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RAIT Financial Trust (NYSE:RAS)

Q2 2009 Earnings Call

August 06, 2009 10:00 AM ET


Andres Viroslav - Vice President and Director of Corporate Communications

Scott F. Schaeffer - Chief Executive Officer

Jack E. Salmon - Chief Financial Officer and Treasurer


David Fick - Stifel Nicolaus

Leon Cooperman - Omega Advisors


Good day, ladies and gentlemen, and welcome to the Second Quarter 2009 RAIT Financial Trust Earnings Conference Call. My name is Michele and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). As a remainder, this conference is being recorded for replay purposes.

And I would now like to turn the presentation over to your host for today's call, Mr. Andres Viroslav, Vice President and Director of Corporate Communications. Please proceed.

Andres Viroslav

Thank you, Michelle. And good morning to everyone. Thank you for joining us today to review RAIT Financial Trust's second quarter 2009 financial results. On the call with me today are Scott Schaeffer, Chef Executive Officer; Jack Salmon, Chief Financial Officer and Raphael Licht, our Chief Operating Officer.

This morning's call is being webcast on our website at There will be a replay of the call available via webcast on our website telephonically beginning at approximately 1.00 PM Eastern Time today. The dial-in for the replay is 888-286-8010 with a confirmation code of 85227218.

Before I turn the call over to Scott, I'd like to remind everyone that there may be forward-looking statements made in this call. These forward-looking statements reflect RAIT's current view 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 Provision and 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. 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 measures is attached to RAIT's most recent current report on Form 8-K available at RAIT's website www., 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 matter described here in, 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 F. Schaeffer

Thank you very much, Andres. I thank all of you for joining us this morning as we present RAIT's second quarter 2009 results. Before I turn the call over to Jack to go through the financial highlights, I'd like to briefly discuss the results for the quarter and then focus my comments on activities recently announced in either 8-K or press release form.

Some things have not changed. The market environment remains challenging. Liquidity is scarce and commercial real estate fundamentals remain weak. However, we've taken a number of steps towards investing in our future by deleveraging the balance sheet, enabling the markets to get a clear view of RAIT and building on RAIT's core competencies in real estate and the real estate securities market. It's impossible to find the ultimate market recovery, but we will continue to take step by step approach to our balance sheet and the business as we position the company for future growth.

During the second quarter, our portfolios generated adjusted earnings of $0.19 per share and we incurred a $4.43 per share GAAP loss. The GAAP loss was caused primarily by a $4.82 per share non cash loss that we incurred on the sale of our interest in four domestic Taberna securitizations and a $1.02 per share provision for losses in our commercial real estate loans and residential mortgage loan portfolio.

During the second quarter, we added 27 million for the provision for commercial real estate loan losses compared to 62 million in the first quarter. And we wrote off approximately 44 million against our reserves, primarily due to the conversion of seven commercial real estate loans in to owned properties during the quarter. We ended the quarter with 108 million provisions for commercial loan losses as compared to 126 million at the end of the first quarter. It's also important to note that we only have 27.3 million of future funding commitments which are pre-funded and available within our securitization.

While we remain focused on the credit performance of our assets, we have also taken steps to reduce our corporate leverage. We completed a number of transactions during and after the second quarter which we expect will de-lever our balance sheet materially in third quarter.

In July, we purchased at a discount approximately 98.3 million par amount of senior convertible notes for 53 million through a combination of 10 million in cash and the issuance of a new 43 million senior secured note which matures in 2014. We expect to save approximately 1.4 million of interest expense per year. The transaction eliminated 55.3 million of senior debt, provided us with additional two years of term on the new debt and reduced the amount of cash needed to service our recourse obligations.

We feel this transaction was a major step forward, is beneficial to our shareholders and provides the company with the needed flexibility as de-leveraging process continues. During 2009, we were also very successful in paying off or extending 51.2 million of recourse debt outstanding on our lines of credit and term loan indebtedness.

At June 30, 2009 RAIT had a 3.4 billion residential mortgage portfolio and 3.1 billion of securitized debt which financed these assets. On July 16, we sold all of our residual interest in new securitizations. We no longer needed these assets for re-qualification purchases and the assets have performed poorly along with the residential real estate market. The sales generated 16.5 million in cash proceeds and eliminated the assets and corresponding liabilities from our balance sheet.

The sale also removed the potential for future credit risk and expected losses as default rate in delinquencies increased. We recorded a 116.3 million of loss provision on these assets for the six months ended June 30, 2009. The pro forma impact of the sales can be reviewed in the 8-K we filed on July 21, 2009.

During the quarter, we also installed our residual equity and a portion of our non-investment grade investments in four of our Taberna trust deferred securitization. These sales resulted in renewable of significant amount of mark-to-market assets and liabilities from our consolidated balance sheet. We expect this have to be in more transparent presentation of our financial statements, and less volatility on our financial results in future quarters.

