Good day, ladies and gentlemen, and welcome to the Q4 2018 Exantas Capital Corp. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference Andy Carr, Head of Investor Relations. Sir, you may begin.

Thank you, Helen. Good morning, everyone and thank you joining our call. Before we begin, I would like to remind everyone that certain statements made in the course of this call are 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 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 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 are contained in our earnings release for the past quarter. I will now turn it over to the Chairman of Exantas Capital Corp., Andrew Farkas, for opening remarks.

Thank you, Andy. Good morning, all. Thanks for joining the call. With me today are Bob Lieber, our Chief Executive Officer; Matt Stern, our President; Dave Bryant, our CFO; Paul Hughson, Head of Commercial Real Estate Lending; and Andy Carr, who just spoke to you, Head of Investor Relations, from whom of course you've already heard. I wanted to take a moment to review our progress in 2018 before handing the call back to management for the normal quarter review. We had a great 2018. Last night, we reported $1.1 billion of new transitional commercial real estate loan originations and CMBS investment activity in 2018, which will drive core earnings growth for 2019. 2018 adjusted core earnings increased to $0.71 per share from negative $0.37 per share in 2017. With that growth, the company's core investment portfolio for 2018 caused core earnings to accelerate, which supported three consecutive quarterly dividend increases in 2018 from $0.05 per share at the beginning of the year to $0.175 per share paid for the fourth quarter. We're anticipating another increase in our dividend to $0.20 per share for the first quarter of 2019, which we will recommend to the board for approval. We've largely completed the strategic plan that we first announced in November 2016. In May of 2018, we announced the rebranding of the company and presented the investment community, the company that's less complicated and has much more predictable earnings. I'm very pleased with the results of 2018 and the prospects for additional net investment portfolio growth and in turn core earnings growth. We look forward to reporting those results to you on future calls. With that, Bob, I'd like to turn it off to you. Bob is our CEO.

Thanks, Andrew and good morning, everybody. As Andrew noted, 2018 was a great transition year for Exantas Capital and we're very optimistic about the momentum that we've developed. Gross originations at 1.1 billion, as importantly, net capital deployment was close to $475 million for the full year in 2018, which is an increase of over 200% from 2017. For the fourth quarter of 2018 - for the fourth quarter, gross originations were over 355 million and net deployment for the quarter was over 125 million or 68% higher than the fourth quarter of 2017. So, trend is very good. We've also significantly reduced the company's cost of capital by redeeming preferred shares, improving the terms on our warehouse facilities and accessing the capital markets where appropriate. The results of these and other efforts have produced adjusted core earnings of $0.24 per share for the fourth quarter of 2018 when compared to $0.01 loss in the fourth quarter of 2017. Net interest income has increased by 36% to $0.49 per share in the fourth quarter of 2018 compared to $0.36 per common share in the fourth quarter of 2017. We are still in the process of converting the proceeds from the strategic plan and loan payoffs in to future income producing credit investments. Our available liquidity for the company at year end was $175 million. We believe that our ability to leverage the commercial real estate, investment management and real estate services business with C-III Capital Partners will continue to be key value drivers for the growth of Exantas' investment portfolio in 2019 despite a competitive investing and lending environment. Additionally, we believe we're well positioned in the current interest rate environment to compete with LIBOR over - when LIBOR rose in 2018, we benefited as a floating rate lender. Indeed,…

