Anthracite Capital, Inc., Q4 2008 Earnings Call Transcript.

Anthracite Capital, Inc. (AHR)

Q4 2008 Earnings Call

March 18, 2009, 9:00 am ET

Executives

Harris Oliner - Secretary

Chris Milner - CEO

Jim Lillis - CFO and Treasurer

Rich Shea - President and COO

Analysts

David Fick - Stifel Nicolaus & Company

Rick Sherman - Oppenheimer

Presentation

Operator

Good morning. My name is Christine and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Anthracite Capital Incorporated Fourth Quarter 2008 Earnings Call. Our hosts for today's call will be Chief Executive Officer, Christopher A. Milner; President and Chief Operating Officer, Richard M. Shea; Chief Financial Officer, James J. Lillis; and Harris Oliner, Corporate Secretary. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions)

Thank you Mr. Oliner, you may begin your conference.

Harris Oliner

Thank you, operator. Good morning everyone. This is Harris Oliner. I am the Corporate Secretary of Anthracite.

Before Chris, Richard and Jim make their remarks, I want to point out that during the course of this conference call, we may make a number of forward-looking statements. We call to your attention the fact that Anthracite's actual results may differ from these statements.

As you know, Anthracite has filed with the SEC reports, which list some of the factors which may cause Anthracite's results to differ materially from these statements. Finally, Anthracite assumes no duty to update any forward-looking statements.

Chris Milner

Thank you, Harris and good morning to everyone. Obviously the current market environment continues to exert significant pressure on the economy, the finance sector and the real estate mortgage sector in specific. As many have stated in many difference instances our company is like others not immune to the various impacts of these events. We talked about in prior calls and anticipated to some degree. We have had a number of negative impacts over the term of the fourth quarter.

And I would also say to some degree even more significantly during the tendency of the first quarter thus far.

We have tried to do each of those elements significant justice in the earnings release this quarter obviously the news is not particularly in lot of respects and as a result we have tried to detail it for the readers benefit in some significant specificity. I am not going to go through and read each and every, one of these elements.

But suffice it to say that credit is continuing to deteriorate as the market for commercial real estate lending activity begins to frankly follow the path of where the single-family market was. We are seeing fewer and fewer lenders that are making [loans]. We are seeing borrowers having increasing difficulty both maintaining their income streams due to the challenges in the economic environment but also increasing problems with actually refinancing maturities as they come along.

In that same regard, obviously the company is a borrower as well, and as we have detailed in the report we are engaged in some fairly significant discussions with our secured lenders. We are pleased that those discussions are moving along and we are making some progress in terms of developing a path forward in the current market, I think that has to be the primary objective of a company of this nature.

We are focused as we say numerous times on our liquidity position and on managing the relationships and circumstances surrounding our secured lenders that process will continue over the coming weeks.

Again we are pleased with the constructive relationships that we have with those lenders but there are number of issues and we are working through them.

In terms of the balance of this call, Jim Lillis is going to spend a few moments on the actual financial results, and Richard will then speak a bit about some operating issues. And then I will be back to address your questions and go forward with the discussion about where we are and where we want to move the company forward in future.

So with that I will turn it over to Jim.

Jim Lillis

Okay thanks Chris. I want to make my comments, looking at page 13 of the press release if that's helpful to people who are listening in, that's the income statement that we presented in the press release.

The loss per share for the quarter is $3.89, for the full year the loss is $2.96 per share. Let me walk you through, quickly the contributors that fourth quarter loss, if you look up in the top of the income statement, equity earnings of our earnings loss in equity investments is a $56 million negative number.

That is almost in its entirety Carbon II there are some other ventures that are in there of smaller nature. But Carbon is the contributor of almost the entire $56 million loss. We own 26% of Carbon II. At the Carbon II level there was about $227 million of loan loss provision. And about $12 million asset impairment, that contributed to that loss.

Looking further down the income statements there is a provision at the parent company level of $122 million.

And then further to the income statements there is a $144 million net realized loss FASB 159. So I think as you know we marked our liabilities and assets to market. And this quarter the assets underperformed the liabilities.

Lastly what I want to point out is there was a income tax provision this quarter and it's not related to US re-taxation I think it's the important things to note. We are full re-compliance at the end of 2008 and in prior years. This relates to our non-US operations which operate through taxable re-subsidiaries.

