Acres Commercial Realty Corp (ACR) 2017 Q4 法說會逐字稿

Good morning, and thank you for joining the Resource Capital Corp. Earnings Conference Call for the Fourth Quarter and Year Ended December 31, 2017.

Before we begin, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. 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 based on management's current expectations and beliefs and are subject to a number of trends, risks and uncertainties that 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, the Risk Factors section of our Form 10-K.

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 to 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.

I will now turn it over to the Chairman of RSO, Andrew Farkas, for opening remarks.

Thank you for joining us this morning. I apologize if my line is a little bit scratchy. I had to call in from a cell phone. With me today are Bob Lieber, who is the CEO of RSO; Matt Stern, who is the President; Dave Bryant, who is the CFO; and Paul Hughson, who is Head of Commercial Real Estate Lending at RSO. Finally, Andy Carr, who I'd like to introduce as RSO's new Head of Investor Relations.

In 2017 and already in early 2018, we've made significant progress repositioning Resource Capital into a competitive investment vehicle capable of producing sustainable core earnings and delivering long-term shareholder value. I'm pleased to report that we are substantially through the strategic plan and sold what we believe were the riskiest of the noncore assets.

2017 commercial real estate loan origination volume was up over 300% as we -- as compared to 2016 and CMBS investments by face amount were approximately $200 million greater than 2016. We expect these investments to make meaningful contributions to core earnings in 2018. As we continue to improve operations and position RSO for a core earnings growth, we've also made significant progress in adjusting the company's capitalization with the full redemption of preferred Series A and B shares in early 2018. On our team's first RSO earnings call, we said 2017 would be a transition year and believe that our efforts during this past year will begin to bear fruit later in 2018.

With that, I'll turn it over to our CFO -- I'm sorry, CEO -- sorry about that, Bob -- Bob Lieber.

Good morning, Andrew, and good morning, everybody. Thank you. I want to start off by highlighting the significant shift in the asset base in our balance sheet compared to when we took over 15 months ago as a result of the implementation of our strategic plan.

The equity allocated to core investments has increased to 84% as of year-end 2017, up from 46% a year ago. We've summarized this in Schedule III of the press release. We've sold $343 million or just over 70% of the $480 million of assets deemed noncore under the strategic plan and realized proceeds of about $364 million, which is obviously well in excess of book value. Our initial guidance of exiting these assets identified in the strategic plan over an 18-month period remains on track. That, notwithstanding a few of the remaining investments included, may require a little more time in order to get the best execution and maximize the proceeds for RSO, but we expect to be substantially complete within that time frame.

Next, I'd like to highlight certain key items relating to our earnings, and Dave Bryant will detail more of this in his comments in a few minutes. But first I'd like to discuss the impact that redeeming the Series A and Series B preferred shares has on our earnings power.

Core earnings for the fourth quarter, excluding charges related to the redemption of our preferred shares, were minus $0.01 for the fourth quarter. As Andrew mentioned, by the end of the first quarter of 2018, we will have redeemed all the Series A and Series B preferreds. And by eliminating the dividend requirement of those -- the entire class of those shares, our common equity picks up $0.44 of earnings per annum or $0.11 per quarter. And from this base, the goal is to grow core earnings and this is really a function of prudently deploying our existing capital base, including what we would expect to be approximately $225 million of incremental equity capital, including proceeds from the $104 million remaining of our strategic plan assets. That said, the timing of and the proceeds from the last asset sales of the strategic plan are unpredictable and may be lumpy. And loans originated in 2014 and 2015, which were historically RSO's 2 strongest origination years, are now approaching their initial maturities and these loans may be paid off or extended.

We expect that the common dividend per share will remain at $0.05 for the first quarter of 2018. Future dividends will generally be informed by core earnings. And as core earnings visibility improves over the course of 2018, we will continue to discuss the dividend policy with our board and update you all as appropriate.

Now turning to the balance sheet for a second. As we continue to recapitalize the right-hand side of the balance sheet and decrease the company's cost of capital, and as a consequence of this, we have incurred and will incur in the future certain one-time accounting charges. At the end of the fourth quarter, book value was $14.46 per share, which was down slightly from $14.91 at the end of the third quarter. Looking forward, we expect book value to stabilize around $14 per share as we complete the balance of the execution of the strategic plan and account for these one-time accounting charges such as those related to the preferred share redemptions I discussed.

