Acres Commercial Realty Corp (ACR) 2018 Q1 法說會逐字稿

Good morning, and thank you for joining the Resource Capital Corporation Earnings Conference Call for the First Quarter Ended March 31, 2018.

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 statement.

These risks and uncertainties are discussed in the company's report filed with the SEC, including its report on Form 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 of the -- 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 accounted 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.

Good morning, everybody, and thank you for joining us.

With me today are Bob Lieber, our CEO; Matt Stern, our President; David Bryant, CFO; Paul Hughson, Head of Commercial Real Estate Lending; and Andy Carr, who is the Head of Investor Relations.

When we took over management of Resource Capital Corporation in 2016, we embarked on a strategic plan to reposition the business into a commercial real estate investment vehicle, capable of producing sustainable core earnings and delivering long-term shareholder value.

While this process has required some difficult measures, I'm pleased to report that 18 months later, the strategic plan is substantially complete.

We are now down to only $63 million of the original $480 million of noncore assets we wanted to sell.

Of the remaining $63 million, $57 million are legacy commercial real estate loans.

Having resolved over $50 billion of similar loans in the past 8 years through C-III special servicing business, we believe the best course of action for these legacy loans is to take the necessary time to work them out to achieve maximum proceeds for our investors.

With the strategic plan now largely complete and increased visibility into earnings, we expect to increase the company's quarterly dividend at $0.10 per share in the second quarter.

This is a 100% increase in our quarterly common dividend since the inception of the strategic plan.

We expect future dividend policy to be informed by the company's improving core earnings profile.

We continue to leverage C-III's expertise in commercial real estate credit to refocus the company's investment portfolio.

In the last 18 months, nearly $800 million of transitional commercial real estate loans have been originated, which was a significant achievement considering that Resource Capital Corp's pipeline came to an absolute halt before we acquired its manager in September 2016.

Over $265 million of CMBS investments by face amount were acquired, including higher yielding subordinated tranches, which are now new investments for the company.

We've also taken meaningful measures to improve the company's capitalization structure by issuing $144 million of 4.5% convertible notes as well as redeeming a portion of the 6% and 8% convertible notes.

Also, we fully redeemed $165 million of the series A and B preferred shares.

These efforts have all been accretive to common shareholders and position us to grow core earnings going forward.

The path to core earnings growth from here is clear. Identifying opportunities for quality, risk-adjusted returns by leveraging C-III's platform to invest in a broad array of commercial real estate credit investments.

We anticipate that successfully delivering such higher core earnings should provide for corresponding common dividend growth in the future.

Now that we have transformed the company into a credit REIT, we out -- into the credit REIT we outlined 18 months ago. We feel it is an appropriate time to rebrand ourselves.

So effective May 25, 2018, the company's name will change to Exantas Capital Corporation.

Exantas is Greek for sextant, which is a navigational instrument that measures the angular distance between 2 visible objects.

The use of a sextant directly relates to our efforts to safely navigate the company back to sustainable earnings and an attractive dividend by leveraging the management platform and network.

The company's common stock and its Series C preferred stock will continue to be listed on the New York Stock Exchange. And effective May 29, 2018, we'll begin trading under the ticker symbol XAN and XAN PRC, respectively.

I'm very proud of the progress we have made to achieve to-date and as we turn to the next chapter, I look forward to reporting the success of Exantas Capital in future calls.

I believe that we have fulfilled all the promises that we made to shareholders since assuming the role as manager, and I'm very pleased to see the progress we are making.

And with that, I'll turn this over to our CEO, Bob Lieber.

Thank you, Andrew, and good morning, everybody.

As Andrew mentioned, the focus of the company is now shifting from the execution of our strategic plan to growing core earnings.

Adjusted core earnings turned positive this quarter for the first time since we announced the strategic plan back in September 2016 to $0.03 a share in the first quarter of 2018.

Adjusting for charges related to the redemption of our Series B Preferred Shares and settlement of legacy litigation.

While executing the strategic plan over the past year, adjusted core earnings have trended from negative $0.10 in the second quarter of 2017 to a negative $0.09 in the third quarter of 2017 and a negative $0.01 in the fourth quarter of 2017. As I said, $0.03 positive in the first quarter of 2018. So the trend line is good.

This trend in the underlying business is causing the earnings power the company to accelerate and our near-term earnings outlooks supported an anticipated increase in the second quarter dividend.