And bailing out plan is actually is one time accounting reserve related to specific tax matters in the foreign operations so. Again point to note it is not a US re-tax matter.

So with that as some background on the earnings numbers I will turn over to Rich.

Rich Shea

Thank you Jim and good morning everybody. As we have been saying on several of these calls and Chris emphasized again this morning, liquidity continued to be a primary concern.

However, after two years of liquidity crisis is in the markets the commercial real estate credit market is now somewhat deteriorating and we are focusing very carefully on that as well and I will talk about that bit in a moment. As we have been saying our objective continues to be to pay down our secured lenders as quickly as possible.

We are currently pursuing agreements that benefit both the company and the lenders to be able to come up with reasonable amortizations schedules. So we can accomplish this objective as efficiently as possible. We are currently using current cash flow from our portfolio to pay those down, so there are scheduled payments that we are looking to continue making.

As we really can not project or rely on being able to raise capital or asset sales in this very difficult market for both of those, if that can happens of course that would be beneficial or helpful for us. But as of right now what we are focusing on is making sure that cash flow that the portfolio generates is utilized to pay down our lenders as quickly as possible.

With that in mind we paid down our short-term liabilities for our balance sheet from $546 million at third quarter end to $480 million at year end that represents about $66 million pay down. The majority of that has come in from scheduled amortization payments. The company has not paid any margin calls since November of last year of 2008. And we are as I said continuing to look at ways to bring down the liabilities, there to our third parties as quickly as possible with scheduled payments.

As of right now, our current liability is to third parties, secured lenders totals about $393 million. That is as of this morning and that includes $15 million reduction that was paid yesterday which we did after reducing the cash covenant requirement that we had prior to this.

The cash covenant was in place to have us maintain a restricted amount of cash and when we emphasized our strategic objective which was to pay down our lenders as quickly as possible, we went back to them and said there is really no reason for us to maintain that level of cash as we are not really in a portfolio acquisition mode we are not buying anything and we are focusing solely on bringing down those liabilities.

So what we did was discussed with them the provision to just remove that covenant and pay down to the extent of $15 million the cash to our third party lenders. So bringing down the total outstanding liabilities to those lenders to $393 million.

As I said we will continue utilizing the cash that our portfolio creates to continue paying down those footings. And as of right now we are looking over the next twelve months under current assumptions we anticipate about $80 million to $90 million of cash to be generated for that purpose over the next 12 months.

Over a period of time that number will of course change, and we are monitoring that very carefully we want to make sure that we create a flexible enough structure to be able to take that into consideration as conditions warrant.

Moving over to the credit side, US CMBS loss estimates have been increased by over $100 million for the quarter since at the end of the third quarter. And that represents in excess of $200 million of increases for the year.

We currently are anticipating in our US CMBS portfolios about $953 million of losses and our CMBS portfolio that has about $1.7 billion of face and represents underlying collateral of about [$57 million] that loss estimate represents about 1.7% on those loans with each vintage year having different amounts with 2007 being the one that we anticipate we will have the highest amount of losses at about what we are currently looking at about a 2% estimated loss on that underlying collateral with lesser amounts on the earlier vintages. As we do believe that the 2007 vintage year was the weakest in terms of credit.

As expected delinquencies across the market in the '06 and '07 years are rising, it is not, I do not think to it is a surprise to anybody as that would be the case. We are seeing that trend take place and we are seeing across the index numbers 30 day plus delinquencies in excess of 1% on those two years with below 1% delinquencies at for 2005 and previous vintages.

Which is a bit counter intuitive because usually the way it works is that as longer the assets are out there, the longer they have time to become delinquent and clearly we have a little bit of an uptick in the '06 and '07 vintage years which we are staying on top of there currently and continuing to monitor. And taking a proactive approach by our loss estimates are consistent with that point of view.

Moving over to the loan, the loan side, we have taken significant provisions for both Anthracite Capital as well as the Carbon II portfolio that Anthracite owns 26% of. The total provisions that we have taken on specific assets is $143 million for Anthracite.

