RAIT Financial Trust's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: RAIT Financial (RAS)

RAIT Financial Trust (NYSE:RAS)

Q4 2012 Earnings Conference Call

February 13, 2013 09:00 AM ET

Executives

Andres Viroslav - Vice President & Director of Corporate Communications

Scott Schaeffer - Chief Executive Officer

James Sebra - Chief Financial Officer & Treasurer

Analysts

Gabe Poggi - FBR Capital Markets

David Walrut [ph] – Leidenberg

Jason Stewart - Compass Point

Operator

Good day ladies and gentlemen and welcome to the Q4 2012 RAIT Financial Trust Earnings Conference Call. My name is Andrew and I will be your operator for today.

At this time all participants are in a 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 like to turn the call over to Mr. Andres Viroslav, Vice President and Director of Corporate Communications. Please proceed sir.

Andres Viroslav

Thank you Andrew and good morning to everyone. Thank you for joining us today to review RAIT Financial Trust fourth quarter and fiscal 2012 financial results. On the call with me today are Scott Schaeffer, Chief Executive Officer and Jim Sebra, RAIT’s Chief Financial Officer.

This morning’s call is being webcast on our website at www.raitft.com. There will be a replay of the call available via webcast on our website and telephonically beginning at approximately 11:00 AM Eastern Time today. The dial-in for the replay is 888-286-8010 with a confirmation code of 873-973-44.

Before I turn the call over to Scott, I would like to remind everyone that there may be forward-looking statements made in this call. These forward-looking statements reflect RAIT’s current views with respect to future events and financial performance. Actual results could differ substantially and materially from what RAIT has projected. Such statements are made in good faith pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Please refer to RAIT’s press release and filings with the SEC for factors that could affect the accuracy of our expectations or cause our future results to differ materially from those expectations.

Participants may discuss non-GAAP financial measures in this call. A copy of RAIT’s press release containing financial information, other statistical information and a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measure is attached to RAIT’s most recent current report on Form 8-K available at RAIT’s website www.raitft.com under Investor Relations. RAIT’s other SEC filings are also available through this link. RAIT does not undertake to update forward-looking statements in this call or with respect to matters described herein, except as may be required by law.

Now, I would like to turn the call over to RAIT’s Chief Executive Officer, Scott Schaeffer. Scott?

Scott Schaeffer

Thanks Andres and thanks you all for joining our call today. Let’s start with the financial highlights for the fourth quarter. AFFO rose to $0.33 per share, a 10% increase over the third quarter of 2012. During the same period, total revenues increased 5% to $55 million and operating income increased 19% to $11.3 million. In addition, our own property portfolio continues to deliver a consistent NOI and cash flow stream. Strong loan originations, CMBS loan sales and stable credit performance from the portfolio were the key drivers this quarter.

During the fourth quarter we funded $90 million of loans, including $67 million of CMBS loans and $23 million of bridge and mezzanine loans for the balance sheet. For the year, we funded $376 million of loans, consisting of $119 million of CMBS loans and $257 million of bridge and mezzanine loans.

Our CMBS lending and securitization initiative is ramping nicely. During 2012, we securitized $98 million of CMBS loans, including $57 million during the fourth quarter. The CMBS loan pipeline continues to grow and is now approximately $640 million.

Also during the fourth quarter, we entered into a $150 million warehouse facility with a subsidiary of Credit Suisse for our bridge loan production. This relationship will increase our capacity while providing access to the floating rate securitization market. We recently funded our first loan on this warehouse line. We expect to hold these bridge loans on our balance sheet while using the securitization market and bank participation initiative to provide attractive match funded financing. The bridge loan pipeline is also growing and is approximately $160 million.

We ended the fourth quarter raising $57 million through a secondary public offering of common stock, including full exercise of the overallotment option in January. The offering was well received in the market and we are working to deploy the proceeds into our lending business.

As a result of the strong performance across our core businesses, RAIT’s board announced our third common dividend increase since 2011 to $0.10 per share for the fourth quarter of 2012. This represents an 11% increase from the prior quarter’s dividend and a 67% increase from the fourth quarter of 2011 dividend. We remain focused on increasing cash flow and delivering a consistent and steadily growing common share dividend as we deploy capital into our core businesses.

At this point, I would like to turn the call over to Jim to go through the financial results in more detail. Jim?

James Sebra

Thank you, Scott. Before getting into the numbers, I would like to take a moment to explain the new income statement presentation.

