Resource Capital's CEO Discusses Q1 2013 Earnings Results - Earnings Call Transcript

| About: Resource Capital (RSO)

Resource Capital Corporation (NYSE:RSO)

Q1 2013 Earnings Call

May 08, 2013 08:30 am ET


Purvi Kamdar – Director of Investor Relations

Jonathan Cohen – President, Chief Executive Officer

David Bryant – Chief Financial Officer

David Bloom – Senior Vice President, Real Estate Lending


Steve DeLaney – JMP Securities

Matthew Stolzar – Pyrrho Capital


Good day, ladies and gentlemen, and welcome to the Quarter One 2013 Resource Capital Corp Earnings Conference Call. My name is Sheena and I will be your operator today. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

And now I’d like to turn the call over to Mr. Jonathan Cohen, President and CEO of Resource Capital. Please proceed sir.

Jonathan Cohen

Thank you. And thank you for joining the Resource Capital Corp conference call for the first quarter ended March 31, 2013. I’m Jonathan Cohen, President and CEO of Resource Capital Corp.

Before I begin I would like to ask Purvi Kamdar, our Director of Investor Relations to read the Safe Harbor statement.

Purvi Kamdar

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 cause actual results to differ materially from these contained in the forward-looking statements.

These risks and uncertainties are discussed in the company’s reports by the DSEC including its reports on Forms 8-K, 10-Q and 10-K and in particular Item 1A on the Form 10-K reporting to 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.

And with that I’ll turn it back.

Jonathan Cohen

Thank you, Purvi. First a few highlights. Adjusted funds from operations, AFFO, were $0.20 for the three months ended March 31, 2013. Book value to common shareholders was $5.60 per share at March 31, 2013. Total revenues increased by $1.9 million or 6.4% as compared to the three months ended March 31, 2012. We paid a dividend of $0.20 per common share for the three months ended March 31, 2013, and during that period we originated $61.4 million of new commercial real estate loans.

With those highlights out of the way I will now introduce my colleagues. With me today are David Bloom, Senior Vice President in charge of Real Estate Lending; David Bryant, our Chief Financial Officer; and of course, Purvi Kamdar, our Director of Investor Relations.

Probably the most significant developments for the quarter was the momentum we are seeing in commercial real estate loan originations. We increased originations to over $61 million in the first quarter while we believe adhering to our solid underwriting and quality standards. That momentum has certainly carried over to the second quarter where we expect to originate substantially more than the first quarter. This growth in origination has been met by our ability to obtain new financing.

During the quarter we expanded our facility with Wells Fargo from $150 million facility to $250 million and are in conversations to obtain an additional line of credit from another major financial institution for $150 million to $200 million more. The ability to finance our long-term originations combined with the nascent or reborn securitization markets for our products means that we can competitively originate high quality loans and hold them on our balance sheets. The dynamics in my opinion are very conducive to our core business.

To augment the debt side of the balance sheet during the quarter we raised over $45 million of common and preferred equity capital. After the quarter ended we did a public offering of $18.7 million shares of common stock and received net proceeds of $114.5 million. We are growing into a stronger company. In my opinion we are becoming a greater force to be recognized in the commercial mortgage market for transitional loans. Proof of this is the $44 million loan we originated in March.

Dave Bloom, our head of Real Estate, will review this with you when he speaks. We also decided to sell down another legacy loan for $34 million and reinvest those proceeds into new more dynamic loans. This decision, although it shrunk our net production, demonstrates our continued focus and dedication to asset quality and real estate fundamentals.

Our business has indeed become simpler. We are focusing on increasing originations in our commercial real estate business, adding new commercial finance investments where we can achieve yield and total returns and doing so while maintaining our emphasis on credit quality that has served us so well. We will also continue to evaluate different investments.

As opportunities to make such investments come our way we will pursue those that can help us build long-term book value. We will keep seeking flexible and accretive sources of financing and will continue to utilize debt and equity capital in a disciplined manner.

Our credit quality is stable and improving. Our real estate watch list is shrinking. The balance of the provision increase of $1 million this quarter came from one previously impaired position by $1.3 million during the quarter. Bank loans reduced provisions by $219,000 during the quarter and with respect to the syndicated bank loan portfolio, credit is actually very benign when you consider that we have only four delinquent loans out of many, many hundreds totaling $3.9 million on a pool of over $1.1 billion, a very manageable 35 basis points.

We have removed most of the poor bank loan credit as evidenced by the reduction of the provisions this period and expect continued strong performance and a very nice return on equity from this portfolio in 2013. We again thank Gretchen Bergstresser.