And if you look at the page 6 of the press release, where you have a chart that lays out the various sectors in which we are focusing very carefully for those particular provisions and I will point out that the, highest amount of loan loss reserves of that $143 million is really focused on multi-family assets, and those assets are generally spread throughout the United States.

So there is not any specific geographic concentration however, these are loans that have more they turn around focus to them, they had a business plan associated with putting in some capital expenditures and switching up the properties and turning them around to drive NOIs higher to maintain value in an environment where cap rates are backing up somewhat.

So you do see our specific focus has been on the multi-family sector. But I do want to emphasize that even when we do have provisions put on these assets. We are certainly working very diligently to maximize the recovery of those assets.

So we are utilizing our, the credit platform that we have developed over the last 11 years of our operation and our guys are working very diligently to minimize the losses on that. But as of right now this is what we feel is the most appropriate provision. So I will just call your attention to that.

And take a look at that chart. We also have similar provisions they are being picked up in Carbon II. We are showing a $56 million loss coming from the Carbon II investments that also as you know, as we have said in past is a collection of B notes and mezzanine loans throughout the United States.

There is a good diversification of assets there as well. But once again, we are utilizing our credit experience and knowledge to get out in front of these issues and try to get take the proper provisions where we deem that’s necessary. That’s part of our overall risk mitigation strategy for this.

One last point I will bring up that we mentioned here in the press release is that. As you know, we have historically had about 25% of our total invested assets in European that were non-US investments and we have historically hedged the currency exposure in two ways.

One is that we borrowed money in the currency of those particular assets and the other one was to utilize, mainly, foreign currency contracts as well as currency swaps.

The one aspect of those that made them more challenging in this liquidity-starved environment is that those instruments are mark-to-market and require cash payments to be made when currencies fluctuate.

And obviously currencies fluctuate really, significantly, on a daily certainly on a daily basis and more so, on a weekly and monthly basis. So in keeping with our strategy of maintaining a stable cash platform as possible.

We have removed all the currency hedges that were in place to hedge out the currency risk on the equity portion, meaning the portion that is not hedged to anybody new borrowings.

So that will create, going forward, that would create some earnings volatility. That will be largely a non-cash item. It's a mark-to-market and we specifically did that to maintain a stable cash platform as possible. So we can continue moving forward on our main objective which is creating stable cash flows that we can then utilize to pay down our third party lenders as quickly and efficiently as possible.

So, those are all the high points I wanted to touch on as far as our strategic objectives that we are carrying those out. So I will just turn it back over to Chris who will then open it up to questions.

Chris Milner

Thank you. There is one last element of the press release that we do want to acknowledge. Obviously those of you that have looked at it our audit opinion in the context of our Form 10-K recently filed does raise a specific and substantial doubt as to the ability of the company to continue as a growing concern.

We do explain in some detail the inputs that went in to that decision having said that it's fairly straight forward in terms of the challenges with respect to the liquidity of the company.

The current market conditions and the ongoing discussions with respect to our secured lenders. So those things are out there. There are ongoing and they did impact the analysis the both the company and our registered public accounting firm took into account when completing the Form 10-K. So we do want to make all the listeners aware of that as well when highlighted.

With that, as our prepared remarks, I would ask the operator to open the lines for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from the line of David Fick of Stifel Nicolaus.

David Fick - Stifel Nicolaus & Company

Good morning. Is it fair to say that you have at this point gotten waivers that you needed to get on each of the margin calls that have come and that you essentially have until April 1st to come up with a restructuring plan, or get additional waivers?

Chris Milner

The process that we went through, much to the specifics of your question was one where we made significant and fairly concerted efforts to get the comprehensive solution that I think both, the company and the lenders seek. We were not able to accomplish that in the timeframe provided for the filing of the Form 10-K.

As a result of that, we did as Richard mentioned entered in to series if transactions that provided waivers of the covenant breaches, waivers of not only margin calls, but the ability to provide additional margin calls between now and the date you mentioned, April 1st to provide some additional time to achieve that what we call the more lasting path towards the future as I mentioned.

But yes, to specifically answer your question, the covenant breaches that would have been in place, have been waived and the other elements of the margin call process have been addressed to provide the time necessary to address the remaining issues that are opened.

