ACRES Commercial Realty Corp. (ACR) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q1 2015 Resource Capital Corp. Earnings Conference Call. My name is Steve and I'll be your operator for today. At this time, all participants are in listen only mode. We will conduct a question-and-answer session towards the end of the conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Jonathan Cohen, President and CEO. Please proceed.

Thank you and thank you for joining the Resource Capital Corp. earnings conference call for the first quarter ended March 31, 2015. I am Jonathan Cohen, President and CEO of Resource Capital Corp. Before I begin, I would like to ask Purvi Kamdar, our Vice President of Investor Relations to read the Safe Harbor Statement.

Thank you, Jonathan. When 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. With that, I’ll turn it back to Jonathan.

Thank you, Purvi. First, a few highlights from the first quarter ended March 31, 2015. Adjusted funds from operations, AFFO, were $0.16 per share diluted. Book value per share was $5 as of March 31, 2015. During the three months ended March 31, 2015 we originated over $156 million in new commercial real estate loan commitments. During the last 12 months we have originated $817.3 million of total loan commitments, an increase of over 107% from the same period last year, a new peak for our origination platform. We funded $165.6 million of commercial real estate loans during the quarter, an increase of approximately 48% over the same period last year and 122% over the same period in 2013. In February 2015, we closed a $346.2 million commercial real estate securitization at a weighted average cost of LIBOR plus 190 basis points. We expect to earn 17% to 19% on our invested equity over the life of the vehicle. This is our third securitization in 14 months through which we have term financed just over $1 billion of mortgage assets. Our middle market lending group, Northport Capital, originated almost $61 million of originations in the first quarter, it also upsized its credit facility commitment from $125 million to $190 million. We paid a dividend of $0.16 per share on April 28, 2015. We anticipate that 2015 AFFO will be approximately $0.70 per share. 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. 2015 had a great start. Business is good. Our originations are strong. In fact they are strong as we have seen since inception of the company. We reiterate our guidance of $0.70 of AFFO for the year and number three, although we haven’t been active recently in the repurchase of our shares due to the capital needs of our originations, we are now committed to repurchasing our shares at these low prices which represent 88% of stated book value. We believe the company is in good shape and feel like our stock price is being discounted unjustly. As we analyze our business, our real estate team has done a tremendous job in both growing commercial real estate loan originations and accessing the securitization market at very favourable spreads. We have originated over $870 million during the last 12 months which is a record production level for our team. Over 107% increase in the same period the prior year. We have accomplished this growth without sacrificing credit quality, which remains excellent, as confirmed by our stellar securitization results. This origination growth helped increase our net interest income by 30% in comparison to the three months ended March 31, 2014. A deeper dive of the figures further evidences this growth, our interest income on whole loans increased by 60% in comparison to the same period last year and we anticipate this trend to continue. Our most recent securitization CRE 2015 three closed on February 24. Our ability to access this securitization market at low rates non-recourse term financing with mid teens or high teens returns seems to be available. Northport Capital, our middle market lending platform originated over $269 million of loan commitments in 2014. As a result of its successful growth, and robust pipeline Northport recently increased its available credit facility by over 50%. While growth is important, we remain extremely focused on maintaining credit quality and we have done so. Our real estate watch list is shrinking. We currently maintain commercial real estate reserves of $4 million. This is in line with our recent charge off history 18 basis point on trailing per year and reflects our strong focus on originating commercial real estate loans with strong credit profile. Equity investments in our securities available for sale continue to benefit from sound credit fundamentals. We directed our investors attention to a significant improvement to the fair values on our investment securities during 2014 and we're able to generate gains of $14.4 million on our securities and loans during Q1 2015. We expect to continue opportunistically harvest some of these unrealized gains during the remainder of 2015. Our liquidity remained strong. We issued $100 million of convertible senior notes in early January to fuel our growing investment portfolio in 2015. We recycled equity via increased leverage in our new CRE securitization and received $78 million in late February and liquidated a bank loan CLO which returned $29.8 million during this period. We feel confident about our ability to generate AFFO of approximately $0.70 and distribute at least $0.64 in dividends. I believe that our origination machine is just warming up and will power us to new levels of profitability. In March of this year Resource Capital Corp. marked its 10th year anniversary. Shortly after our formation the United States went through one of the worst financial crisis since the Great Depression and a slow recovery thereafter. Despite those headwinds we've originating over $3 billion in commercial real estate loans, over $1 billion of which was originated in just the last 18 months. We have distributed almost $580 million in dividend or $11.28 per share held since inception. We are very proud that most of our core senior professional team has been here for mostly all of our history and they continue to do excellent work on behalf of our shareholders. 