As we move forward, any further dividend adjustments will generally be informed by core earnings, and as core earnings visibility improves, we will continue to discuss dividend policy with our board.

As we previously discussed, the completion of the preferred stock repurchase will increase core earnings by $0.11 per quarter, which will be fully realized for the first time beginning in the second quarter of 2018.

We originated $146 million of CRE loans in the first quarter of 2018. We succeeded loan payoffs for a net deployment of $92 million.

We expect this positive deployment to continue to help increase the earnings power for the CRE loan book starting in the second quarter.

Additionally, we acquired $44 million of CMBS this quarter for net deployment of $41 million.

As we look forward, the net deployment will be the primary driver of our core earnings in the quarters ahead and we are pleased with our aggregate net deployment of $133 million for this quarter.

Matt will walk through the specifics of this deployment, but to reiterate, these developments are sufficient enough for us to justify the anticipated increased dividend guidance for the second quarter.

Turning to the balance sheet, book value declined to $13.92 per share at the end of the first quarter of 2018 as compared to $14.46 per share at the end of 2017.

This reduction in book value was driven by 3 events. As we mentioned in our last call, we took a $0.24 impairment associated with the redemption of the remaining preferred B shares. We also took a $0.14 mark associated with the Legacy CR loan included -- CRE loan included in the strategic plan and $0.08 associated with the vesting of our shifted stocks, which includes $0.02 of accelerated stock vesting related to departure of several employees.

The company has transformed now that we have substantially devastated the legacy noncore assets.

As we move forward, we feel it's important to rebrand our identity and put a new face on the company, which reflects a new chapter of this credit REIT under our team's management.

Our objective with this rebranding effort is for borrowers, issuers, the market and counterparties to recognize the new direction of our company and our management team who have a deep relationship in the commercial real estate market.

As we move forward, we intend to be more proactive and visible in our communications with the market by attending industry conferences and interfacing more frequently with the research community.

To kickoff Exantas' in our rebranding efforts, we will be launching a new website, creating a new investor deck and meeting with sell-side equity research analysts in the next coming weeks.

With that, I'd like to turn the call over to Matt Stern. Matt?

Thank you, Bob, and good morning, everyone. I'd like to begin by taking a closer look at the origination and investment activity that Andrew and Bob alluded to earlier.

In the first quarter of 2018, we closed on $146 million of transitional CRE loan commitments with a weighted average spread of 394 basis points over a 30 day LIBOR.

At March 31, 2018, our commercial real estate loan portfolio is comprised of $1.4 billion of floating rate self-originated whole loans.

As a floating rate lender, and like many of our competitors, our earnings benefit from increases in short-term interest rates.

Our CRE loan origination team continues to see improved deal flow, and despite a competitive market, we are optimistic that the recent growth in our origination volume should continue, and the 2018 guidance provided on our last earnings call can be achieved.

Turning to our CMBS portfolio, we acquired $44 million in face amount of CMBS bonds during the first quarter of 2018.

Among other investments, these investments included tranches of our Freddie Mac case series transaction and a single-asset, single-borrower deal with a strong sponsor in an attractive asset class.

One of C-III's core competencies is underwriting real estate credit and identifying good risk-adjusted returns throughout the capital stack of CMBS trusts.

We believe CMBS investments provide attractive risk-adjusted yields while adding meaningful diversification and duration to the company's portfolio.

While we anticipate transitional commercial real estate loans, we'll continue to be the substantial majority of the asset base for Exantas Capital.

We continue to explore investment opportunities that can deliver sustainable and predictable earnings streams and enhance value for our shareholders.

We believe it to be prudent for an open-end, stable income-oriented investment vehicle, such as Exantas Capital, to supplement its loan portfolio with some longer duration investments that enhance ROE and provide visibility into earnings duration and stability.

As discussed on prior calls, CMBS provides such duration as well as diversification to the rest of our portfolio.

We are evaluating other attractive opportunities for Exantas Capital, including net lease investments, which also meet these criteria and have certain favorable tax attributes.

Turning to the strategic plan, we have approximately $63 million of strategic plan assets remaining, of which $57 million relate to legacy CRE loans.

Finally, on our last call, we discussed our progress in reducing the company's cost of capital by nearly 130 basis points in September 2016.

We have continued to make progress on that front by improving the terms of our asset level financing through a new warehouse facility and pursuing more favorable and market rate terms with our existing lenders.

Using C-III's platform and a vast network of real estate professionals, we continue to evaluate and source investment opportunities for Exantas, while improving the company's cost of capital.

