million and $1 billion dollars. We've experienced substantial growth in our new loan production and are again projecting increased volume for 2015. That said, we've continued to emphasize credit quality through the application of strict evaluation and cash flow metrics as well as conservative assumptions. Our core lending philosophy still places the ultimate premium on asset quality, location and business plan as well as sponsor experience and financial strength.

In our origination efforts, we are at all times mindful of concentration issues and strive to maintain a granular portfolio make up with asset type geographic and sponsor diversity. It is emblematic of this focus and diversification that the $777 million of new originations last year were comprised of 35 separate loans. As Jonathan mentioned, on February 6 we successfully price RSO 2015-CRE 3 our third CLO in 14 months, which closed this past Tuesday, February 24. Starting with our first CLO in late December of 2013, we have financed over $1 billion of collateral through these transactions at a weighted average cost of LIBOR plus 1.74% and weighted average leverage of 77.24%. RSO's weighted average annual yield on the retained equity in our three CLOs is between 17% and 19%.

We will continue to utilize our $600 million term financing facilities to support the growth of our new loan originations, and we plan to access the CLO market to optimally match fund our assets on a regular basis. We know improving credit metrics across all asset classes represented in our commercial real-estate loan portfolio, the majority of the properties securing our loans continuing to realize improved cash flow with borrowers' plans for value creation well on track. I am once again pleased to report the entire commercial real-estate loan portfolio is performing with no defaults.

We continue to see improving metrics across all asset classes, with the majority of the property securing our loans continuing to trend in a positive direction. The positive performance of our portfolio is a daily reminder that validates our books and credit and structure as well as the selectivity we applied to asset classes, markets and sponsors in our origination process.

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

Thanks, Dave. Now, I'll ask the other Dave, Dave Bryan, our Chief Financial Officer to discuss our financials.

Thank you, Jonathan. Resource Capital Corp declared and paid a cash dividend for the fourth quarter of $0.20 per common share, bringing the 2014 total to $0.80 per share. Our AFFO for the quarter was $21.7 million or $0.17 per common share diluting. In determining AFFO for the fourth quarter there were several non-cash adjustments that net to 8.2 million and cash adjustments of 9.9 million. Our 2014 calendar year AFFO comes in at $0.73 per common share diluted.

In terms of income statement presentation, I'd like to highlight that we reclassified several line items to other income expense in Q4. One other income expense is added to total revenues, we get to 32.5 million for the quarter and $125 million for the year. We passed all of the interest coverage and over collateralization tests in all of our securitizations that require such tests including two legacy real-estate CDOs and two remaining bank loan CLOS. Please note our three most recent securitizations are not subject to such tests. Each of these financing structures performed well and produced healthy cash flow to us in the fourth quarter. We had one of our legacy CLOs liquidity in Q4 and another two will liquidate during 2015. The capital from these liquidations will be recycled into newly-underwritten loans.

The increase in borrowing capacity on our real-estate term facility provides plenty of runway for the robust real-estate loan pipeline and the correlated rate reduction of 25 basis points will help our net interest income and cash flow from real-estate operations as we warehouse these loans. We ended Q4 2014 with availability of $392 million on our real-estate term facilities combined. And 70 million on our CMBS term facility. At the closing of our latest securitization, a few days ago we repaid $214 million and now have available $512 million out of a total capacity of $600 million on our two real-estate term facilities. In the fourth quarter, we had a net increase of 3.5 million in provisions for loan losses. Most of this increase came from a $2.9 million charge, that we took on bank loans related to the liquidation of a legacy CLO namely Apidos I. This expense was essentially offset by unrealized gains of $3.2 million that are recorded elsewhere on the income statement. So this is simply a matter of geography on the income statement, not an ongoing credit concern. We also took 293,000 provisions on our two other legacy CLOs and a $360,000 provision on a loan related to leasing asset. We ended the period with $4 million real-estate allowances and $569,000 in bank loan allowances. Overall, credit has been excellent and I categorize our loan portfolio credit as very benign. Two bank loans wer $1.4 million are delinquent out of a portfolio of $323 million, 41 basis points and all 78 of our real-estate loans are current.

Of note, in Q4, we were able to sell off two remaining real-estate properties for gains of $3.2 million, bringing 2014 gains to 6.1 million. We also recorded gains in Q4 of about a million dollars on a joint venture that we originally invested back into 2010, that targeted distressed multifamily properties. This was the final disposition in that joint venture, which has performed very well for us. Our leverage stands at 1.8 times at December 31. When we treat our TruPS issuances, which have a remaining term of 22 years as equity, our leverage is 1.7 times.