Due to our focus in the projected growth in our CRE lending, we have change our income statement and are now presenting net interest margin. The new presentation enhances our disclosure by allocating the associated interest and hedging cost to the loan and real estate equity portfolios. Interest cost associated with our investments and loans and securities is presented as investment interest expense and together with investment interest income generates net interest margin. The interest cost included in expense is associated with corporate obligation and interest associated with our own real estate properties.

Now, let’s get into the number. AFFO increased 11% to $0.33 per diluted share, up from $0.30 in the fourth quarter of 2011. Net interest margin increased $800,000 as compared to the fourth quarter of 2011, due to reduced hedging cost as interest rate hedges in our CRE CDOs continue to burn off during 2012.

As we indicated in our earnings call last quarter, for the full year of 2013, we are expecting additional savings in our interest rate hedge cost associated with our CRE CDOs of approximately $3 million as these hedges continue to amortize in 2013.

Year-to-date loan production was $376 million in 2012, of which $119 million was associated with our CMBS conduit business. Rental income increased by 9% or $2.3 million in Q4 2012 as compared to Q4 2011, as rental rates in our multi-family portfolio continue to decline and we acquired one multi-family property in October 2012.

Lastly, fee and other income is up $4.3 million in Q4 2012 as compared to Q4 2011 as a result of our securitizing $57 million of CMBS conduit loan resulting in $3.8 million of profit during the current quarter.

With respect to our expenses, most of the expenses are in line with our expectations and historical levels. A couple of items of note. First, interest expense is down $1.3 million compared to the fourth quarter of 2011 due to lower outstanding debt and lower interest cost and $25 million of subordinated debt. That flips from a fixed rate to a floating rate of interest during the second quarter of 2012. Second, property operating expenses increased by $600,000 as compared to the fourth quarter of 2011. All of this increase was the result of three properties acquired in 2012 that were not present in 2011.

Property NOI was $12.2 million during the fourth quarter, an increase of 16% or $1.7 million since the fourth quarter of 2011. Combined compensation and administrative expenses are consistent at approximately 18% of total revenue in Q4 2012 as compared to Q4 2011. We expect some modest increase in these expenses as we continue to hire the personnel necessary to grow our business.

For the fourth quarter of 2012, operating income was $11.3 million, that’s a 164% increase over the fourth quarter of 2011 operating income of $4.3 million. That is $7 million increase quarter-to-quarter, or $28 million annually. The combination of CMBS loan sales, the broad improvement in our net interest margin, and our property NOI drove our operating income higher in 2012 as compared to 2011.

As with prior quarters, we reported a GAAP net loss for the fourth quarter of $50 million, or $0.99 per diluted share. The GAAP net loss was attributable to $58 million of continued negative changes in the fair value of our various financial instruments. The primary driver of the negative changes in these financial instruments was an increase in the market price of the Taberna CDO liabilities during the fourth quarter and throughout 2012. Please remember that the changes in the fair value of our financial instruments relates to our consolidated Taberna securitizations and our non-cash. As such, we believe that our presentation and discussion of AFFO is more indicative of our financial performance.

From a credit standpoint, we continue to see stability in our loan portfolio. Non-accrual loans decreased slightly to $69 million or 6.5% of our portfolio. We continue to maintain loan (inaudible) at approximately 44% of our non-accrual loans and believe that we adequately reserve for any potential future losses.

With respect to our CRE CDOs, we continue to meet all overcollateralization test. At December 31st, CRE CDO I reported an OC test of 126.6% that is above the required level of 116.2%. CRE CDO II reported an OC test of 118% and that is above the required level of 111.7%.

At December 31st, we continue to maintain good liquidity and capital available for investment. In December 2012, we accessed capital markets and sold 10 million shares of RAIT common stock, inclusive of the overallotment exercise in January 2013 and raised $57 million of proceeds. We ended the quarter with $500 million of capital available for investment comprised of $100 of cash on hand, $250 million of availability under our two CMBS warehouse lines, and $150 million of availability under our bridge loan facility.

As we discussed on our last earnings call, we closed the $100 million capital commitment from Almanac Realty on October 2012. Since the closing, we have drawn down or issued $65 million of the Series D preferred shares. Along with the issuance of Series D preferred shares, we issued warrants and SARs on our common shares. Due to the variety of considerations under US GAAP, the Series D preferred shares are shown in the mezzanine level in the balance sheet that is between liabilities and equity and the value of the warrants and SARs is recorded as a separate liability, included in other liabilities. The resulting discount and cost incurred to complete the transaction will be amortized earning over the respective term. The 10-K will continue further disclosure surrounding the accounting treatment for this transaction. The remaining unfunded commitment from Almanac Realty is $35 million. Since year end, we have funded $38 million of CRE loans and have repaid $19.4 million of indebtedness that was costing us $9.6 million annual. As of today, RAIT has no recourse debt maturities until April 2015.