With our credit quality being good we have kept our debt levels relatively low and opportunities to expand the franchise and build out existing and new platforms remain ever present. Our liquidity remains excellent. We had approximately $162 million of unrestricted cash as of April 30 which includes the proceeds from our most recent common stock offering, even after making considerable investments during the last four months. We expect to be fully invested within the next four to six months.

Our portfolio of real estate loans continue to perform well. During the last 12 months we have grown our real estate loan portfolio by over $223 million on a gross origination basis. We expect this trend to continue as our real estate debt team continues to find good opportunities to lend money against good real estate. We have greatly strived to grow our origination channel and we believe the investments we have made in our team and systems will start to pay off.

While our portfolio decreased by $17 million for the quarter due to repayments from three loans that repaid during the quarter for $44.8 million of which one was originated in 2007 and two were originated at the beginning of the recovery in the real estate origination markets. The portfolio nonetheless increased by $44 million on a net basis over the last year. We are picking up pace and expect this portfolio to grow tremendously in the next few quarters.

Our leasing joint venture continues to grow and we remain excited about its prospects. We also continue to explore additional opportunities to diversify and invest capital, to provide current return, long-term growth and good risk management. LEAF, our leasing venture, achieved profitability in the month of March and we anticipate that trend to continue in future periods.

The growth in our business has been exciting. As compared to the quarter ending March 31, 2012, this quarter we recorded revenues of $30.6 million versus $28.7 million a year ago, a tremendous achievement given the steadfastness of our debt-to-equity levels. In addition, the revenue growth came from both the real estate segment as well as the syndicated loans side of the business.

Now I will ask Dave Bloom to review our real estate activities.

David Bloom

Thanks very much, Jonathan. Resource Capital Corp’s commercial mortgage and CMBS portfolio has a current committed balance of approximately $1.032 billion in a diverse and granular pool. RSO’s commercial mortgage portfolio is comprised of 56 individual loans with an aggregate committed balance of approximately $732 million. The underlying collateral base continues to be geographically diverse, spread across the major asset categories with a portfolio breakdown of 24% multifamily, 12% office, 23% hotel, 28% retail, and 13% other such as research and development and mixed use.

The portfolio is in components as follows: 84% whole loans, 14% mezzanine loans, and 2% B-notes. During the first quarter of 2013 through today RSO closed six new loans totaling $88.8 million with eight more loans in process totaling another $80 million.

Currently RSO has issued applications on four new loans totaling approximately $53 million, is in negotiations on an additional $107 million of new lending opportunities and is actively underwriting additional loans totaling approximately $300 million.

We note improving metrics across all asset classes with the majority of the properties securing our loans realizing improved cash flow year-over-year and continuing to trend in an upward direction. In addition we are pleased to see that the majority of the asset-specific business plans across the portfolio are well on track and progressing towards the realization of borrowers’ plans for value creation and the entire portfolio remains performing with no defaults.

While we see many lending opportunities we remain keenly aware of credit, value and deal structure. And although we are lending on lightly transitional properties we continue to focus on business plans that stand up to rigorous underwriting and verification and on loans with Day One cash flow coverage and meaningful sponsor equity.

As Jonathan mentioned, RSO increased and extended our existing $150 million term financing facility with Wells Fargo bank. So now the facility’s $250 million with a revolving period that goes through 2015 and extension options that carry the facility comfortably into 2017. New whole loans are being financed on RSOs term financing facility with Wells Fargo and we are in the process of documenting an additional $150 million to $200 million term financing facility with another major financial institution.

RSO’s term financing facilities are specifically designed to fund our long-established bridge lending business with targeted returns on new loans utilizing these facilities between 13% and 18%. Ultimately the loans that are being financed on the facilities are being aggregated as we again made plans to access the securitized financing markets in optimally match fund our assets which will increase the return on equity and overall profitability of RSOs real estate direct origination platform while at the same time managing recourse financing exposure.

RSO benefits from our focus and expertise in directly originating floating rate bridge loans and other structured finance solutions for borrowers on a nationwide basis. Even though there are a number of capital sources in the market to make new loans, our platform’s reputation is well established with the same senior team remaining intact since inception.

With certainty of execution at a premium, the fact that our professionals and process are well known to borrowers, intermediaries and other market participants provides us with a distinct advantage over many other lenders. We’re actively underwriting between $250 million and $500 million of transactions at any given time and are confident in our ability to continue to grow new loan origination in a meaningful way.

We remain optimistic about meeting prior peak production levels of approximately $500 to $600 million of new loans per year and ultimately surpassing these numbers as we continue to grow our well-established national origination platform and add new loan programs to our product offerings.