David Fick - Stifel Nicolaus & Company

I am wondering if you had a chance to analyze what Cap Trust did and that restructuring and issues are very similar to yours. Do you think we should expect a similar pattern in a negotiated outcome here year with your lenders?

Chris Milner

I have to be honest. David, I read their press release at about 1 o'clock, this morning for the first time. I do understand that conceptually where that seems to be headed, and I think you are accurate in saying that a number of the challenges both, companies face have a lot of similarities.

Having said that without more insight into the specifics of it, and like I said a late-night read of a press release really can't compare the two in any great detail. I do think though however that like I said the challenges we both face and the likely solutions are probably going to have some overlap.

David Fick - Stifel Nicolaus & Company

Okay. On a call like this you are talking to number of constituents. Obviously, your shareholders and your creditors, and from a fiduciary perspective I know you have to be careful what you say. But I am just wondering how you would advise common investors today to look at this company.

Obviously, there is a concern opinion out there is to some extent I guess as technicality. But how should they look at value A of this company. And B, what sort of business plan can you conceive given that this is an advice structure and perhaps the easiest and best thing for you all is just to create a new entity at some point.

Chris Milner

I think there is a couple of elements to that question. I will start with from the standpoint of the business plan and kind of the prospects that we are trying to avail ourselves and our shareholders to.

I think, we have recognized for quite some time and discussed on this call, or previous versions of this call, the fact that the current economic environment makes the business plan very simply managing liquidity and doing the things that are necessary in order to perpetuate the business of the company, frankly.

I think we have seen in this environment over the last 12 to 18 months now that the number of companies who have not only received this kind of qualification or emphasis of the matter I guess is the technical term with respect to their operations.

We have also seen a very large number of companies actually ceased to operate. And so I think from a business plan point of view, our focus is very much on like I said managing liquidity and doing the things that we need to do in order to get through this very difficult period of time.

In terms of the second aspect of your question and how listeners on this call, particularly those that are focused on the common equity securities should evaluate, what it is, we are saying here today.

I think we have tried to communicate in fairly significant detail, the number and the extent of the challenges that we face as managers of this company and the shareholders have to read those disclosures and take them into account in their investing decisions.

We are not trying to suggest these things that we are talking about in the environment that we are experiencing is, particularly pleasant for companies who do what Anthracite does, so I think in response to that that's really what we would suggest.

Lastly, in terms of your reference to the externally managed structure and how that has any impact on the opportunities for the company and all of the stakeholders I think what we would at least highlight is the fact that this particular company has been in business for quite sometime.

And I guess as Richard mentioned almost 11 years, we have gone through periods of very positive market environments and some of much more negative circumstances like 1998 and 2001. I think from our point of view, the sponsorship of our manager, the involvement of sell resources that we think is more extensive than a company of this size and scale could sustain on its own has a an advantages impact on the company.

It obviously, doesn't fix everything, but we do think it's in exactly this environment where that sponsorship adds the most value in the bullish segments of the market when anyone can start a business. I think that that sponsorship is less important then we would just put that out there for people's consideration.

David Fick - Stifel Nicolaus & Company

Clearly that relationship provides you with a deep bench and lots of human resources, but they are not in a position and there has been their proposal for them provide a bridge or any form of backstop landing, is that correct?

Chris Milner

I mean just to be specific about the balance sheet that the manager has extended credit to the company that's, I believe, quite fully disclosed in the Form 10-K, and there is also at least from our point of view, a relatively substantial level of support in terms of the fact that the manager is taking its compensation in over the past 12 to 18 months either entirely or substantially in the form of stock.

And as a result providing what we at least believe is a significant amount of legitimate economic support. So there has not been additional discussions that have been disclosed going forward, but those are a couple of points that we think that are mentioned.

David Fick - Stifel Nicolaus & Company

We certainly appreciate your candor. My last question is what is your cash position today and what are your outstandings on your margin calls?

Jim Lillis

We have no outstanding margin calls. As I mentioned, we haven't paid the margin calls since November. Our current cash position is around $5 million or so. We just paid off about $15 million yesterday to the lenders in consideration for the elimination of the cash covenant.

Like I said, we felt that was an important aspect of what we were trying to accomplish here and that is to pay them down as quickly as possible. And since we are not really in an active portfolio acquisition mode, we really see no need to hold that amount of cash and we would prefer to just paying it off.