I want to reinforce that these accounting changes are not related to investment or operating performance. The preferred shares that we redeemed were issued at a discount and redeemed at par, which gives rise to the one-time charges under GAAP reporting even though the redemptions are favorable to the -- our common shareholders.

In closing, we continue to be pleased with the results from the strategic plan and are optimistic about the future of the company. Looking back, book value has stabilized, our corporate cash cost to capital has decreased by nearly 130 basis points as a result of reducing or eliminating expensive components of our capital structure, loan origination and CMBS volumes are meaningfully increasing, and adjusted core earnings have trended in the right direction.

In second quarter of 2017, core earnings were a negative $0.10 a share; in the third quarter, were negative $0.09 a share; and for the fourth quarter of 2017, a negative $0.01 for the quarter. Investment activity has and continues to be refocused on commercial real estate credit, which is a core competency of C-III Capital Partners and we'll use this to fuel the growth of our core earnings. We are very pleased about the trajectory and the momentum behind the company and its ability to deliver long-term shareholder value.

And with that, I'd like to turn this over to Matt to detail some more of these components. Thanks, Matt.

Thank you, Bob, and good morning, everyone. I'd like to begin with our origination and investment activity. In 2017, we closed on $600 million of loan commitments and acquired $212 million face amount of CMBS. For the fourth quarter of 2017 alone, we originated $229 million of transitional CRE loan commitments with a weighted average spread of 426 basis points over 30-day LIBOR. Our CRE loan origination team continues to see improved deal flow, and we are confident that the recent growth of our origination volume will continue. I am pleased to report that our second half of 2017 loan origination volume of $387 million exceeded the guidance of $350 million that we provided to the market during our third quarter earnings call.

At December 31, 2017, our commercial real estate loan portfolio was comprised of $1.3 billion of floating rate self-originated whole loans. As a floating rate lender, we believe our portfolio is well positioned to benefit in a rising interest rate environment.

Turning to our CMBS portfolio. We acquired $78 million face amount of CMBS bonds during the fourth quarter. RSO continues to benefit from one of C-III's core competencies of underwriting real estate credit and identifying good risk-adjusted returns throughout the [capitals back] of CMBS trusts.

During the fourth quarter, RSO acquired a noninvestment-grade CMBS bond as well as a CMBS B piece, comprising the higher-yielding subordinated tranches of the CMBS trust. We believe CMBS investments, particularly the low investment grade and more subordinate credit tranches, provide attractive risk-adjusted yields while adding meaningful diversification and duration to RSO's portfolio.

Going forward, our goal is to make approximately $1 billion of commitments and investments in 2018. We would expect CRE loans to make up 70% or more of these 2018 commitments and investments.

We believe this investment goal, as well as our plans to grow sustainable core earnings, are achievable, despite the current competitive market and while also maintaining our credit standards.

The next item I would like to discuss is our amended and restated management agreement. Effective October 1, 2017, RSO's base management fee will be fixed at an annualized rate of $11.25 million until December 31, 2018, at which time the base management fee will revert back to 1.5% of RSO's equity.

To give some context for this change, at the time C-III acquired RSO's manager, the annualized RSO management fee was greater than $13 million a year. And at September 30, 2017, the annual run rate fee was equal to approximately $11 million a year. In light of the significant incremental resources that have been required to execute the strategic plan and reestablish RSO's origination and asset management functions, the board agreed that it is -- was reasonable for compensation to the new manager to be fixed at this level through December 2018, as the strategic plan is executed and finalized and incremental resources are required.

Now I would like to discuss the changes to the incentive management fee calculation. At the board's request and following an analysis of market comps, the manager agreed to a 20% incentive over a 7% return hurdle versus the then-current 25% incentive over an 8% return hurdle. The amended capital base, on which the preferred return hurdle is calculated, has been changed from the weighted average issue value of equity raised since RSO's IPO, to RSO's 3Q book value adjusted for the impact of resolving the remaining strategic plan assets. To provide some context, RSO's equity was raised by the prior management team at an average price of approximately $31 per share. The issue with the preamended incentive management fee calculation was that the calculation of the incentive fee hurdle did not account for the fact that over half of the capital raised since the IPO has since been returned to shareholders via dividend in excess of earnings by previous management.