With regard to real-estate leverage specifically, we ended the year at 1.77 times on our entire portfolio, including cash allocated to new real-estate loan originations. The growth of total assets on our balance sheet year-over-year from $2.2 billion to $2.7 billion reflects the impact of our focus on growing our interest income producing asset base. We saw our total leverage slightly increase from 1.7 times at December 31 of 2013. And we saw changes in the components of leverage, which is correlated to the growth in our assets. Net borrowings increased from our new real-estate securitization and real-estate term facilities, that of course helped fund our loan origination business.

We also had increased borrowings for our CMBS and RMBS assets, our new middle market syndicated credit facility and to a lesser extent from the CLO we consolidated. These increases to leverage or offset partially by paydowns and run-off of the legacy CLO debt, legacy real- estate debt and our 2013 real-estate securitization. In terms of equity capital, we invest virtually all of the $116 million of net proceeds from our preferred see offering in June of last year in new assets. Overall, our weighted average effective cost on the three series of preferred stock is 8.77%. Overall, our weighted average cost of capital as of the end of the year on all sources including borrowings, derivatives, preferred and common stock were 6.52%.

We ended the year with a GAAP book value of $5.07, down from $5.21 per share at September 30. At December 31 our equity is allocated as follows. Commercial real-estate loans in CMBS 67%. Commercial finance 29% and 4% in other investments. As we have previously stated, we expect our real-estate in CMBS equity allocation to rebalance in the coming year to a range of at least 70% to 75%. This trend will continue in Q1 as one of our legacy CLOs liquidated in January, returning $30 million to us. This equity will be invested substantially and that healthy loan pipeline from our CRE lending platform.

Our emphasis on high quality credit combined with our conservative use of leverage has grown our balance sheet in a meaningful way in 2014, while maintaining our core focus on providing attractive cash returns relative to book value to our shareholders. We look forward to furthering the progress we made in 2014 and are off to a good start in 2015.

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

Thank you. Looking back on 2014, we believe that this had been a year in which we have accomplished our principal business objectives, to grow our real-state originations successfully executing the securitization market, increase our middle-market lending business, while maintaining excellent credit quality thus generating a strong return on equity that provides our shareholders with a solid dividend and total return on the investment.

We continue to seek opportunities to generate solid returns and credit quality on quality credit related products to supplement our principal commercial real-estate lending business and we are off to a good start thus far in 2015 to further to furthering these objectives. I think you will see net income increase and dividend coverage materialize.

With that I will open the call for any questions. Thank you.

Thank you. (Operator Instructions). Steve DeLaney from JMP Securities.

Good morning everyone, thanks for taking my question. So, the first quarter dividend, we should assume that will be declared by the Board in mid March and are we still looking at that range that you announced in early January of $0.16 to $0.18?

Yes, we are.

And your AFFO guidance for 2015 of 70 to 80, I'm just curious what LIBOR rate assumptions might be in there for the second half of the year if in fact the Fed starts raising rates here, mid-year, you know we don't exactly what they will do or how fast, but I guess where I'm going is, if you could comment, on which of your assumptions for rates are in your projections, but also looking forward, you have any sense for -- you're really focusing on the senior floating rate loans with the match funded CLOs structures. And I'm just curious if you could estimate how much your or we might improve or your AFFO might improve that if say LIBOR was 100 basis points higher than it sits today?

I think that we would be making more money at that, 100 basis points up. I can't really quantify that for you because there are loans that have LIBOR floors of 50 basis points and 100 basis points. So we wouldn't really be making now much more on those loans, but that being said, we have a lot of loans that don't have LIBOR floors. So we will be making more loans on that. My [guidance] would be any kind of modest rate increase will be really not that effect -- it wouldn't affect us one way or another much. If rates increased 100 basis points to 200 basis points, I think we will be making more money as long as of course, the economy remained robust and credit quality remained excellent the way it has been.

As far as assumptions, we assume fairly you know, conservative approach of just using the the curve of LIBOR futures.

So nothing too dramatic in -- that may not be realized as well. And then as far as the bank loan portfolio, I think you were down to -- these are the syndicated bank loans, down to $330 million. Can you give us a sense of how for modeling purposes, maybe how we should be running that off over the next several quarters?

Yes, Steve. This is Dave. I would say that about a third of that will run off sort of mid-year June likely date. And then the balance of it you know probably maybe a little less than the third maybe more like 25% on the first point and then maybe 250 million or so will be around for a while that reinvestment period just ended this past May. So, that typically would run off over, say a 3 to 4-year period. Almost ratably.

So you're still going to have some of that around benefiting earnings over the next couple of years?

Yes, we will probably just put some detail on that. We will probably call that securitization, I would say probably within the next 18 months. At some point it will make. May be sooner.