While not a new program, RSO will continue to drive high-quality loan production by utilizing our strong balance sheet combined with our extensive capital market experience to continue to provide customized financing solutions to our borrowers to seek loans larger than we typically hold in portfolio.

The ability to originate and principle larger loans provides RSO with access to the high-yield mezzanine loan space on a self-originated basis while still retaining control over structure and placing of the transaction as well as the direct relationship with the borrower. All hallmarks of our direct origination platform.

As Jon mentioned in the first quarter of 2013, we closed a $44 million loan secured by well-located shopping center and plan to sell the A-note to a strategic partner while retaining a $13 million controlling mezzanine loan at premium spread to that, which would be available had we purchased it rather than originated the position.

We are actively underwriting and quoting other transactions similar to this one and anticipate growing this aspect of our Lending business. We look forward to steady new loan origination while maintaining the credit quality structure pricing and diversity of our current portfolio and continuing to grow our loan platform and expand product offerings.

With that, I’ll turn it back to Jonathan and rejoin for Q&A at the end of the call.

Jonathan Cohen

Now I will. Thanks, Dave. Now I will quickly review our syndicated bank loan portfolio. Resource Capital syndicated bank loan portfolio has a carrying value of approximately $1.2 billion at amortized costs. Overall, our portfolios remain in excellent condition. As of March 31, 2013 we had specific reserves of $2.6 million and general reserves of $5.2 million as compared to specific reserves of $3.2 million and general reserves of $6.5 million for the fourth quarter of 2012. We continue to forecast a good outlook in corporate credit in the future.

The default rate for the last 12 months was 0.18%, 18 basis points. This has been a great business line for Resource Capital and we will continue to allocate capital to the corporate credit world.

In addition to our portfolio of syndicated bank loans, we also collect management fees from our acquisition of the right to manage five other CLOs. During the last three months we received $1.4 million in fees. Now I will ask Dave Bryant, our Chief Financial Officer, to discuss our financials.

David Bryant

Thank you, Jonathan. RSOs board declared a cash dividend for the first quarter of $0.20 per common share or approximately $21.6 million. Our adjusted funds from operations, or AFFO, for the first quarter was $21 million or $0.20 per share, per common diluted respectively. AFFO for the period was impacted by several noncash adjustments netting to $5.6 million and to a less extent net cash inflows of approximately $3.1 million.

We passed all of the critical interest coverage and over collateralization tests in our two real estate CDOs and five bank loan CLOs as of March 2013. Each of these financing structures performed well and continue to generate stable and even improving cash flow to us in 2013. The commercial real estate CDOs produced approximately $22 million including a return of principle of $16 million on our ownership of the RREF 2006 senior note class.

Bank loan CLOs generated approximately $9 million of cash flow during the three months ended March 2013. These amounts compare favorably to the same period in 2012 when they generated $6.3 million and $6.7 million from real estate and bank loans respectively.

This cash flow improvement reflects a better credit environment as well as our ability to invest recycled capital. As of March 31, we have in excess of $107.6 million of restricted cash in these structures, comprised of approximately $107 million and $729,000 in our bank loans and real estate deals respectively.

Of these balances, $35.7 million is available for reinvestment and two of our CLOs which we expect to provide attractive spreads over the cost of the associated debt which is a very inexpensive weighted average rate of 1.46%. The balance is primarily being used to pay down notes outstanding and de-leverage our balance sheet.

All of the real estate principal cash balances are designated to repay the senior notes when the two real estate CEOs as the reinvestment period on those have expired. I reiterate that we own a meaningful amount of those senior notes so that as the underlying real estate loan collateral pays off principal is returned to us and becomes unrestricted cash available for reinvestment as is the case with the 16 million return to us this period.

Of the Q1 provisions for loan losses of approximately $1 million, $1.2 million is for real estate loans and there was a reduction of $219,000 for bank loans. Regarding our bank loan portfolio we decreased reserves on our portfolio reflecting improved credit conditions on our general portfolio, offset a bit by increased reserves for a few positions sold for credit reasons. On our real estate loans, we added $1.2 million in reserves for our previously impaired whole loan.

Overall, real estate credit has been excellent and as John mentioned it continued to reduce our exposure to a legacy portfolio which is evidenced by a reduction of 19% from the March 2012 period. I characterize that our bank loan portfolio credit as very benign and improving. A mere four bank loans with an amortized cost of $3.9 million are delinquent out of the $1.2 billion portfolio and notably all of our real estate loans are current and performing.

Our leverage stands at a very modest 2.5 times at March 31. When we treat our Trups issuances which have a remaining term of over 23 years as equity, our leverage is 2.3 times. Focusing on real estate leverage, we ended Q1 a very conservative 1 times lever on our entire real estate portfolio which is a reflection of our de-leveraging and pay down of those CDO notes I previously mentioned.