This resulted in an incentive fee hurdle based on 2x the amount of capital actually available to deploy by the company. Amending the capital base hurdle appropriately aligns the interest of the manager and our shareholders. Consistent with market terms and the preamended agreement, this capital base will also include the weighted average issue value of any equity raised in the future.

I'd now like to discuss the progress we have made in improving the right side of RSO's balance sheet. Finding accretive assets in a competitive marketplace is challenging with an expensive cost of capital, and that is the reason we thought it was important to address the right side of RSO's balance sheet. We have reduced our corporate cash cost of capital by nearly 130 basis points, from 7.59% to 6.3% since we became RSO's manager in September 2016.

This includes 71 basis points attributable to the simultaneous issuance and redemption of convertible notes completed in August 2017, 15 basis points attributable to the $50 million Series A and partial Series B preferred redemption completed in January 2018 and 43 basis points attributable to the $115 million Series B preferred redemption announced on February 21, 2018 and scheduled to occur at the end of the first quarter on March 26, 2018. This cost of capital improvement includes our convertible notes, trust preferred and preferred equity and excludes our asset-level financing and common equity.

By reducing the company's corporate cash cost of capital, we believe we will be in a better position to meet our accretive investment objectives for 2018 and beyond. We continue to evaluate ways to improve the company's cost of capital and look forward to discussing our progress with you in the quarters to come.

With that, I'd like to turn it over to Dave Bryant to discuss our financials.

Thank you, Matt, and good morning. Our GAAP net loss allocable to common shares for the 3 months ended December 31, 2017 was $12.1 million, or $0.39 per share, and our GAAP net income for the year ended December 31 was $5.7 million or $0.18 per share.

Our net loss for the fourth quarter includes the following significant activity: a charge of $3.8 million with a redemption of all of our Series A and a portion of our Series B preferred stock, which represents the difference between the redemption price and the carrying value of the redeemed stock; a net loss of $3.3 million from discontinued operations, primarily related to the wind-down of Primary Capital Mortgage; a net loss of $1.7 million from our investments in unconsolidated entities included in the strategic plan; and a charge of $1.5 million from a valuation adjustment to a CRE loan held for sale, also included in the strategic plan.

Also a charge of $1.3 million from increased general loan provisions and, finally, a legal expense of $700,000 related to a shareholder class action settlement entered into after year end.

The decline in our GAAP book value per share to $14.46 at year-end 2017 from $14.91 at September 30, 2017 can be attributed to the following: a net loss of $0.39 per share, and a common dividend payout of $0.05 per share and also a net decrease of $0.01 to other comprehensive income from mark-to-market adjustments.

Adjusting the book value at December 31, 2017, for the charge to be incurred in the first quarter on the March 2018 redemption of the remaining outstanding Series B preferred stock, results in an additional decrease of $7.5 million or $0.24 per share of book value.

As Bob discussed in his remarks, we expect our total assets to ratably increase as we finalize the execution of the strategic plan and deploy the proceeds into new CRE credit investments with a market-standard use of leverage. We received approximately $39 million of proceeds and saw the net value of the remaining strategic plan assets decrease by $45 million during the fourth quarter, including $18.3 million decrease in our investment in Primary Capital Mortgage from $19 million to $700,000. With all of PCM's remaining financial assets under a contract for sale, it is notable that PCM's net book value includes $1.1 million of cash on the balance sheet. The wind-down of this former operating business over the past 6 months represents a significant resolution to the volatility in our income statement and underperforming assets in our strategic plan.

Our GAAP leverage stands at 1.7x, down from 1.9x at December 31 of '16. The leverage decline was a result of net paydowns of $161 million on our borrowings and other liabilities, offset by a decrease in our equity of $33 million. We had total capacity of $650 million on our commercial real estate term facilities and have approximately $358 million available as of year-end 2017.

