Acres Commercial Realty Corp (ACR) 2016 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q1 2016 Resource Capital Corp. earnings. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). I would like to remind everyone that this call is being recorded.

I would now like to turn the conference over to your host, Jonathan Cohen, President and CEO of Resource Capital Corp. You may begin.

Thank you. Thank you for joining the Resource Capital Corp. earnings conference call for the first quarter ended March 31, 2016. I am Jonathan Cohen, President and CEO of Resource Capital core. Before I begin, I would like to ask Purvi Kamdar, our Director 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 statement. This 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 in the Form 10-K reported under the title "Risk Factors". Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update any of these forward-looking statements.

Furthermore, certain non-GAAP financial measures will be discussed on this conference call. Our presentations of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with the Generally Accepted Accounting Principles can be accessed through our filings with the SEC at www.SEC.gov.

And with that, I'll turn it back to Jonathan.

Thank you Purvi. First, a few highlights on the quarter ended March 31, 2016. Adjusted funds from operations, AFFO, was $0.47 per share diluted. Since the inception of the common stock repurchase program in August, we have repurchased nearly 8% of our outstanding common shares through March 31, 2016.

Net interest income increased $1.6 million, or 7%, as compared to the three months ended March 31, 2015. RSO as a company liquidated its investment in RREF CDO 2006-1, a commercial real estate CRE CDO, on April 25, 2016, and received the remaining collateral of $66.3 million in exchange for its remaining interest after paying off the CDO debt.

GAAP net income allocable to common shares was $0.31 per share diluted. Adjusted for the residential mortgage servicing right mark-to-market, it would have been $0.39 per share. Economic book value was $17.73 and we paid a dividend of $0.42.

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 Director of Investor Relations.

Earnings from our core commercial real estate business were strong this quarter, and we expect them to be stronger prospectively. We also saw good performance from Northport, our middle-market corporate credit business. We continue to see stable credit statistics exemplifying the results of prudent lending through rigorous underwriting.

Our existing term financing facilities and CRE securitizations give us certainty in our financing sources at attractive spreads as we see the markets reprice risk across all sectors. During the first quarter, we had nearly $50 million of CRE loan originations, including funding of obligations of existing loans as we focus on liquidating and refinancing properties and positioning the Company for solid originations. We expect our originations to be in the range of $400 million to $600 million for 2016, mostly taking place in the latter half of the year.

As we have stated previously, we have been committed to repurchasing our securities. Since the inception of our buyback program through the end of the first quarter, we have repurchased almost $37 million of our securities. The Company repurchased over $33 million of its common stock, which represents approximately 8% of outstanding common shares. We have also bought back approximately 3.5% of our outstanding Preferred V shares.

In the quarter, we saw significant opportunities to generate yields for our shareholders via our share repurchase plan and executed on common share repurchases that were accretive to book value by $0.13. We look forward to continuing this in 2016 if those opportunities present themselves. Accordingly, on March 15, our Board authorized a repurchase plan of up to an additional $50 million of the Company's outstanding securities.

During our last call, we stated that we would begin to recycle capital from our legacy CRE CDOs and bank loan CDOs over the next year. Last week, we called and liquidated our investment in RREF CDO 2006-1, our first CRE CDO which closed in August of 2006 and had $345 million of assets at closing. We received the remaining collateral of $66 million in exchange for our equity interest after paying off the CDO debt.

I want to note that this securitization which invested just before the beginning of the great financial crisis paid every bond in full and on time. It never failed an interest coverage or over collateralization test. We think that's a remarkable achievement for a transaction of its vintage and we are proud of that.

As we have previously indicated, we believe that Northport, our middle-market lending business, is ultimately not optimized by being a REIT subsidiary even though the business continues to perform very well and we are very proud of its profitable growth to scale in just over two years. In the fourth quarter, Northport received $105 million of repayments, which resulted in $2.6 million of prepayment fees, providing capital for us to recycle into our business. As we focus on reallocating our capital to our CRE lending business, Northport's assets were reduced from $376 million to $322 million during the quarter, and we anticipate further reductions. We are exploring several options in which we can give it a better structure outside of a REIT and expect to have clarity on this in the near future. When we do so, the capital currently allocated to Northport will be redeployed into our core CRE business.