Scott, this concludes the financial report. Back to you.

Scott Schaeffer

Thanks, Jim. We remain focused on our multi-strategy approach of commercial real estate lending and direct ownership of commercial real estate property. The property portfolio provides stability during volatile times and is an effective hedge against inflation. Though we expect to deploy the majority of our available capital into the lending businesses, we do see and we will take advantage of attractive opportunities to acquire properties for our loan portfolio.

You may have seen the recent announcements surrounding Jack Salmon. Jack played an important role as RAIT’s CFO during the great recession after which he moved over to lead the Independence Realty Trust effort. Jack will be leaving both RAIT and IRT and I will be taking over the CEO responsibilities at Independence Realty. We wish Jack well.

I think at this time operator I would like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Gabe Poggi, FBR, please proceed.

Gabe Poggi - FBR Capital Markets

Hi, good morning guys.

Scott Schaeffer

Good morning, Gabe.

Gabe Poggi - FBR Capital Markets

A couple of questions for you. Scott, you mentioned that you guys have made or funded a first loan on – against the CS facility. Can you talk about what you see as the ramp of that $150 million facility, is there a time table for that?

Scott Schaeffer

Sure, Gabe. Well, keep in mind that we didn’t close on that facility until the middle of December. Of course, while we have always been a bridge loan lender, we really weren’t ramping a pipeline until we knew that that was going to close because we didn’t want to get ahead of ourselves and have commitments out there that we couldn’t fund. So, we really started ramping the pipeline very late in the fourth quarter and then early in January. It’s now I think I said about $160 million give or take, and we expect to have that facility used and have a portfolio ready to securitize sometime during the later portion of the first half of this year.

Gabe Poggi - FBR Capital Markets

Great, that’s helpful. Second question, is there any comments you can provide on what you guys have done in conduit lending year-to-date? I mean, you had a very robust fourth quarter and a great year in 2012, how is that continuing? I know you have a huge pipeline, I think you said $600 – in excess of $600 – kind of anything year-to-date that you can talk about?

Scott Schaeffer

Yes, the pipeline is growing and is very strong. We have already funded $35 million of CMBS loans. I have been reporting that we wanted to do a $150 million of lending in the first quarter and we are on track to do that.

Gabe Poggi - FBR Capital Markets

Perfect. Last question for you, can you comment about – you are pushing rents in multi-family, the REO book has higher occupancy, north of 85%, can you talk about how shareholders should think about the value of your REO portfolio, kind of, where you guys carry that and where you think that value might be today, at least like a 20,000 foot level?

Scott Schaeffer

Sure. Well, we think it’s undervalued. When we took ownership of these properties we book them at their market value at that time. Most of this portfolio was built during 2009 and 2010. We know that net operating income at the portfolio has increased significantly since that time and property values in general had increased since that time. Just looking at that, as cap rates have compressed and as our NOI has increased, clearly this portfolio has gained in value, but we do not reappraise, we do market, it’s carried at the cost that we in effect acquired that a number of years ago.

Gabe Poggi - FBR Capital Markets

Okay, thank guys, nice job.

Scott Schaeffer

Thanks, Gabe.

Operator

Thank you. Your next question comes from the line of David Walrut [ph], Leidenberg, please proceed.

David Walrut [ph] – Leidenberg

Good morning, guys, good quarter.

Scott Schaeffer

Good morning, Dave. Thank you.

David Walrut [ph] – Leidenberg

I just wanted to talk a little bit about the capital that you raised later in the quarter. Obviously, you are sitting on more cash at the end of the quarter due to the timing of that. Can you talk first about the – I guess, pace that you are able to deploy that that new capital?

James Sebra

Quickly and I will add accretively. The new capital came in as a good match for the CS warehouse line for the bridge financing. But keep in mind that we do have fulsome growing pipelines and we wanted to just make sure that we had adequate liquidity to fund the opportunities that were available to us. So that was the driver behind raising the money and we do expect to have it all deployed quickly this year.

David Walrut [ph] – Leidenberg

Okay. You are saying that the spreads that you are seeing on what you are deploying is accretive to where your previous portfolio, the legacy portfolio have been?