Thank you, Bob and good morning, everyone. I'd like to begin by taking a closer look at our fourth quarter origination activity. For the fourth quarter, the company originated 11 commercial real estate loans, totaling $275 million or an average commitment of 25 million with a weighted average spread of 306 basis points over 30 day LIBOR. At December 31, 2018, our commercial real estate loan portfolio was comprised of 1.5 billion of floating rate self-originated whole loans, a $19 million preferred equity position and a $5 million fixed rate mezzanine loan. Our portfolio grew by 55 million during the fourth quarter, as new loan originations exceeded payoffs and paydowns. Our commercial real estate loan origination team continues to see quality lending opportunities, resulting in a strong deal pipeline. New deal flows sourced as a result of our growing market presence combined with repeat lending opportunities arising from existing borrower relationships contributed to a 40 plus percent year-over-year increase in loan originations, with 2018 loan origination volume exceeding $860 million. This is the highest annual origination volume in Exantas' history. We remain optimistic about the multifamily space, which accounted for approximately 63% of our loan portfolio collateral at December 31, 2018, while our exposure to retail has decreased to less than 10%. Our lending strategy remains focused on seeking the best risk adjusted returns in markets around the United States that are experiencing growing demographics and the prospects for job creation. Despite a competitive lending environment in 2018, the weighted average unlevered yield of new loan originations increased 13 basis points to 5.84% in 2018 from 5.71% in 2017. We also financed our loan portfolio more efficiently in 2018, thereby reducing the average spread on our asset level cost of funds by 52 basis points over the last 12 months…

Thank you, Matt. Good morning, everyone. Our GAAP net income allocable to common shares for the three months and year ended December 31, 2018 was 7.4 million or $0.23 and 7 million or $0.22 per share respectively. Core earnings were 6.5 million or $0.21 per common share and adjusted core earnings were 7.5 million or $0.24 per common share for Q4 2018. For calendar year 2018, core earnings were 9.4 million or $0.30 per common share and adjusted core earnings were 22.3 million or $0.71 per common share. GAAP net income for the three months ended December 31 includes several significant items. One, the most significant was the 1.4 million recovery of a corporate credit loan position previously held in a legacy [indiscernible] CLO, which of course was a non-core activity. Two, we also received 1.4 million in commercial real estate loan exit fees during a period due to increased loan payoffs, which have, based on our experience, tended to be seasonally higher in the last calendar quarter. And three, we realized an impairment of 932,000 on a legacy CMBS bond, which was recognized in Q4. The following adjustments were made to arrive at 2018 adjusted core earnings. A 7.5 million or $0.24 per share from our redemption of 115 million of Series B preferred stock; a 2.3 million or $0.07 per share from a loss on a CRE loan originated in 2013 and reserved for in 2016; another 0.9 million or $0.03 per share from the impairment on the CMBS bond acquired in 2007, which again occurred in Q4 of '18, and finally, we paid a 2.2 million or $0.03 per share legal charge, which was also accrued for in 2016. We view these items as non-recurring and/or as out of period adjustments that affected our core earnings performance…

Thanks, Dave. As Andrew mentioned at the beginning of the call, we've made a lot of progress during 2018. Just to highlight, we've substantially completed our strategic plan. We've reduced our cost of capital. We've grown adjusted core earnings from a negative $0.37 in 2017 to a positive $0.71 in 2018. We've increased the dividend by 300% from $0.20 a year to $0.20 a quarter expected in the first quarter of 2019. Our net capital deployment is up over 200% year-over-year. We've continued to diversify and de-risk our portfolio and extend portfolio duration and economic book value has remained relatively stable. We have over 175 million of available capital and we're optimistic about the opportunities in front of us. Thank you for your time here today and listening. I would be happy to open the phone to any questions? Operator?

[Operator Instructions] Our first question comes from Steve DeLaney of JMP Securities.

Thanks. Good morning, everyone and congratulations on a strong close to last year. Lot of noise in December obviously, I wanted to start with asking about the legacy CMBS, the $0.03 impairment there. Was that due - also due to spread widening, or was this more of a fundamental credit driven type of a write down? Thanks.

In that case, Steve, it was a legacy bond that we own, that one asset that remains, people responsible for the trust that provided guidance on what valuation was. And that's what informed the mark and they sold that one last asset at less than was anticipated. And that's what gave rise to it. Yeah. So that's - yeah, that was not a mark-to-market concept.

So that's pretty much done and I'm guessing that's not included in the $0.28 general CMBS fair value decline and the estimated 50% recovery? This is completely separate from those numbers. Is that correct?

That's right.

Okay. Thanks. And we noticed, you do - you are carrying a general loan loss reserve of 1.4 million? Was that something - I can't recall whether that was legacy back from RSO or was that something that C-III put in place just as sort of a buffer or a cushion? And is that something that we should expect to see you grow, as we move through 2019 ahead of the CECL accounting policy coming into effect in 2020?