Our overall leverage continue to decrease from December 31, primarily due to pay downs and run off of the CLO debt, the real estate CDO debt, as well as from equity raised from our common stock dividend reinvestment program. We also continue to sell preferred shares through an at-the-market program established last year and sold 1.1 million shares at a weighted average price of $24.82 through this program in Q1 2013 for proceeds of $26.9 million at a weighted average of 8.44%.

Overall, our weighted average effective cost on net proceeds of both series of preferred stock is 8.5%, an attractive cost of capital for RSO. In terms of liquidity, after taking into account the receipt of $114.5 million of net proceeds from our follow on common stock offering and after paying the first quarter common and preferred stock dividends in late April we have $162 million of unrestricted cash as of April 30, 2013, with several real estate loan originations in process intended to put this cash to work.

We ended the March 2013 quarter with GAAP book value per share of $5.60, down slightly from $5.61 at December 2012. At March 2013, our equity is allocated as follows: Commercial Real Estate Loans and CMBS 75%, Commercial Finance 15% and Other Investments 10%. With that, my formal comments are completed and I turn the call back to Jonathan Cohen.

Jonathan Cohen

Thank you, Dave. And with that I will open the call for any questions.

Question-and-Answer Session


(Operator Instructions). Our first question is from Steve DeLaney, JMP Securities. Please proceed.

Steve DeLaney – JMP Securities

Good morning, everyone.

Jonathan Cohen

Hi, Steve.

Steve DeLaney – JMP Securities

Jonathan, congratulations on a solid quarter. It’s pretty obviously just looking at the trend back two or three quarters that the quality of earnings is improving in terms of the recurring nature and it’s encouraging to see that progress, especially the loan loss provision of only $1 million.

Jonathan Cohen

Thank you.

Steve DeLaney – JMP Securities

That was great to see. So a couple things. I guess the new – really appreciate the press release on these large originations. That’s helpful for modeling and just to keep the story going. But I like the idea of the structure where you’re going to sell of an A-note and hold the mezz. The press release didn’t talk about loan coupon. But could you comment maybe just on a general range of which you would expect your, once the loan is structured and the A-note is sold, on your retained mezz piece, what type of target yield would you be looking for there?

Jonathan Cohen

Well we don’t like to talk about loan coupons just because it doesn’t help our business for everybody to know exactly what one guy got on one property. But just in general, depending on the quality of the property, our loan coupons can range anywhere from 5.75% to 8.5%, depending on the quality of the property. Then this is on the whole loan.

And you can think to yourself that we’re borrowing somewhere between 65% and 75% on an A-note or 60% to 70%, depending on if it’s a sold A-note or whether we borrowed on our line. And we borrow at 2% and change from the banks. And we think that in the securitization market, that goes down to 1% and change. And so that’s the rough math.

Steve DeLaney – JMP Securities

Okay. We can back into that.

Jonathan Cohen

Yeah. And just generally, you should know that we look at it on a levered return, whether it’s a mezz piece or mezz piece or a whole loan that we lever. We look at that as somewhere between a mid-teens, 13, 14, and up to 20% return with all the fees involved over a two-year holding period.

Steve DeLaney – JMP Securities

Okay. Within, switching over to the plan to eventually do a CLO, within your loan portfolio, obviously you’ve got $1 billion, but a lot of that is the legacy stuff. I’m focused on the $223 million of originations in the last 12 months. I don’t know if any of that is those near-term originations have repaid. But can you estimate what you have under your bank lines? In other words, what collateral do you have earmarked for a potential structuring with the CLO? And what would be the minimum size of a collateral pool before you would find it efficient to pull the trigger?

Jonathan Cohen

Well I think that it’s hard to estimate. Right now, as I said in my comments, and I think Dave echoed in his comments, we did 60, $60-some odd million last quarter. We’re looking at a much greater number this quarter and a much greater number the quarter after that. So with that happening, a lot of the prepayments, as I said, came from legacy loan.

Steve DeLaney – JMP Securities


Jonathan Cohen

So we sold a legacy loan, we had a legacy loan prepay and then – which is always nice, because they have pretty nice exit fees as well and we like to move the portfolio to a newer portfolio. And then two loans that were originated very close to the start of the real estate lending market in 2009, 2010. So we often have a lot of prepayment or no prepayment clauses in the loans we originated over the last 18 months, let’s say.

So I would say we probably need a portfolio to start marketing over $125 million or so and we’ll go to work somewhere around $150 million to $200 million range on the line. And we ended the last quarter probably with $65 million to $75 million, up to $93 million, I think, by now.

