Acres Commercial Realty Corp (ACR) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Resource Capital Corporation's second-quarter 2016 earnings conference call. (Operator Instructions). As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference, Mr. Jonathan Cohen, President and Chief Executive Officer of Resource Capital Corp. Sir, please go ahead.

Thank you. Thank you for joining the Resource Capital Corp. earnings conference call for the second quarter ended June 30, 2016. I am Jonathan Cohen, President and CEO of Resource Capital Corp. Before I begin, I would like to ask Purvi Kamdar, our Director of Investor Relations, to read the Safe Harbor statement.

Thank you, Jon. 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 1A on the Form 10-K report 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 presentation 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 will turn it back to Jonathan.

Thank you, Purvi. First, a few highlights from the quarter ended June 30, 2016. RSO yesterday made significant progress in its previously announced strategy to clarify its business model and focus on the core real estate lending business. We entered into an agreement to sell approximately 80% of the portfolio of Northport, a middle market direct origination lending business, to a third-party joint venture for $247 million. The remaining loans are assets we will hold, but which can be used to generate liquidity if necessary. This transaction will generate immediate liquidity of $102 million for RSO.

Adjusted funds from operations, AFFO, were $0.48 per share diluted. Adding back the charges resulting from the Northport transaction, AFFO would have been a very healthy $0.75 per share diluted. RSO liquidated its investment in RREF CDO 2000-1, 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. Due to the Northport transaction, GAAP net loss allocable to common shares was negative $0.05 per share diluted. Economic book value was $17.11 per share and we paid a dividend of $0.42 per share.

With those highlights out of the way, I will now introduce my colleagues. With me are Dave Bloom, Head of Real Estate; Dave Bryant, our CFO; and Purvi Kamdar, our Director of Investor Relations.

Earnings from our core commercial real estate were strong this quarter and we expect them to be stronger prospectively. We continue to see stable credit statistics in our commercial real estate loan portfolio 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 second quarter, we focused on liquidating and refinancing properties and positioning the Company for solid originations and thus temporarily slowed CRE loan originations. We expect our CRE loan originations to pick up considerably in the second half of 2016, and we will be adding high-quality assets as we deploy capital generated from the Northport transaction.

As we have stated on previous calls, we believe Northport, our middle-market lending business, was ultimately not optimized by being a REIT subsidiary, even though the business has performed very well. We saw an opportunity to clarify our business and increase the Company's equity allocation to real estate to over 75% with a goal of at least 90% and to generate substantial liquidity.

To that effect, RSO entered into a purchase agreement to sell Northport to a third-party JV for $247 million. The transaction includes nearly all of the direct origination middle-market loans with a par balance of $257 million and the assumption of the JPMorgan senior secured revolving credit facility for net proceeds of approximately $102 million. RSO will retain the broadly syndicated middle-market loans with a current market value of $51.2 million and one direct origination middle-market loan with a net carrying value of $13.9 million. We are currently holding these assets as they continue to produce income, but they are generally marketable and we could generate additional liquidity if necessary.

RSO recorded an $8.2 million after-tax loss on the sale. The sale of Northport is significant to Resource Capital Corp. in many regards. First, it generates over $100 million of equity that can be used to increase commercial real estate originations, which continue to generate mid-teens returns. Secondly, we are making great strides in simplifying our business model to more strongly emphasize our primary commercial real estate focus, as we have indicated in our strategic plan. Also one thing to note, if it was not for the sale and the associated provision of the cost, AFFO for the quarter would have been $0.75.

As we have reiterated in the past, we've been committed to repurchasing our security. Since the inception of our buyback program through the end of the second quarter, we have repurchased almost $38 million of our securities. The Company repurchased approximately $34 million of its common stock, which represents approximately 8% of the outstanding common shares. We have also bought back approximately 3.4% of our outstanding Preferred B shares.

During the first six months of 2016, we saw significant opportunity to generate yield for our shareholders via our share repurchase plan and executed on common share repurchases that were accretive to book value by $0.15. We were not able to continue repurchasing stock during the second quarter as the Northport transaction came to fruition. We look forward to continuing this in 2016 as those opportunities present themselves.

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. In April, we called and liquidated our investment in RREF CDO 2006-1. We have one remaining legacy CRE CDO that we think will be called over the next 18 months and one remaining bank loan CLO that should be called over the next 6 to 9 months.

In addition, we are expecting our CRE securitization CRE Notes 2013, which closed in December 2013, to naturally liquidate in quarter four 2016 as the remaining collateral pays down into our equity notes and returns cash and assets. CRE Notes 2013 performed extremely well, paid every interest payment to the noteholder, has not had one loan miss an interest payment or even be late on a payment, and there were zero credit costs to date on the securitization.