Rich Shea

And it was restricted anyway.

Jim Lillis

It was restricted anyway?

Rich Shea

They did not have the use of it.

Jim Lillis

And as portfolio and cash comes in, as we have said, we are hoping to come up with an efficient amortization schedule, so that all of our lenders can get their fair share, or their proportionate amount of what we owe them to get them paid down as quickly as possible.

And of course, we will not be relying on any possibility of any capital raises or assets sales. Although like I have said if that comes to fruition that's helpful but it's not something that we will be planning for.

David Fick - Stifel Nicolaus & Company

Okay, great. Thank you.

Chris Milner

Thanks, David.

Operator

Your next question comes from the line of Rick Sherman of Oppenheimer.

Rick Sherman - Oppenheimer

Tell me what you are doing to lower expenses. And secondly, what is your best case? If things fall into play, what would you like to see happen that basically puts you in a more stable footing to survive through this period?

Chris Milner

The first question is, as I mentioned in response to the last question. The manager is charging its fees in common stock, and in fact has left a couple of what we consider to be rather sizeable amounts outstanding as a receivable.

The primary expenses of Anthracite, the company are associating with the management contract, and as a result that is quite significant from a general and administrative standpoint.

For the year, the total amount is just under $2.5 million. I believe, am I reading that right for the quarter?

Jim Lillis

For the year it's just over $8 million, $2.5 million for the quarter. We are making efforts to reduce that, but again, it's a relatively small component of the overall income statement.

In terms of what would qualify as an upside surprise, I will be pretty macro about that. I think the best thing that can happen for this business plan, and frankly a lot of others in this country wants to figure out how to arrest the significant challenges that we face in the economic front.

I think from the standpoint of CMBS model and some of the government programs that are being contemplated if they were to become applicable to the commercial real estate business. I think that would help.

There are a whole litany of relatively smaller and more specific things, but the bottom line is this company is engaged in the taking of credit risk that is extremely correlated to economic performance, and our turn in this economy would be without question in my mind the best thing for this business enterprise.

Rick Sherman - Oppenheimer

Apart from the fact that you have liquidity issues, you are still showing a substantial book value that's still less. Are you basically saying that that book value is really just on paper only?

Chris Milner

Well, no. We are saying that the book value is really is a combination of things it's the value of our assets, which has been dropping over the last 12 months and is merely against the value of the liabilities.

As you know, we mark-to-market both sides of the balance sheet, so there is a formula to that. And I think what's happening is that you do see a reduction in the assets. And therefore you will see a reduction in value of the liabilities as well.

So that's the way we compute GAAP book value, and I think that's one metric that investors will look at to determine what the actual value of the underlying assets and liabilities of the company are.

Rich Shea

Obviously construct like book value or net asset value is only relevant to the extent that we are able to continue the operations of the business and own the assets and retire the liabilities over their life.

And so I think that's part of the reason for the disclosures that I talked about a few minutes ago. But I don’t think what we are suggesting to you that there is anything inappropriate or taper about the book value. It's calculated on a net asset value basis for the most part.

Rick Sherman - Oppenheimer

Yeah. But is it based on current marks to the market, or is it based on some cash flow analysis when you have certain assets that are basically completely liquid or non-functioning market?

Chris Milner

It's based on marks from third-party dealers as both the assets and the liabilities, the third party dealers however as you can imagine is thinning out a bit and we are utilizing on the security side, we are utilizing some index pricing as well, but it is mark-to-market number.

And on the loan side, we are utilizing the required accounting rules, which we really put our loans on at adjusted purchase price net out any provisions and now we could see the details of what provision we put on here, obviously in this quarter.

Rick Sherman - Oppenheimer

Okay. Thanks a lot.

Chris Milner

Sure.

Operator

(Operator Instructions). At this time there are no further questions. Gentlemen, are there any closing remarks?

Chris Milner

This is Chris Milner. Thank you, everyone for joining the call. We are continuing to, as I said, move forward towards that path towards the future and we will provide everyone with updates as things become appropriate to disclose. So we thank you, and we will speak with you in the coming quarters.

Operator

This concludes today's teleconference you may now disconnect.

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