David Bryant

And what Jon is saying there, Steve, is $93 million is the total loans on that facility. [64] [ph] borrowing is the outstanding fees.

Jonathan Cohen

So we’re going to get that ramped up. We’re putting loans in April and in May and we hope to access that market accordingly. Now, the difference really is, is that it frees up our lines. We don’t really need to free up our lines because we have a decent amount. We’ve expanded our relationship with Wells, which we’re grateful for, and we also have – we’re close to a new line that we’re going to sign with another major financial institution. But it will help with the borrowing, the rate and so we’re excited for that as well.

Steve DeLaney – JMP Securities

Well, it certainly sounds like you’ve got enough funding capacity that you can approach the CLO market where you don’t necessarily just have to be a price taker, you can be...

Jonathan Cohen

All of the prices are starting to feel – the prices on the AAAs are starting to feel pretty good. So we may be a price taker. But I just want to add that you can see by the fact that we’re opening up another facility and expanding Wells, our take on our business, where it’s going and what we need to accomplish then over the next 12 months.

Steve DeLaney – JMP Securities

With respect to the origination volume outlook?

Jonathan Cohen

Yes, exactly.

Steve DeLaney – JMP Securities

And just one final thing, and I’ll drop off. I noticed no gain on debt extinguishment this quarter after obviously a big item in fourth quarter of $11 million. Would you say that in terms of projecting and expectations, would you say that trade, where we are now with spreads tightening and everything, is that trade about done and we should just focus on...

Jonathan Cohen

No, I mean, the trade’s not done, but as we look to refinance some of those older CDOs as they get down in terms of size, I think there will be a discount that we can refinance in that, but we’ll only probably be looking to do that upon refinancing, not as an opportunistic buy. So for example, let’s say that the AAAs are at 94, 95 or 96, we’ll say that the AAs are at 92 or 93, that’s not really that interesting to us.

Steve DeLaney – JMP Securities


Jonathan Cohen

But if we knew that we were going to refinance and pay off all the bonds we might try to get as much of that as we could a month before we knew we were refinancing it.

Steve DeLaney – JMP Securities

When you say refinance you mean like a clean up call of something?

Jonathan Cohen

Yeah, we’d clean it up and put the collateral either on our line or into a new CLO.

Steve DeLaney – JMP Securities

Okay. Well listen, thanks for the time and the comments.

Jonathan Cohen

Okay. Thank you.


Our next question is from Matthew Stolzar, Pyrrho Capital. Please proceed.

Matthew Stolzar – Pyrrho Capital

Hi, guys. Thank you for taking my question. You spoke about accessing the securitization market and potential sizing, but I was wondering from a timing perspective what you guys are thinking and just the general trend you’ve been seeing over the past few months.

Jonathan Cohen

Thanks for the question. There really hasn’t been that many deals because everybody is re-up – deals that needed to get done or people were willing to be price takers as Steve just said, got done in different structures. Now people are really ramping the next group of originations. And there are probably three or four of us that are doing that. And I would expect to see more deals in the next three to six months. But as far as any color on it maybe, Dave, you have some?

David Bryant

I mean there’s – the deals that were done early were permeations of old CDOs. The deals that are coming around where I mean we’re starting to see the features that as prudent managers in the past that we should have the opportunity to get in the future which is a ramp facility, an active reinvestment period.

And as those, as we start seeing those more and more in the market and our collateral remains of this quality that’s really what we plan to go out with. But as Jon said there’s been a very limited universe, a bunch of small deals, but we would be I think one of the larger deals looking for the types of structures that we had in the past.

Matthew Stolzar – Pyrrho Capital

Got it. And the way to think about timing I guess is your – you had said in the previous question you’re at 93 millionish of collateral that could go into a CDO. And you would look – you think it’d probably have to be 125 to 150 range.

Jonathan Cohen

When I was talking it, Matthew, I was talking about how much debt would be issued not total collateral. I think total collateral – you’d like to have $200 million and have a 125 bar in your line. It doesn’t – we’re starting to market these things. But to get seriously involved and start to think about really what the market looks like and spend two months working on it, I think that that’s the level we want to be at, and it’s coming very soon.

Matthew Stolzar – Pyrrho Capital

Okay. Great. Thank you, guys.

Jonathan Cohen



Thank you for your question. We have no further questions at this time. (Operator Instructions). We have no further questions. Therefore, I would like to turn the call over to Mr. Jonathan Cohen for closing remarks.

Jonathan Cohen

Well, we thank you for your support and we look forward to continuing to hear from you, on a regular basis. So thank you.


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

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