I also want to update our investors on the residential mortgage business, Primary Capital Mortgage, or PCM. In the second quarter, PCM generated an operating profit, but since we were required to mark our mortgage servicing rights to market, they declined in value with a dramatic fluctuation in 10-year U.S. Treasuries. We recorded a $2.3 million non-cash reserve against these MSRs. The MSRs are continuing to provide volatility to our financial statement and we are actively reviewing our strategy with respect to them, but the PCM business has reached operating profitability. Please note that between dividends and share repurchases, we returned over $45 million to our shareholders to date in 2016. We remain steadfast in our commitment to maximizing shareholder value. Now, I will ask Dave Bloom to review our real estate activities. Dave.

Thank you, Jon. Resource Capital Corp's committed commercial mortgage and CMBS portfolio has a current balance of approximately $1.73 billion and a diverse and granular pool. RSO's commercial mortgage portfolio is comprised of 80 individual positions with an aggregate balance of approximately $1.6 billion. The portfolio consists of 79 self-originated whole loans and one mezzanine loan of only $7.3 million secured by a residential and retail property in the prestigious Lincoln Square section of Manhattan. This mezzanine loan will be paying off imminently.

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 -- 38% multi-family; 23% retail; 21% office; 16% hotel; and 2% other, such as mixed-use properties.

Since the start of 2016, we have closed $59.6 million of new loans. As Jonathan noted, through the second quarter of 2016, RSO has been focused on positioning the Company for strong future growth in our commercial mortgage business. Our origination efforts are again fully ramped, and the immediate liquidity generated from the Northport transaction will be put to work in our core commercial real estate business.

RSO presently has $68.2 million of new originations in various stages of documentation for closing with a pipeline of approximately $450 million of additional new loan opportunities in various stages of negotiation or underwriting. Our pipeline continues to grow and we feel well-positioned to return to or exceed prior origination levels as we deploy capital from other businesses into the commercial real estate space and fully optimize our financing structures.

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

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

Thank you, Jonathan. Resource Capital Corp. declared and paid a cash dividend for the second quarter of $0.42 per common share. Our adjusted funds from operations, or AFFO, for the quarter was $14.5 million, or $0.48 per common share, a payout ratio of 88%. In determining AFFO for the second quarter, there were several non-cash adjustments that netted to approximately $9.8 million. These non-cash items include amortization of deferred costs, notably the acceleration of $2.6 million in the middle-market revolving credit facility and discounts on our convertible senior notes; also, a valuation reserve on our residential mortgage originator's mortgage servicing rights portfolio; and adjustments for share-based compensation.

We had cash adjustments to AFFO for $6.3 million. The cash gain on debt extinguishment is from a legacy real estate CDO that was liquidated during the quarter. The genesis of these gains are from notes that we purchased from 2008 to 2012 at substantial discounts to par. As the non-cash gains were not realized through AFFO at the time those notes were purchased, we are now recognizing these gains as cash as received.

After recognizing the cash gains in Q2, $15.1 million of gains remain. We expect that this will be realized proportionately as the remaining collateral pays off or pays down. Of note, and as Jonathan mentioned, our other real estate legacy CDO, namely RREF 2007, is expected to mature over the next 18 months and, likewise, this CDO has $13.8 million of deferred gains that will be realized ratably as we see the collateral liquidated.

As of January 1, we deconsolidated our 2006 and 2007 real estate CDOs, as well as Apidos Cinco. In April 2016, we liquidated the 2006 CDO as previously mentioned. As a result, we now reflect those 2006 loan assets on our books at fair value. With respect to 2007 CDO and Apidos Cinco, we continue to hold those investments as available-for-sale securities at fair value and record income on a net effective yield basis.

We passed all of the interest coverage and overcollateralization tests in each of our securitizations that require such tests, including the deconsolidated legacy real estate CDOs and a remaining bank loan CLO. Our three most recent real estate securitizations are subject only to overcollateralization tests, which we have comfortably passed. These structured finance vehicles continue to perform well and produce reliable cash flow.

We have total capacity of $650 million on our commercial real estate term facilities and availability of $367.4 million as of June 30. We see that substantially all of our commercial real estate portfolio is comprised of self-originated whole loans. We have weighted average LIBOR floors of 2.8% on $1.4 billion of loans, of which $947 million are in our four real estate securitizations and have our remaining terms ranging from one to four years and a weighted average floor of 0.28%.