James Sebra

Yes, absolutely.

David Walrut [ph] – Leidenberg

Okay. I guess kind of broad big picture, can you take us through the mindset of raising the common versus tapping the preferred D that you signed late last year as well?

James Sebra

The preferred D is there for us to draw over a two-year period from October of last year. The common raise was available to us. If you remember, at the end of December we didn’t know what the fiscal cliff was going to look like in January. The market reaction in early 2011 was somewhat of unknown. So we took advantage of an opportunity to raise the money as we did in late December, knowing that we still had the $35 million remaining of the Almanac commitment available to us for the future.

David Walrut [ph] – Leidenberg

Okay, great. Okay, I appreciate you guys. Thanks a lot.

James Sebra

Thank you.

Operator

Thank you. Your next question comes from Jason Stewart, Compass Point, please proceed.

Jason Stewart - Compass Point

Alright, thanks. We know you contributed about $30 million to the UBS commercial and mortgage back security deal that’s in the market, I think this week it’s expected to prices. Is there any reason to think that there is a concentration limit to these deals and rates contribution to them?

Scott Schaeffer

No. We are contributing everything that we have closed and available to be identified when the tape has been put together.

Jason Stewart - Compass Point

Okay.

Scott Schaeffer

It’s the idea that we have. It’s the program and it’s why we have two warehouse providers and a securitization partner, so that we can continue to contribute our loans with some real velocity as we close them. So, the UBS deal is going today, our other partner has a deal presumably going later in February and then there will be another one coming in March and we are contributing the loans really as quickly as we are funding them.

Jason Stewart - Compass Point

Got you, thank you. And then on the mez business, could you just give us a quick update on incremental returns there if you are seeing any difference in pricing?

Scott Schaeffer

We are not really looking to do a lot mez. I don’t like the mez market today. I think that that the pricing in the market is not appropriate for the risk that’s associated with mezzanine lending. The mez that we are doing it is mez behind our own first CMBS production if we need to do a little bit of mez in order to win a deal and we like the property and borrowing it all makes sense, or in the bridge situation as well. So, the mez that I see it, I have seen mez being priced as low as 10% in some markets and as high as 12% to 13% in others. I just frankly don’t believe that in the environment that we are in when you recognize that the mez is inherently levered because it’s already behind a large senior mortgage that those returns makes sense. So we are only doing mez where it helps us win another deal that we think is priced appropriately.

Jason Stewart - Compass Point

Okay. In the case where you are putting mez behind a more senior loan, is the borrower typically to the table with additional equity in that case or if it’s a refi?

Scott Schaeffer

It depends. If the borrower has enough equity in the building or the property and we believe and all of the third party experts agree with this that there is value there, then borrowers don’t have to come to the table with equity. Let me just rephrase that a bit. We are looking to do total loans, senior loans in the 70% range and we will do 5% to 10% mez behind that. So that means that there is 20% equity. It may be a huge [ph] equity based upon the property’s value and if it’s not there, then the borrower has to bring cash to the table in order to get the financing closed.

Jason Stewart - Compass Point

Okay, that’s helpful. And then a strategic question, just to pull way up, you have obviously demonstrated the ability to raise capital on the debt, both the debt and equity side really, has that changed the board’s thinking about the payout ratio in terms of the dividend?

Scott Schaeffer

I can’t speak for the board as a whole but I would tell you that I don’t think it changes their thinking.

Jason Stewart - Compass Point

Okay. One last question. We have obviously seen the securitization market come back and then if we think way forward, if there is a securitization vehicle to buy securities and securitize them instead of loans, so currently it’s predominantly loans, is that a business that that RAIT would consider, or is it going to be primarily a lending business going forward?

Scott Schaeffer

RAIT is a real estate business and our focus is on real estate investing through the lending platform and as I said through opportunistically acquiring direct ownership in properties that we see. We are not going to be in the business of securitizing securities.

Jason Stewart - Compass Point

Okay, thanks for taking the questions.

Scott Schaeffer

Thank you.

Operator

Thank you for your question. I would now like to turn the call over to Scott for closing remarks.

Scott Schaeffer

Thank you. In summary, we are in a strong position as we begin 2013. Our pipelines are growing, cash flow is increasing, we have access to capital, and our balance sheet remains stable. We look forward to sharing our progress with you next quarter. Thank you all for joining our call today and your continued interest in RAIT.

Operator

Thank you for joining today’s conference. This concludes the presentation. You may now disconnect and have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!