We anticipate that at least 1 of the 2 securitizations issued in 2015 will liquidate during 2018, which is [one in] approximate 36 months CLO lifespan, similar to our recently liquidated 2013 and 2014 deals. We will target a new securitization issuance in 2018 as market conditions permit.

We believe that we have ample liquidity to fund the business on a go-forward basis, with over $181 million of cash on hand at December 31, 2017. We also have access on our CRE term and CMBS facilities to leverage newer investments in real estate loans in CMBS that are currently held unlevered.

With that, I'll turn the call back to Bob for final comments.

Thanks, Dave. Andrew, did you have anything you wanted to close with?

So I guess (inaudible) had been in the call, so I didn't -- but I just I want to let you know. Yes, I'd like to congratulate management on a job continued to be well done. I think the performance of the enterprise continues to improve and is moving along [within] the guidance. I appreciate the general following that we've gotten from the market, and I think you will truly see the results showing themselves over the course of the balance of this year that will derive from all the work that we've done over the course of the last 18 months.

I think that with that, we should take questions.

Okay. Operator, we'll open it up for questions, please.

(Operator Instructions) Our first question is from Steve Delaney with JMP Securities.

Matt, I would like to start with you on the origination side. Obviously, good momentum as you went into the end of the year. Could you remind us of what your platform looks like in terms of your number of office locations around the country? And how many loan originators and support personnel do you have on that side of the business?

Sure. Paul, do you want to discuss just the magnitude of platform as a start?

Sure. So we have an office in L.A. that's staffed with 4 folks. We've got an office in Philly that's staffed with 2. And then the C-III origination infrastructure, coupled with the RSO underwriting infrastructure in New York has approximately 16 people, where -- that's where the bulk of the originations and underwriting support derives from for the platform.

Great. Following up on that, the -- Matt, your comments about $1 billion in 2018, 70% of that, hopefully, in new CRE loans. In 2017 you had some pretty significant originations, but given the level of payoffs, the amount of portfolio growth was somewhat muted. Do you have a sense of what payoffs may be in 2018, vis-a-vis the $700 million target that you've set for new CRE originations?

Yes, sure. Just to clarify on the $1 billion that was discussed, we expected that would be approximately the floor for it, so it could be upwards of $700 million on the loan side. In terms of portfolio growth, your comment is well taken. It is very difficult to predict precisely borrower behavior in terms of repayments. But based on our analysis of expected repayments and the maturities of loans, we do expect to see meaningful portfolio growth through 2018 as a result of the guidance that we gave on aggregate originations. I think it's important to note that we just began the origination build for RSO in earnest in the first quarter of 2017. And now that we've -- are in a position to [up] ramp that, we do expect a more significant portfolio growth, net, in 2018.

Great. And is it a rationale -- you guys have the capability to be involved in CMBS. Is one of the benefits there also just the longer duration of those assets versus the floating rate senior loans? Is that something we should keep in mind about why you should allocate capital to CMBS?

Yes, it is precisely one of the reasons there are meaningful diversification benefits of the investment, given the underlying credit that sits under the investment of that type. And then you've touched on something that we think is paramount for the business, which is an increase in longer duration to the asset base of the company. We think it's supportive both to the earnings base as well as future dividends of the company. So longer duration investments as a component of our asset base, we think is critical.

Okay. And one final quick thing for Dave Bryant, if I may and I'll sign off. Looking at the noncore table of what is left, $126 million, I'm seeing this $10.5 million investment in unconsolidated entity. I thought PCM was -- is this a carryover from PCM that wasn't off the books at year end? And if not, what does that represent?

It is not PCM, Steve. It is essentially an investment in a hedge fund that RSO participated in, that further liquidated post-year end, and we're looking to liquidate the rest of it over the coming 30 to 40 days -- 45 days, let's say.

And I'm showing no further questions. I would now like to turn the call back to Bob Lieber for any further remarks.

Okay. Well, thank you all for participating. Steve, thank you for your questions. And if there are other questions that come up, don't hesitate to contact Andy Carr, who can get the appropriate responses to you. And we look forward to talking to you more on our next quarterly call. Thank you, all, for participating.

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