The result of having these floors in relation to where rates stand today means that any potential incremental increases in LIBOR will be accretive to our earnings on our equity invested. In Q2, we booked provisions for loan losses of $12.1 million comprised of $9 million related to the Northport sale, $3.5 million on a specific provision related to the retained middle-market loan and a miscellaneous recovery of approximately $400,000 related to a previously reserved position.

In terms of delinquencies, all of our middle-market loans are current and each of our commercial real estate senior whole loans are current with respect to debt service payments due from our borrowers. Our leverage is 2.0 times at June 30, 2016 as compared to 2.3 times at December 31. Most of this decline in leverage is due to the CDO's deconsolidated and principal paydowns on other CDOs.

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 Q2 at 2.35 times on the entire portfolio, including cash earmarked for new real estate loan originations. We remain focused on getting our total real estate equity allocation increase to a minimum of 75%.

Overall, our weighted average cost of capital held corporately based on book value was 8.82% at June 30. We ended the June quarter with GAAP book value per share of $16.63, down from $17.63 at December 31. We had earnings of $0.27, saw an accretive benefit of $0.15 per share from the share repurchase plan. We paid dividends of $0.84 per share and had a $0.55 temporary decline due to the deconsolidation adjustments; picked up $0.12 from our marks on securities and interest rate hedges and the balance of $0.15 is the cost of investing and expense associated with restricted stock.

Economic book value is [$17.11] per share and this metric provides our investors with an economic basis as we expect to recover our investments in those deconsolidated CDO vehicles. We have relatively low leverage and are substantially match-funded with nonrecourse floating rate term financing on the vast majority of our platform. In addition to the liquidation of our first real estate securitization in April, we anticipate recycling capital from our remaining legacy CRE CDO and legacy bank loan CLO over the next 6 to 18 months, each of which will provide us substantial cash upon liquidation.

Coupled with the $102 million of proceeds from the Northport transaction, we expect to have ample liquidity on hand as we head toward the balance of 2016. We will deploy this liquidity judicially in higher-yielding investments. Our selective reuse of the recycled capital will help us grow our real estate portfolio and improve core earnings quality with our complete focus on credit quality. With that, I will hand the call back to Jonathan Cohen.

Thanks, Dave. We are implementing our strategy at RSO and as always maintain what I believe is a consistent focus on credit quality, high underwriting standards, diligent 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 paying this meaningful dividend.

As announced on May 22, Resource America, Inc., the Company's external manager, has agreed to be acquired by C-III Capital Partners LLC, C-III, a leading commercial real estate services company. As part of the transaction, RSO's core commercial real estate team will remain in place. Upon closing of the acquisition of Resource America, I will no longer be the Officer Director of Resource Capital Corp. Andrew L. Farkas and Jeffrey P. Cohen, Executive Managing Director of C-III, will be appointed to RSO's Board of Directors and it is anticipated that Robert C. Lieber, Executive Managing Director of C-III, will succeed me as the Chief Executive Officer of RSO. I believe that C-III is a stellar organization and will work very well with the outstanding origination and asset management teams that will be continuing. We thank you for your continued support and with that, I will open the call to any questions. Operator.

(Operator Instructions). Steve DeLaney, JMP Securities.

$102 million coming in, realistically, how long will it take to deploy that? And I heard your comments that the focus will be on the senior CRE portfolio, so how long to deploy and what would be the incremental growth in CRE loans based on that $102 million once it was deployed? Thanks.

Thanks, Steve. Dave Bloom or Dave Bryant, would you like to take that?

We, as I mentioned, have got a very full pipeline with about $70 million slated to close imminently starting next week and through the end of August. And back with about that pace I think for the few months that we can see beyond. So I would anticipate it being put to work very rapidly.

So realistically by the end of this year you could have that capital deployed?

Certainly, yes.

I think that the capital will deployed in the next five months, but obviously some of the loans will come on later in the quarter in Q4, so the real impact in the stabilized version of our Company having redeployed that Company will be first seen in the end of the fourth quarter, first quarter.

Got it. And so the portfolio, the senior loan portfolio, is just under $1.5 billion, I guess, currently. Would this support something on the order of another $400 million of loans if we were to assume 3 to 1 --?

Steve, I would say that's right. We also have a lot of other capital, as we've mentioned, being recycled through -- for instance, the CRE 2013 securitization is now going to start to pay off the equity notes, so we've seen some massive deleveraging as we've seen things pay off in this very nice credit environment. And so I think that you will see the overall portfolio grow by more than $400 million and that should be very helpful to 2017.

Understood. Switching over to PCM, Jon, you mentioned that you are thinking through your strategies there. I guess two parts to the question. What is the amount of our RSO's equity exposure/investment in PCM at this time?