I also want to update you on our residential mortgage business, Primary Capital Mortgage, or PCM. In March and April, PCM operated profitably, except that we were required to mark our mortgage servicing rights to market and thus we took a $2.5 million non-cash reserve. The MSRs are continuing to provide volatility to our financial statements, and we will review our strategy with respect to them. While this operating segment impacted our net income for the quarter, it has achieved operating profitability and we think it will contribute to net income going forward.

Please note that, between dividends and share repurchases, we returned over $29 million to our shareholders in 2016 Quarter 1. We remain steadfast in our commitment to maximizing shareholder value. We are reiterating our guidance of at least $2.65 per share of AFFO, and at least $1.60 per share of GAAP net income.

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

Thank you Jonathan. Resource Capital Corp.'s committed commercial mortgage and CMBS portfolio has a current balance in excess of $1.85 billion in a granular and diverse pool. RSO's commercial mortgage portfolio is 100% self-originated and is comprised of 88 individual whole loans with an aggregate committed balance of approximately $1.8 billion.

The underlying collateral base securing RSO's commercial mortgage portfolio is in geographically varied markets with loans secured by assets in major use categories. The portfolio is broken down as follows: 42% multi-family; 21% office; 21% retail; 15% hotel; and 1% other such as mixed-use properties.

Since the start of 2016, we closed $56.1 million of new loans. Over the trailing 12 months ending March 31, RSO originated $642 million of new loans, inclusive of commitments for future findings across 35 separate positions.

On our last call, I explained that, in the fourth quarter of last year, although we remained in the market, we pulled back on originations due to what we felt to be a significant mispricing of risk in our long-established bridge lending business. We continued to take a measured approach to new originations as the market has been recalibrating.

During the first quarter, we were focused on increasing equity for new loans through liquidating lower leverage legacy securitizations, which allow us to originate new loans at our midteens return targets. As Jonathan mentioned, in late April, RSO liquidated our 2006 securitization, received our equity interest in approximately $66 million of collateral that is in the process of being optimally financed. This will free up equity to invest in new loans as well as increase the return on the existing collateral during its short remaining duration.

RSO's 2007 securitization is also being prepared for liquidation, and as with the liquidation of the 2006 transaction, through the proper re-leveraging, we will again optimize returns of any remaining collateral and unlock equity that will be used for new originations.

In general, the CMBS market still remains volatile, and as I have stated in the past, while we do not originate any long-term fixed-rate loans for the securitization market, CRE CLO price tends to track the broader CMBS market. As CMBS markets continue to firm, we contemplate our return to the CRE CLO market.

RSO has been the most prolific issuer of CRE CLOs and has term financed approximately $1.5 billion of collateral in four separate transactions from December 13 (technical difficulty) December 2013 through August (technical difficulty) 2015. The RSO deals were well received by the market and have had a total of 38 separate institutional investors that participated in our CRE CLO transactions. As this market continues to return, we will again access it to efficiently term finance our new loan production.

As I have previously noted, RSO is not dependent on capital market exits in the CRE CLO market. We have a great deal of capacity on our term facilities with our commercial banking partners. To that end, I'm pleased to report that we are in the process of documenting a new $400 million five-year term financing facility with Wells Fargo which will replace the Wells facility that we have had in place since early 2012.

We are again actively building a forward pipeline of new loan opportunities and look forward to returning to a normalized pace of originations, ramping up through the second quarter. We currently anticipate 2016 origination volume to be between $400 million and $600 million.

We have remained active through the recent retrenchment and are seeing new lending opportunities increasing week by week. As banks are pulling back in overall direct balance sheet lending, and with the absence of floating-rate CMBS options, RSO is well-positioned as a bridge lending platform with over 10 years of history, and in excess of $3.5 billion of loans closed.

The wall of maturities from 2006 and 2007 CMBS loans will surely drive transaction volume for the next few years as many assets will trade to value-add buyers. In addition, the uncertain execution in the CMBS market is driving many owners with high-quality, stabilized properties away from long-term financing and towards short-term financing with certainty of execution.

Real estate fundamentals have remained largely in check, and we see an increase in demand for our core floating-rate bridge loan program. At this point, we feel the market is clearly moving towards us.