We appreciate your patience and continued interest as we transform the company and look forward to updating you on our progress 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 March 31, was $12.6 million or $0.40 per share.

Our net loss for the first quarter includes the following significant items: a net loss of $7.5 million on the redemption of our remaining Series B preferred stock, which represents the difference between the redemption value and the carrying value of the preferred stock we redeemed.

A $4.5 million decline in the fair value of a CRE loan, which is included in the strategic plan, and a net loss of $700,000 from noncore assets included in the strategic plan.

These nonrecurring and/or noncore adjustments total $12.7 million or $0.41 per share.

Our core earnings for the 3 months ended March 31, 2018, was a loss of $8.6 million or $0.28 per share.

Our net loss for the first quarter includes the following significant and nonrecurring items: the after-mentioned net loss of $7.5 million or $0.24 per share on the completed redemption of our Series B preferred stock and a net loss of $2.2 million or $0.07 per share from the pending settlement of a lawsuit, which was accrued in 2017.

When we adjust core earnings for these nonrecurring items that total $0.31, our adjusted core earnings per share are $0.03 per share for the first quarter of 2018, up from adjusted core of a minus $0.01 per share in the fourth quarter of 2017.

We expect our core earnings run rate to increase with additional equity deployed in our core commercial real estate credit investment platform, and we will see incremental savings of $0.08 per share in the second quarter when we realize the full impact of our preferred share redemptions.

As a reminder, the full impact of the preferred share redemptions equates to an annual savings of $0.44 or $0.11 per quarter.

The decline in our GAAP book value per share to $13.92 at March 31 from $14.46 at December 31 can be attributed to the following: net loss of $0.40 per share, which again includes nonrecurring items of $0.41 per share plus a net decrease of $0.08 from the dilution of vested restricted stock, of which $0.02 relates to accelerated stock vesting; a common dividend payout of $0.05 per share; and a net reduction to mark-to-market adjustments of $0.01.

We expect our total assets to ratably increase as we finalize the execution of the strategic plan and deploy the remaining proceeds in new commercial real estate credit investments with a market standard use of leverage.

Our equity allocated to core credit investments increased to 89% as compared to 84% at year-end 2017. And this will continue to increase as we further deploy our available equity capital and exit the remaining strategic plan assets.

Our GAAP debt to equity ratio stands at 2.2x, up from 1.7x at December 31, 2017.

The increase in leverage results from a net increase of $59 million on our asset level borrowings combined with a net decrease in our equity of $121 million. Which again, is predominantly the result of our preferred share redemptions.

We now have total capacity of $900 million on our commercial real estate term facilities including a new facility we closed in April and have approximately $396 million available as of April 30, 2018.

We reiterate that we expect at least 1 of the 2 securitizations issued in 2015 will liquidate during the third quarter of 2018, which is on an approximate 3-year CLO lifespan, similar to our recently liquidated 2013 and 2014 deals.

We will target a new securitization issuance in 2018 as market conditions permit.

Before any additional liquidity from the sale or settlement of remaining held for sale assets in our strategic plan, we believe we have ample liquidity to fund the business going forward but there were $67 million cash on hand at the end of April.

We also have access to approximately $87 million of additional liquidity from our CRE term and CMBS facilities to finance newer investments in real estate loans and CMBS that are currently held unlevered on our balance sheet.

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

Thanks, Dave. And we look forward to updating you all on our progress, as we attend upcoming conferences under the rebranded Exantas Capital name, and discuss the results of our investment efforts on future calls.

We appreciate your time and your interest here this morning.

And with that, I'll ask the operator to open up the call to any potential questions.

(Operator Instructions) And our first question comes from the line of Steve Delaney from JMP Securities.

First comment is love the new name. I hope it steers you to calm waters and fair winds. Just a little -- if we could get a little more color on the first quarter originations. Maybe just a bit, the number of loans, anything unique about the GO or property type in that group of loans?

Sure, it was $146 million total. It was 9 investments in the aggregate, majority in the multifamily side, but there was some diversity there as well.

Okay. That's helpful. And I guess shifting, you talked a little bit about the new facility, and it looks like there's approximately $150 million of capital available. How should we think about that? And your pipeline that you're currently seeing? It would seem that you have as -- maybe somewhere between $500 million and $600 million of additional lending capacity on a net basis and maybe push the portfolio up to somewhere just under $2 billion. Am I -- I think those -- I know they're very rough metrics. But do you guys see your balance sheet having that kind of capacity for loan growth?