Yes. The company has always had a reserve policy, but you are correct that since C-III took over the management agreement, we have altered that policy over time. But you'll see that rise because it is - it's largely correlated to a percentage of the portfolio itself. And so as a result, as the aggregate investment portfolio rises, you would see that tick up.

And Steve, we have not finalized our analysis of the impact of CECL, but we would expect the number to grow as a result of that, as it would - in next year, in 2020 and going forward. And of course, any catch up adjustment that will be made will be a balance sheet entry and not impact earnings.

Exactly, because non-cash obviously wouldn't fit with core. And is there, the 1.4, I'm just curious if there's any kind of percentage of principal that you're trying to work towards?

So, Steve, if you take a look at the - we haven't filed our K yet, but if you look at the third quarter Q, you'll notice that we have categories of risk ratings and when you look at risk rating 3 and risk rating 4, that's how we developed our general reserve risk rating 3 is a 1.5% reserve, meaning, any loans in that bucket get 1.5% of their principal balance reserve and in category 4, it's 5% because it's gotten progressively worse. And then aside from that, we have a category 5, those are specifically impaired loans. So we look to establish the reserve on a loan by loan basis if anything falls into that category.

Our next question comes from Ben Zucker of BTIG.

Good morning and thanks for taking my questions. And I'd like to echo congrats on a very successful 2018.

Thank you.

I just wanted to talk about actually repayments quickly. Looking at your earnings release, 2018 originations are like half of your year-end '18 loan portfolio. So I don't want to put words in your mouth, but it really feels like repayment should be slowing down here in 2019. Is that a fair characterization?

I just want to make sure we understand your first comment, meaning around - meaning that originations for the year were about half.

Yeah. Is that right? Am I seeing like originations around 850 million, 860 million, which is about half of the carrying value of the year-end?

That's correct. Yeah, that's correct. I do think, I think we mentioned on the third quarter call that 2018 repayments were a bit elevated. I think that's the product of the timing of the origination of some of the predecessor years when the origination volume for the company had ticked up. Obviously, you can have people pay off a little bit sooner or extend. It's difficult to predict with precision, but we would expect the number to be a bit lower in 2019.

Okay. That's definitely helpful. And I guess, following up on that, on the production side, you gave guidance of, I think, $850 million to $1 billion for 2019. Did that include CMBS as well or was that just CRE loan origination?

Yeah, that was the combination of our loan investments as well as CMBS.

Okay. And from like a timing and deployment perspective, should we assume that the December volatility might exacerbate the normal seasonal 1Q slowdown, or would you still expect that you had pretty steady flow throughout that period?

The loan pipeline still looks strong right now. It's difficult to predict with precision exactly what will close before the end of the month, relative to what will fall into the beginning of 2Q, but the pipeline is still in decent shape, as we've mentioned.

That's helpful, Matt. And then just kind of turning to the expense side of things, you guys were running on that fixed management fee agreement in 2018, correct?

That's correct.

So starting now, we go to the 1.5% on equity, I'm assuming. Is there anything that's going into that equity besides common and preferred stock?

No. That's the calculation, so you would see starting in the first quarter, you'll see that run as a percentage of equity as would typically be the case.

Great. Well, I guess if my math looks right on the surface, that should be a nice little drop in the management fees then. And did you guys have any kind of like G&A or operating expense targets for this year, for 2019? I can't remember when you were going through your Investor Day deck?

Sure. I would say that our expectation of following being done with the strategic plan and normal operational activity, which certainly we would hope to achieve this year, you'll see guidance in the investor presentation, we'll be updating that shortly, I would say, in the coming weeks, but I think the guidance that is provided in the existing deck is consistent.

Our next question comes from Stephen Laws of Raymond James.

Following up on a couple of these topics from Ben and Steve, I guess CMBS growth, little higher in the fourth quarter, was that opportunistic given wider spreads in December. If so, have you continued acquiring those assets here in January and February or have spreads tightened back up to shift your focus on a relative attractiveness back to loans here in the first quarter?