With market fundamentals playing in our favor, and the proven ability to term finance our loans in either CRE CLOs, or on facilities provided by our commercial banking partners, as RSO continues to allocate more capital to the core CRE platform, we are optimistic about growing net interest margins and overall profitability in a meaningful way.

Our primary focus remains, as always, on credit. Our core lending philosophy places the ultimate premium on asset quality, location, and business plan with significant focus on sponsor experience and financial strength. Once again this quarter, RSO's 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.

As always, thank you Dave Bloom. Now I will ask Dave Bryant, our CFO, to discuss the financials.

Thank you Jonathan. Resource Capital Corp. declared and paid a cash dividend for the first quarter of $0.42 per common share. Our adjusted funds from operations, or AFFO, for the quarter was $14.7 million, or $0.47 per common share, a payout ratio of 89%.

In determining AFFO for the first quarter, there were several non-cash adjustments that netted to approximately $5 million. These non-cash items included amortization of deferred costs and discounts on our convertible senior notes, valuation reserves or residential mortgage origination mortgage servicing rights, and adjustments related to share-based compensation.

The deconsolidation of our two legacy real estate CDOs, RREF 2006 and RREF 2007, and our one remaining bank loan CDO, Apidos Cinco, resulted in a reclassification of the assets, interest rate swaps and debt held at December 31 to what is essentially a net amount representing available for sale securities held in each CDO. Accordingly, we recorded the required adjustments for estimated fair value through retained earnings, and will record income on a net effective yield basis on these investments going forward.

We pass all of the interest coverage and over collateralization tests in each of our securitizations that require these tests, including the deconsolidated real estate CDOs and remaining bank loan CLO. Our three most recent securitizations, one in 2014 and two in 2015, are subject only to over-collateralization tests which we have comfortably passed. These structured finance vehicles again performed well and produced healthy cash flow to us in the first quarter. We now have total capacity of $650 million on our real estate term facilities and availability of $392 million as of March 31.

We see that our commercial real estate portfolio is now comprised of 100% self-originated whole loans, and this core business is providing us with several benefits. We have a strong track record with the credit quality on our originated real estate loans. We also have weighted average LIBOR floors of 27 basis points on $1.4 billion of loans of which $1 billion are in our four real estate securitizations and have terms remaining from 1 to 4.5 years and a weighted average floor of 0.29%. This means that any potential increases in LIBOR will be accretive to our earnings.

In Q1, we booked provisions for loan losses of $37,000. We ended the period with $1.5 million in commercial real estate allowances and $2.7 million in middle-market loan allowances.

In terms of delinquencies, all of our $322 million middle market loans are current and as Dave Bloom mentioned, each of our real estate loans are current with respect to debt service payments due from our borrowers.

Our leverage decreased to 2 times at March 31 from 2.3 times at December 31, 2015. Most of this decline in leverage is due to the deconsolidation previously discussed. When we treat our trups issuances, which have a remaining term of approximately 20 years, as equity, our leverage is 1.8 times.

With regard to real estate leverage, we ended Q1 at 2.4 times on our entire portfolio, including cash earmarked for new real estate loan originations. We remain focused on getting our real estate equity allocation increased to a minimum of 75%. Overall, our weighted average cost of capital from all sources was 5.53% at March 31.

We ended the March 31 quarter with a GAAP book value per share of $17.12, down from $17.63 at December 31. We had earnings of $0.31 and so an accretive benefit of $0.13 per share from the share repurchase plan. We paid dividends of $0.42 per share and had a $0.55 reduction due to the deconsolidation adjustments, which we consider temporary, and picked up $0.02 from marks on securities and interest rate hedges.

Economic book value, as Jon mentioned, is $17.73 per share, and this metric serves to provide our investors with an economic basis as we expect to again substantially recover our investments in these deconsolidated vehicles.

In addition to the common shares repurchased during the period, we repurchased RSO preferred series B preferred stock during Q1, which provided a $0.05 benefit to common share earnings as we retired those shares. We look forward to continuing to implement the stock buyback plan in 2016 as liquidity allows us, and as we continue to trade well below book value on our common and preferred stock. We have relatively low leverage and are substantially match funded with nonrecourse floating-rate term financing on the vast majority of our lending platform.