Okay. We will start to know how to make the adjustment in mid year June. That's helpful. My last comment would be this, you guys give great detail on your loan portfolio as far as both geography and industry. You do have 27% of your loans in Texas and I was just curious if you can make any comments you know as far as sub-markets and how well you feel your position relative to any weakness we might get in the energy industry affecting some Texas markets?

We've done an extremely detailed analysis of our exposure in Texas and we have here clear of sort of energy corridor office buildings. The majority of our investmentst there are value add, Class B multies that really cater to people with incomes between $40,000 and $70,000. Not energy sector workers. We've gone through the office buildings we have in Dallas looked that we have no energy exposure there. We feel extremely well insulated from what's going on there. We've also done a lot of other research study what the Dallas Fed had to say and and really looked with energy where it is now, even if it's been under lag down. The overall economy, we can talk about Houston or Texas in in general is it's extremely diverse. Our assets I think are well insulated from that one industry.

Jade Rahmani from KBW.

I was wondering if you could comment on the current investment environment, and whether you saw any spread widening in the fourth quarter as a result of volatility if that created any unique opportunities or if you think generally loan spreads continue to tighten?

I think on the -- just a general feeling is that in multi-quality, decent multi even kind of value add B type stuff, you continue to see spreads where they were or even slightly tighter in kind of some other asset classes, I think you've seen kind of spread tightening stop a little bit, but not much. And on the corporate side, you are seeing a little bit of widening for riskier assets.

And can you comment on the or provide some color on the types of loans you are originating right now, just a sense for the range of loan yields that you right to and also how LTVs have trended say quarter-over-quarter?

I thinl LTVs have stayed pretty much where they were. In some cases it is you know again property specific. I think in general, maybe Dave should comment on this.

Sure. I mean, looking at our -- looking at the tapes from our last two securitizations, our weighted average LTVs are if you're in the low 70. We've -- feel very comfortable. So we really not been pushing leverage. Again John that spreads are really kind of holding, which -- here holding lines on spread and on structure, I mean just to give you a sense like, we've been between 4.5% and 6% plus for depending on the asset type low 70s average LTV probably is very consistent today with where we were a year ago.

And are sectors in the market that you feel are overheated or where you're increasingly cautious?

I would say we're increasingly cautious on LTV in the multi-area. And we're also -- and we've always been this way, incredibly cautious on hotel.

Just turning to the repurchase debt, how much remaining embedded gains are there from months previously repurchased?

Jade, this is Dave Bryant. I would take that in $40 million range, probably a little bit more, but at least $40 million.

And that would be the aggregate amount of gains that could be realized over say the next 12 to 18 months?

Probably a little more term in that.

Yeah, probably over next three years. Just to remind you that these are not gains -- these are gains for AFFO purposes, we get the cash, but not being for book value purposes?

Richard Eckert from MLV & Company.

First, a couple of housekeeping items. On the press release there is whole loan production of $265.4 million and if I add 46.5 to that in unfunded commitments, I get something like a little over $310 million not 302 million. Is there something Imissing in there?

Yes. Part of that number includes 9.6 million of funding of commitments, which were originated prior to this year. (mulitple speakers). That's okay Richard that put down to the 302.

Also while having on the line David Bloom, you said that the execution on the latest CLO was LIBOR plus 190. If I recall correct, the last one over the summer was LIBOR plus 130. Is there something special about that summer issuance?

You got to remember that each one has its own leverage. So this was more levered than that was. So we put that equity in so you can compare one rate to the other rate.

Just curious what the difference was. Back to David Bryant, I know something like a team (inaudible) here, but this is like the fourth quarter in a row, the allocation that CRE is falling below 70%. And I'm just curious as you know, I'm ever going to see it above 70% again.

Rich you will see it. The fourth quarter was one where we put a lot of equity into the middle market because we had only a certain amount of debt capacity there. And this will shift around over the next couple of quarters. Yeah, just be patient with us.

I can go over these laundry list items now, I mean later with David, but just curious

I just wanted to point out that when the percentage of equity allocated to real-estate it moved through that 61% at the end of Q3 to 67%, at the end of Q4 or so that trend will continue into 2015.

Okay. That's encouraging. Just of the many one-off items that stuck out and you'll be tax benefit of 1.5 million considerably larger than that recorded in the previous two quarters. Is there any one particular item that pump that number up?

What I would say Rich is that because we had losses in some of the taxable subsidiaries, partly in their resident business that John highlighted in and in some other areas that's what created that tax management. That will realize as those businesses become profitable in future periods.

Thank you. I would now like to hand the call over to Mr. Jonathan Cohen for closing remarks.

We thank you very much and we look forward to reporting next quarter. Be well.

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