I think there was origination activity on the buying side or investment activity earlier in the quarter as well. You're correct that there were a few bonds wherein spreads moved out that we ended up and committing on and ended up buying some, but I think it was relatively spread out across the quarter. I don't know that I can give specific guidance right now on 1Q activity, but as mentioned in our comments, spreads have come in maybe 50%, 60%, since December and we continue to look at opportunities to invest.

Great. Along those lines, new loans had a returns look today versus November. Has the dislocation lightened competition, kind of what type of impacted did December or late 4Q volatility have on what you're seeing on competitive landscape for new CRE loans.

I mean, I think the volatility was much more pronounced than bonds, it wasn't loans. There was, I'd say, fourth quarter, if anything, there was a pause in spread tightening as opposed to any real meaningful spread widening. I think, spreads have kind of stabilized within a band over the course of the last 8 to 10 weeks.

And Dave, wanted to follow up on your, your comments talked about leverage at 2.8. Where do you see that running, where it's a comfortable target? I know, you mentioned there's still - you do still have some capital available for investment that you guys highlighted in prepared remarks, but can you talk about your leverage targets and where you see that moving to over the year?

So, we do have some more room to move leverage marginally higher. I think it's fair to say that we were under levered in 2017. We're approaching a more reasonable level now and have some room in 2019. We're well within any leverage constraints that our warehouse facilities would call for. So, we're not constrained by that. It's more of a question of being comfortable with the risk that we're taking, but we do have some room to move now. Obviously, as we do more CLOs, they tend to get us a little bit higher leverage. So that is obviously something that we look to do as we want to match funds, or our assets with our debt.

Appreciate the color there on leverage. And then lastly, you guys have accomplished quite a bit with the legacy assets, looking at this table, from 480 million identified to 30, can you talk about that remaining 30? What's the timeline of addressing that? Are these assets that are left going to be more difficult or can you maybe talk about the timeline of how the remaining legacy assets will wind down?

Yes. There are just a couple of assets that remain, a couple of commercial real estate loans and then some cash and legacy liabilities associated with one of the operating businesses, but we would anticipate that they'll play themselves out during 2019. So it's challenging to speak with specifics there, but we would expect them to play themselves out this year.

Well, that's helpful. So that will be addressed this year most likely, so that's great. Well, I appreciate you taking my questions.

Thank you. Our next question comes from Jade Rahmani of KBW.

This is actually Ryan Tomasello on for Jade. Thanks for taking the questions. Looking at the anticipated dividend of $0.20 from 1Q, it equates to about, looks like 7.5% return on economic book value. So just wondering if you can remind us what stabilized post expense ROEs you're targeting when you expect to hit those levels and perhaps how we should expect the dividend to trend throughout the year in 2019.

I guess it's difficult to give specific guidance on exactly where the dividend will go. But I think the earnings power of the business, we tried to depict that, I believe it's on page 12 of our investor presentation. Hopefully that'll provide some visibility. Obviously, we will update that when we put out our new investor deck, but we think core earnings will substantially inform directionally where we go with the dividend and at least relative to book value, we would anticipate the company, once fully deployed, to be able to be upwardly mobile.

And just to add to Matt's comment and we do have capital availability to continue to grow our investment portfolio here in 2019.

Okay. And given the historical participation you've had in the CLO market, we're just wondering if you can give us some commentary on the current state of that execution, if it's still attractive and how competition for these CLO eligible loans has trended post year, after this volatility has kind of played out?

I think CLO, it continues to be an efficient way to match our assets and liabilities. I mean I think, the spreads have moved around a little bit. I think spreads have widened more dramatically on managed deals and on static deals. I think that the dramatic tightening of CLO liabilities over the course of 2018 did lead to spread tightening on the origination side. That has largely dissipated. So I don't really think that CLO - where CLO spreads are today meaningfully impacts where origination spreads are in today's world.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Bob Lieber for closing remarks.

Thank you all for joining us today and learning more. We intend to be out talking more to the market as we go through the investor conference upcoming here. We appreciate your interest and your questions. Don't hesitate to call. Andrew, would you like to have any closing comments?

No, I think that's it. I want to congratulate management for yet another excellent performance and like to thank our shareholders for your continued support.

Thank you, everybody.

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