In addition to the liquidation of our initial real estate securitization from 2006, we also anticipate recycling capital from our remaining legacy real estate CDO in 2007 and a legacy bank loan CLO, which should happen over the next 12 months. Each of these will provide us substantial cash upon liquidation. We can deploy these proceeds in higher return on equity investments as these legacy financings have been substantially delevered. Our selective reuse of the recycled capital will help us cautiously grow our real estate portfolio, improved core earnings quality, along with the utmost focus on credit.

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

Thank you Dave. In summary, we are pleased with where we are and continue to maintain a consistent focus on credit quality, high underwriting standards and vigilant management of our investments. Our leverage remains low and we have an experienced and dedicated management team that will carefully monitor our risk while continuing to look forward to a stable dividend.

We thank you for your continued support. And with that, I will open up the call to any questions.

(Operator Instructions). Steve DeLaney, JMP Securities.

Thanks, good morning, everyone, and congratulations on the progress in the first quarter. Really nice to see the dividend covered by AFFO.

I was struck by your comments about projected origination volume of $400 million to $600 million after what was a slower start to the year. And I'm just curious if you guys are trying or you're looking out to the second half of the year and you're seeing scheduled maturities. And are you somehow trying to match the flow of your origination pipeline against the actual payoffs that you have coming in later in the year?

Thanks Steve. Good question. We are really doing two things, in my opinion, and Dave Bloom can add whatever to this. One is that we are moving dollars from non-CRE -- non-CRE allocation, primarily from Northport, over to CRE, so we are timing that. And we expect that to hasten here in the next two to three, four months. And we will be redeploying those dollars into earning assets at that point, as well as, by the way, into stock buyback and other things.

The second thing is that we have old CRE CDOs like 2006 and 2007 and various properties that are on our books that are more in the legacy side, as well as even creeping up to 2013 CDO, where these things are starting to mature and those deals will be called eventually. Just like 2006, those dollars are a lot and are low levered and low earning, so we will be able to redeploy that into new, higher levered earnings assets in the current market. So, as we see that, we see a lot happening in the back half of this year.

Dave, do you want to add to that?

Got it.

I don't really think I have much to add to it Jon, other than we really do see great lending fundamentals. As banks are pulling back, the floating-rate CMBS market is essentially nonexistent. And quite frankly, as people are now just going to begin ramping risk retention compliant long-term CMBS deals, there are just going to be I think a whole lot more people who want to let that shake out over the next 18 to 24 months and are going to be looking for shorter-term solutions as we tend to offer.

Thanks Dave. Jon, on the Northport -- on the middle-market portfolio, could you give us a rough estimate, if you were just able to let's just say theoretically you were able to sell that portfolio, pay off any financing, approximately how much capital could come back from that portfolio to be redirected into CRE lending?

It's a lot of capital. The total amount of capital is probably --

$175 million, $180 million --

But it was down in total, if we sold the whole thing, Steve.

Okay, so about $175 million.

Yes, and so that's about the amount we would expect.

Okay, and essentially -- and that's the majority of the 30% allocation, you're 70% in CRE now, and it seems like that would be the vast majority of the (multiple speakers)

Yes, exactly. And over time, that would move us very close to our goals.

Got it, okay, that's helpful.

And I just want to add, while the market may think VDCs or whatever are trading at low book values, there is an incredible desire on behalf of institutional and other owners to own the middle-market loans specifically that we originated. And so we are quite excited about the value of them.

It's funny, Jon, how the private markets are valuing assets versus the public markets, isn't it, in terms of (multiple speakers). Public equity versus real money, two entirely different attitudes about the same asset.

Just one other thing because I think it's important long-term. So we know about what's happened with CMBS in the spreads, and that obviously has to have some spillover impact I assume on your floating-rate CRE CLO deal. So the last one is August. How far away are we? I guess the extreme is could you do a deal today and just not like the pricing, or would you say funding would not at any price probably not available? Where are we and when do you get back to what would feel like normal? Thanks.

I can say, just through reverse inquiry, we could fill a book. As you know, these things tend to ratchet in. They blow out quickly. They ratchet in a little more slowly, but AAAs have certainly come back to levels that are where we've seen them in the past. Our BBB slug -- or our BBB tranche is very small, so, again, it's something we evaluate regularly but do look forward to accessing that market again.