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 for the current balance in excess of $1.83 billion in a pull that is both granular and diverse. RSO's commercial and mortgage portfolio is comprised of 84 individual loans with an aggregate committed balance of approximately $1.64 billion and is comprised of 95% self originated whole loans, 4% mezzanine loans and 1% B notes. The underlying collateral base securing RSO's commercial mortgage portfolio continues to be spread across the major asset categories in geographically varied markets with a portfolio breakdown of 47% multifamily, 20% office, 15% hotel, 13% retail and 5% other such as R&D and mixed year's deals [ph]. During the first quarter of 2015, RSO closed new loans with commitments totaling $157 million which represents 48% increase over the same period last year. Of more significance though, those trailing 12-month production as of the end of the first quarter of 2015 was over $817 million, which is a 107% increase over the trailing 12-month period as of the end of the first quarter of 2014 which is record loan origination volume for RSO and in line with our previous announced origination target for 2015 of between $800 million and $950 million. In addition, since the end of the first quarter, we have closed new loans with commitments totaling approximately $115 million have another $76 million of new loans in the process of closing. As of today just slightly over four months into 2015, RSO’s aggregate new loan production activity stands at approximately $350 million across 21 separate loans. Our origination pipeline remains full and continues to grow, while still remaining keenly focused on credit metrics and overall asset and sponsor quality and diversity. We currently have approximately $300 million of new lending opportunities underwritten, quoted and under negotiation with approximately $350 million of additional opportunities in active underwriting and structuring. As I have said in previous calls, while we have recognized peak production levels in our origination efforts and are again projecting increased volume for 2015, our primary focus remains as always on credit. Our core lending philosophy still places the ultimate premium on asset quality, location and business plan – with significant [ph] official sponsor experience and financial strength. Through the application of strict valuation, cash flow metrics and conservative growth and exit assumptions, RSO continues to build a strong portfolio that has ready access to term financing through our financing facilities with our commercial banking partners as well as in the CRE CLO where RSO's deals have been met with broad acceptance. On February 24, we successfully closed RSO 2015-CRE3 our third CRE CLO in 14 months. With our first CLO that closed in late December of 2013 we have financed over $1.1 billion of collateral through these transactions at a weighted average cost LIBOR plus 174 and weighted average leverage of 77.24%. We anticipate RSO’s weighted average annual yield and the retained equity in our three CLOs to be between 17% and 19%. With regard to our CLOs RSO has voluntarily adopted a level of investor friendly reporting that goes well beyond trustee requirements and provides periodic reports that contain narrative business plan updates for each of the commercial mortgage loans in our term financing CLO vehicles. These reports are posted on the trustee’s password protected website and investors who own bonds in these deals are notified of the postings and can track the progress of each asset in the deal. The first reports for our 2013 CRE1 and 2014 CRE2 deals were posted on CTS link on April 20. The CRE CLO market continues to build strength and RSO is committed to providing as much transparency as possible to investors and our CLO financing in all stages of the transaction through the implementation of what believe to be best practices for this market. I am once again pleased to report that the entire commercial real estate loan portfolio is performing with no defaults. The broader real estate recovery has taken hold and we remain optimistic about fundamentals, but are cautiously on the lookout for markets that we feel are outpacing normal sustainable growth. The positive performance of our portfolio is a daily reminder that validates the credit first approach to lending and selectivity we apply to markets, asset classes and sponsors in our origination process. With that, I’ll turn it back to Jonathan and rejoin you for Q&A at the end of the call. Thank you.

Thanks Dave. Now I'll ask our other Dave, Dave Bryant our CFO to discuss our financials.