I think from a liquidity perspective, I think that's largely correct, Steve. So we have the $60-or-so million on balance sheet and then incremental liquidity, as Dave had mentioned. When we deploy that I think the aggregate incremental assets are correct and then we would probably be at what we would say is a more appropriate targeted leverage level for the business. So we do expect, as Dave mentioned, to see that the asset base grow, and that's partially -- not partially, that's the primary driver of core earnings growth is that net deployment, which we do anticipate.

Makes sense. Sure. Okay, that's helpful for modeling purposes. And then, anything, repayments are always a challenge and I really do appreciate your comments about CMBS and triple net lease. I think some duration mixed in is very helpful. To that end, do you see anything lumpy or big out there that you do expect in terms of sizable repayments? Or just the smaller loan size for your portfolio, kind of prevent that type of quarter-to-quarter or surprise and repace?

We certainly don't see anything that -- looking out that is disproportionate. But as you know, repayments are difficult to predict in the aggregate. We have a normal maturity low profile and we'll expect that to smooth out over time as we get to a normal run rate origination for the business. But we don't see something disproportionate, at least that we anticipate right now.

And our next question comes from the line of Ben Zucker from BTIG.

Can we talk for a second about the preferred equity investment that you guys made? Was that just a one-off type of investment or do you plan to look at more pref equity and other types of subordinate debt?

Yes, the preferred investment really was effectively like a mezzanine investment or just a junior part of the capital stack on a property that we wanted to make a loan to. We thought it had attractive return profile and was more of a structuring matter than anything else. While I don't know that it would become a disproportionate part of the asset base, certainly as we work with borrowers, we'll evaluate opportunities to earn excess yield when we like the credit. And I would just add to that, that we are -- we focus on real estate credit and there are lots of different places you can play in the capital stack for that, and the preferred credit -- the preferred equity presents those opportunities as well.

I hear you there, and I guess that's a benefit of being kind of a diversified smaller lender and not a bank. And I also heard you mention, potentially pursuing some of the net lease investments. Could you expand on that a little? Is that something that the C-III platform can help you identify or an expertise of C-III? I think those of us on the call understand the duration that net lease can provide, so I think we'd welcome seeing them in the portfolio.

Yes, it's something that we continue to evaluate and are looking into. Many of the skill sets in terms of identifying the investment opportunities, the credit underwriting skill set, we do think it's housed within C-III, and think it could present an opportunity, as I mentioned, from a duration perspective and provide the ROE profile and visibility that we want from an earnings perspective. But it's something that we continue to look at and evaluate, but as we consider it, we thought it warranted mentioning.

Got you. Appreciate that. And is there any reason that your pace of sales on the discontinued assets really seem to pick up in the last 5 weeks or so? And as a follow-up, could you quickly review the status like the loan quality of reserves, et cetera, for the remaining legacy CRE loans held for sale, that basically make up all of your discontinued operations at this point?

In terms of the pickup. I don't know that there is specifically a causation for that. Certainly, in some cases, we were waiting until just the end of the year, just in terms of planning some of the divestitures, but not necessarily in the last few weeks. And in terms of the reserve profile, we continue to work through the loans that remain on the bulk, and as we're working through that, it's difficult to provide specifics to those resolutions. But we feel as though we have taken appropriate reserves based on appraisals, et cetera, that we have received or obtained, and continue to work through the remaining assets.

Got you. And lastly, and just a bit of housekeeping. That asset held for sale that had the $4 million write-down on fair value. Is that an asset that's still on your books? Or was that one of the ones sold subsequent to quarter-end?

That is still on our books, Ben.

Perfect. All right, well, congrats on the continued progress on the dividend increase guys.

At this time, I'm showing no further questions. I would like to turn the call back over to Andrew Farkas, for any closing remarks.

So I just want to say to everybody that we greatly appreciate you're having followed and continue to support the company. I believe fervently that everything we said that we would do has been executed within the time frames we said they'd be executed. And as far as we are concerned, the progress that we continue to make and the steps that we have taken to continue that progress are again entirely consistent with what it was we said that we would do.

At C-III, and now with Exantas, that's really our brand, which is, we will always execute on the plans that we tell you we are going to execute on. I'm really very proud of what the management team has accomplished here. And I think we can look forward to continued results as we proceed along the plan that we've articulated.

With that, I'll say thank you, once again, and we'll be in touch with you in the next quarter. Thank you.

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