And there definitely is desire, I would say globally from our investors who buy our bonds, to continue to buy our bonds. But at the lower levels, they still want to be paid for them, and I think we are already starting to see that as ratchet-in. So we also have long-term term facilities we're in no pressure to do anything, so we'll just wait it out, although I think you might see that, if the market opens up, we go sooner than later.

Good progress in the first quarter, and thanks for your comments.

Thank you Steve.

Jade Rahmani, KBW.

Thanks. You mentioned that banks are pulling back. Can you quantify the magnitude to which you are seeing this? And I guess does it make you increasingly cautious about where we are in the cycle, or do you think this is just driven by bank concentration risk in CRE, and also if you've seen much of an impact on loan spreads as a result?

Let me try to answer them in order. Banks are pulling back certainly in our space where we would run up against banks on a regular basis. They would be obviously a lower leverage option. We are not that much above them.

As there are a number of banking regulations out there, we did see, in 2015, banks put on a tremendous amount of direct lending obligations and have noted a pullback. And there is certainly regulatory pressure for them to stay that way. They are -- many, many banks with lots tier 1 capital are far better off doing lines than doing direct lending at a certain point. They are absolutely not going out of the market, but we don't see them being as aggressive. I think that's a fairly standard theme, and there's been lots written and lots of talk about that.

As far as spreads, we are never going to price through the market, but we have pricing power that had been eroding. We were never the low cost provider. But to the extent that we look back at our weighted average spreads in 2014 a little above 5%, which was I think were, frankly, high, or on the higher side, and we were happy to do it. Right. LIBOR, that was the spread. We see things, we absolutely see things going -- loans are more expensive, and borrowers who had been adjusting to it, as I said, as the market is recalibrating, certainly have closed and the need to refinance is driving business our way. We feel very optimistic about the future and our position.

Do you have any concerns that the bank pullback and tightness in CMBS could lead to a liquidity crunch in the market, or it's not nearly of that magnitude at this point?

It's not nearly of that magnitude. There's clearly -- look. There's lots of things going on. There's CMBS risk retention issues. There's sort of -- there's bank lending caps. But if you look the balance sheets of the extremely large banks, they are enormous and they are very, very healthy. We tend to play in the $10 million to $40 million space on a floating-rate basis. That is not where they tend to play. So, quite frankly, we, again, in our specialized space, we really do view it as an opportunity.

And just the loan repayments moderated sequentially. Was that due to timing or was that just lumpiness, or as a couple of other commercial mortgage REITs have noted, they did see the volatility in the market impact the pace of loan repayment?

This is Jonathan. I think, for us, that was mostly just timing. And we expect, for instance, a decent amount of repayments coming forward and we will turn our machine back on to replace that. But for us, I don't think it was the volatility of the CMBS market.

And just lastly, in terms of credit quality and the portfolio, it seems stable sequentially. Did you see any indications of deterioration, or are there any pockets of concentration in your portfolio that you have concerns about?

No, there aren't. We feel, and again, we do this quarterly, obviously as we close every quarter, things are performing well ahead of plan. We still see sort of active -- an active sales market, an active refinancing market. We are largely in multi-family now, which is -- there is still lots of capital chasing it, so we feel -- we don't feel -- we don't feel concerned about any of it. And we've been through a lot to get to that point.

Thanks for taking my questions.

(Operator Instructions). Jessica Levi-Ribner, FBR Capital Markets.

Good morning guys. Thank you so much for taking my question. Just one question on your Northport segment. Is there -- I know you talked about finding a more optimal kind of structure for it to be in. Is there any timeline for that, or is it just something that you work on?

You can see that the overall portfolio has shrunk by 15%, 20% over the quarter. There is a very active market there. Companies are being sold, refied, etc., so there's lots of opportunities just to shrink the book based on that. But in terms of a bigger situation that moved us more quickly, as I said in my comments, stay tuned and in the near future, we will be updating you.

All right. Thank you very much. And the rest of my questions have been asked and answered.

Thanks Jessica.

I'm showing no further questions. I would now like to turn the call back over to Jonathan Cohen for any further remarks.

Thank you very much, and we look forward to continuing to build the Company and speaking with you next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.