Thank you, Jonathan. Resource Capital Corp. declared and paid a cash dividend for the first quarter and in March 31, 2015 of $0.16 per common share matching our adjusted funds from operations or AFFO for the quarter of $21.3 million, again $0.16 per common share diluted. In determining AFFO for the first quarter, there were several non-cash adjustments that netted to approximately $9 million and cash adjustments of $2.9 million. We passed all the interest coverage and over collateralization tests in all of our securitizations that require such tests, including our legacy real estate CDOs and remaining bank loan CLOs. Our two most recent securitizations RCC 2014-CRE2 and RCC 2015-CRE3 are subject only to over collateralization tests which we have easily passed. Each of these structured finance vehicles performed well and produced healthy cash flow to us in Q1 2015. We had one of our bank loan CLOs liquidate in Q1 and in addition we expect another legacy bank loan CLO to liquidate in June of this year. We anticipate recycling returned capital from each into newly underwritten loans. As we discussed on the year end, the recent rate reduction of 25 bps on our $400 million term facility with Wells Fargo together with the continued portfolio growth outlined by Dave Bloom augment our net interest income and cash flow from real estate operations. As a reference point, we increased the net interest income on our full real estate loan portfolio by $5.7 million or 72% for the 2015 quarter over the same period in 2014. We ended Q1 with availability of $506 million on our real estate term facilities combined after the February paydown of $214 million on our CRE term facilities at the close of the most recent real estate securitization. And we ended the period with $71 million on our CMBS has term facility. This availability provides plenty of run way for the dynamic real estate loan pipeline. The three most recent real estate securitizations have 700 million of senior notes issued to outside investors at a weighted average cost of LIBOR plus 175 a very attractive cost of capital to RSO. In Q1 2015, we booked a provision for loan loss of $4 million. This charge was predominantly a result of our increased provisions on our commercial finance portfolio, $2.5 million of which was attributable to one possession in our middle market space. Another $700,000 was attributable to possessions subsequently sold for credit reasons and $800,000 for reserves on the general loan portfolio. We ended the period with $4 million in commercial real estate allowances and $3.2 million in commercial financial allowances. With the loan exception of the one specific middle market position that began impaired our credit has been very good. One bank loan where a mere $251,000 is delinquent out of a portfolio of $298 million, all of our middle market loans are current and as Dave Bloom mentioned, all 79 of our real estate loans totaling $1.5 billion are current. We see that our corporate GNA is a bit lumpy this quarter, which I'll explain in more detail in a moment. First, we do expect our 2015 corporate G&A run rate to be in the $15.5 million to $16 million range comparable to the $15.3 million amount incurred in 2014. What happened in Q1 is that we saw two nonrecurring charges totaling approximately $450,000 and several additional expenses of a similar amount based on the timing of their recognition versus the timing in 2014. That is, these expenses were billed later in 2014 and this year which skews the period-over-period comparison. After adjusting Q1 by approximately $900,000 for these items, the adjusted Q1 run rate matches the Q4 corporate overhead of $3.9 million. Again, after considering the timing and impact of these anomalies we expect the 2015 G&A run rate to approximate the 2014 total of $15.3 million. Our leverage stands at 2.1 times at March 31. When we treat our TRUP [ph] issuances which have a remaining term of 21 years as equity, our leverage is 1.9 times. With regard to real estate leverage, we end Q1 at 2.07 times on our entire real estate portfolio including cash earmarked for new real estate loan originations. Our asset base grew from $2.7 billion to $2.9 billion and about half of that is attributable to a net increase in commercial real estate loans. This growth reflects the impact of our focus on growing our interest income producing core asset base. The three month leverage ratio increase to 2.1x from 1.8 is correlated directly to the growth in our total assets. Net securitization borrowings increased primarily from our new real estate securitization offset by pay downs in our legacy CLO portfolio. We also had increased borrowings from our 8% convertible notes issuance in January and to a lesser extent, an increase in our middle market related syndicated credit facility. In terms of equity capital on a book basis we were relatively static during the period. Overall weighted average cost on net proceeds from the three series of preferred stock is 8.77% and overall our weighted average cost of capital from all sources was 5.72% as of March 31. We ended the March quarter with cap book value $5 down from $5.07 at year end 2014. At March 31 2015 we saw a mix shift in our equity as expected. Our equity is now allocated as follows; commercial real estate assets of 72% up from 67% at year end 2014, commercial finance of 24% down from about 29% at year end 2014, and our other investments remained steady at about 4%. We previously stated an intent to rebalanced the portfolio in 2015 to a minimum of 75% in commercial real estate and we’re well on our way toward that goal. As legacy CLO investments are liquidated the equity will be reinvested substantially in the healthy real estate loan pipeline, which will continue to increase our net equity allocated to that core business. As Jon said, our real estate lending platform is in high gear and remains centered on underwriting high quality credit combined with our conservative use of leverage. We look forward to maintaining a generous yield to book returns for our investors while growing our balance sheet with the upmost focus on credit quality coupled with long-term match funded financing which is the strategic focus of our growth. With that, my remarks are completed and I'll hand the call back to Jonathan Cohen.