I think it's in the mid-30%s equity investment. And I just want to clarify, that includes all of the MSRs, which could be sold readily (multiple speakers).

Exactly. So that's about $1 a share. I'm trying to get some sense of the magnitude of, in a worse-case scenario, which I'm not necessarily predicting or suggesting, but just to frame it, it's helpful to know what that is. (multiple speakers).

I just want to mention though, Steve, that if you talk to the team there, we've seen incredible business generation there, platform building, profitability now. I think that they think it's worth well in excess of that.

Interesting. Okay, that's helpful. And you carry your MSRs I believe in the intangibles line on the balance sheet. Dave Bryant, I wonder, could you tell us what the carrying value of the MSRs is in that $26.7 million of total intangibles?

I'm sorry, Steve. Say that again please.

Yes, Dave, I'm trying to find out, you carry your MSRs on your balance sheet. I believe you have them included in the intangibles line. Could you tell us what the fair value, the carrying value of the MSRs at June 30 was?

It's approximately $22 million, Steve.

Okay, so the bulk of that intangibles is the MSRs. Okay. I think that covers it. Jon -- (multiple speakers).

Just to add to that, Steve, the accumulated reserve on those MSRs is about $5.4 million.

That's the non-cash fair value marks that you made?

Right, that we made a little bit at the end of last year and then in the first and second quarter of this year.

Okay. Very good. But the $22 million is the net-net of those reserves.

Net. That is -- (multiple speakers).

Understood. Okay. Thank you. That's all the questions I have and, Jon, if in fact the timing of the REXI sale is September/October, if in fact this is your last call as CEO of RSO, we've enjoyed working with you, want to wish you all the best for the future. Thank you.

Jade Rahmani, KBW.

Just stepping back for a second. Not sure if you are able to, but I'd appreciate if you could offer any high-level thoughts on what C-III may bring to the table with respect to RSO.

We are really not at liberty to speak about C-III or the merger, but their reputation speaks for itself and they are a tremendous firm with Andrew Farkas and the team, Jeff Cohen, etc. have a tremendous reputation for building incredibly valuable public and private franchises, and they are deep in the mortgage and mortgage bond business. So I think with our team will bring tremendous value to the RSO shareholders, as well as in growing the Resource platform. But we really are at liberty to say much more.

Okay. I appreciate that. Just regarding the market overall, can you characterize what you are seeing in terms of borrower sentiment quarter-over-quarter and also highlight any trends in loan spreads?

Dave Bloom, do you want to take that?

Sure. Thanks, Jade. We have seen transaction volume pick up. I think borrowers feel a general firming in the market. We see banks backing away, even the regional banks that have been more aggressive. So we actually feel the market coming to us, which is a good position for us to be in now. Spreads remain competitive, but, on a levered basis, we are still looking at a mid-teens business. So I think that we are very active. When we are this active, we tend to get our share of quality deals. We do stay up credit and that's what we will continue to do, but we do look forward to deploying the additional capital in a prudent, but expeditious way.

Thanks. Are you seeing any flow from upcoming or pending CMBS debt maturities and recapitalization transactions?

We are. There's certainly the wall of maturities that you can see in any number of pitch books and analyst reports. We are absolutely seeing that. We are taking advantage of well-located transactions. While the CMBS market in general is in a state of disarray as risk retention compliant pools continue to be ramped, there are quite frankly borrowers who are waiting that out, waiting for a little bit more stability, certainty of close. Those people are coming to us as well, and obviously, as 10-year deals roll, defeasance has been enormously expensive. They are paid off and sold and there are value-add opportunities there as well. So we really see it coming from a number of different places and feel that there's a nice convergence of events that open up the market for bridge loans in a fairly unique way at this time.

And just lastly, how did credit migrate in the quarter? Any movement in the watchlist or risk ratings?

There was no movement this quarter, no.

Thanks for taking my questions.

Steve DeLaney, JMP Securities.

Apologies, I should have asked this earlier, but you have not made any comments about your previously established guidance of 265 that was given on the first-quarter earnings call. Is there anything that you can say about your guidance? Are you leaving that in place or does that need to be updated?

No, I think that we are leaving that in place in terms of our dedication to the $0.42 dividend, and I think that as new management comes in, I think that they will provide their own guidance. We usually provide guidance for 2017 sometime at the end of -- I think sometime in November, which I think will continue.

Okay. Thanks for clarifying that.

I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Cohen for closing remarks.

I greatly appreciate you listening to our call and investing in our business, and we look forward to speaking with you in the near future. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.