Thank you, Dave Bryant and then with that I will open the call for any questions.

[Operator Instructions] Your first question, which comes from the line of Jade Rahmani from KBW. Please go ahead.

Hi yes. This is actually Ryan Tomasello on for Jade. Thank you for taking my question. Can you talk a bit more about the current competitive environment for us are you lending and where you see RSO having a competitive advantage and in what niches that would be?

Sure, Dave Bloom?

Yes. Thanks Jade, did a, oh right, I'm sorry Ryan. We certainly see a competitive environment, but as Jonathan mentioned, having been in business with essentially the same team facing the market for 10 years now, we have a tremendous advantage in a process that is extremely well understood by borrowers and intermediaries alike. And with markets that focus on certainty of close it provides in an invaluable edge. There will always be outliers who will come in. We oftentimes find them falling out and fine deals coming back to us. But I think that it’s a competitive market, but we are winning more than our share, yes.

Great thanks and then have you seen any particular markets or property types where there has been a loosening of underwriting seen among peers?

No, I mean in general people are staying relatively in locked step. I mean, again there is, there can be outliers in any given deal, but it’s still a very relationship centric business and we continue to grow our relationship base every day.

Great thanks, and then just one last question, the gains on the debt extinguishment you know has still have been contributing to AFFO and I was wondering if you could provide any color on how much more gains do you expect to flow through that line over the next year?

We've anticipated somewhere in the neighborhood of $5 million to $6 million total for the year Ryan. There is a lot more behind that, but more the bigger dollars will start to come as those legacy CDOs terminate and liquidate, because a lot of these gains are at the bottom of the tranches. But in terms of actually getting more this year probably close to double what we had for the full year in the first quarter.

Great, thank you.

And your next question comes from the line of Richard Eckert from MLV & Company. Please go ahead.

This is for David Bloom. The funding commitments for the first quarter at least versus my estimate, were a little light. I mean, I may have jumped in a little late, but can you talk about your pipeline and what you are looking at for the full year?

Sure, thanks for the question. We in the last call provided guidance for the year between $800 million and $800 million to $950 million.

And that’s what I have in my estimates. Do you think that's still realistic?

And we, yes we absolutely do. I mean, the first quarter is generally a light quarter. I think we did well in first quarter year-over-year, but certainly as we continue into the year with deals in process and $116 million of deals closed in really April alone, we are at about $350 million of total loan production for the year for four months and so we believe that we are pacing extremely well.

Okay, and then the next question is for David Bryant. You guided to 75% capital allocations to commercial real estate for the year when do you think you’ll get back to the 80% to 85% that you have targeted over time?

I think that we have a chance of getting closer to that by the end of this year, but as I said the minimum goal was 75% for this year. We will certainly get there in 2015 and I would think the higher number in the early part of 2016.

Okay, thank you very much.

There are no further questions at this time. [Operator Instructions] Your next question comes from the line of Jade Rahmani from KBW. Please go ahead.

Hi thanks just following up again, this is Ryan Tomasello on for Jade. Can you give any color on where incremental yields were on commercial real estate originations during the quarter?

As I look at our current tape where, I think we are still kind of, I mean we're still looking at spreads plus under [indiscernible].

I'm sorry, what was that?

We're still looking at spreads just a touch under 5%.

Great, thanks.

I'm sorry, that's without, as Dave Bryant pointed out, that's the pure spread that faces the borrower and does not include the accretion of the origination thing.

Got it, thank you.

Thank you. I would now like to turn the call back over to Jonathan for closing remarks.

Well, thank you very much. We greatly appreciate your support and we look forward to speaking with you on the next call.