Also we have taking steps to build upon RAIT's core confidently in real estates and the real state security market. We continue to provide collateral management services for the deconsolidated securitizations and generate corresponding senior asset management fees.

Furthermore, we expect to diversify our income streams by generating fee income from nine capital intensive business activities. We recently announced the expansion of our broker dealer RAIT Securities, LLC into a fixed income sales and trading platform and hired two experience professional to lead the growth in that business.

RAIT is investing modest levels of operating capital for infrastructure operates but is not lifting capital for trading. We expect to generate the current stream of free income from this business overtime as well as grow our relationship network.

In May, we acquired a majority interest in Jupiter Communities LLC, a Chicago based multi-family property manager with more than 10,000 apartment units under management nation wide. Jupiter Communities is not only manages great portfolio multi-family properties but is also growing its third party fee for service business.

And with that overview of activity at RAIT, I'd like to turn the call over to Jack to go through financial results.

Jack E. Salmon

Thanks, Scott. As Scott has discussed RAIT is now focused on two primary portfolios. Number one, our core CRE business consisting over $2 billion of loans and directly owned real estate. And secondly, our relatively static portfolios of debt securities primarily helped by our Taberna VIII and IX and two European portfolios.

As a result my comments will address primarily the financial aspects of these two portfolios during the second quarter. From an overall balance sheet standpoint, total assets decreased by approximately 1.4 billion during the second quarter including the following major events.

We converted a 142 million of CRE loans into investments in real estate and recorded adjustments to the carrying bases of this investment of $28 million which was previously recorded against the allowance for loan loss reserves.

The net assets acquired reduced our CRE loan portfolio and had a correspondingly increased in our investments real estate to a total of $605 million of quarter debt. We disposed a 1.1 billion of investments and securities held by the four previously consolidated Taberna CDOs and approximately $900 million of corresponding liabilities. We recorded a $136 million reduction in the residential mortgage portfolio due to principal prepayments and associated $124 million reduction in the related mortgage back securitization debt on that portfolio.

The remaining $3.4 billion of net RMBS assets were sold in July 2009. During the quarter, we've maintained cash and cash equivalents of approximately 41 million after making our semi annual interest payment on our convertible debt in April 2009.

For the quarter-to-date, the first six months of 2009 our recourse debt obligations have decreased as a result of principal repayment and debt repurchases. As of today, we've extended two of our commercial bank lines beyond 2009, repaid approximately $28 million of secured debt and reduced our convertible debentures by over a $100 million, while issuing new secured debt of $43 million which is due in 2014.

Today, our total recourse debt of approximately $498 million has less than 5% maturing in the balance of 2009, an additional 10% due within one year and another 5% due within two years from today. From operating prospective, the following events have occurred. First, our investment interest income is $130 million for the quarter which is 27% below the 177 million for the comparable quarter in 2008. This is primarily due to reductions in nominal interest rates and loans placed on non-accrual status.

Total revenue of 60.8 million includes net interest margins of 38.5 million, rental income of 13.6 and fee income of $8.7 million. Our rental income is increasing as we acquire more owned real estates. Our fee income has increased as we broaden our property management and advisory services. During the quarter, we recorded additional allowances for loan losses of 56 million together was a 119 million during the first quarter 2009. Of this, 27 million is pertaining to CRE portfolio that Scott discussed.

In total, we charged off $54 million of commercial and residential loans during the quarter against previously recorded allowances for loan losses, resulting in a net increase of $12 million in the quarter and a total allowance of $238 million at June 30, 2009. We also recorded $46 million of asset impairments which were primarily related to our equity investments in our European portfolios and other investments in debt securities. We recorded a non-cash charge of 340 million in disposing of the four Taberna CDOs.

After recording the gains on this extinguishing of debt at fair value mark-to-market adjustments, both of which, have no effect on cash flow, we're reporting a net GAAP loss of 289 million or $4.42 loss per common share. After adjusting for the non-cash effects of the above write-offs in the fair value changes I've described, we are generating $0.19 per common share with adjusted earnings during the quarter and $0.46 of adjusted earnings per common share on year-to-date basis.

Let's comment briefly on our credit performance overview. In the CRE portfolio of which we own $2.3 billion of CRE loans and direct investments at June 30, 2009, over 172 million of non-performing loans on a non-accrual basis at June 30. This is associated with 27 loans representing approximately 7.6% of our total portfolio.

In July of 2009, both of our CRE CDOs are meeting all of the required interest coverage and over collateralization tests necessary for normal monthly distribution of cash flows. We received 19.1 million of gross cash overall during the quarter related to our CRE investments.

Turning to the trust portfolio, the portfolio is currently represents subordinated debt and other investment securities carried at a fair value of 675 million as of June 30, 2009, representing the two remaining consolidated CDOs. We received quarter senior managed REITs on both our owned and managed CDOs of 2.7 million during the quarter.

I would like to comment briefly on liquidity. During the second quarter, we generated gross cash flow of approximately $34 million from operations in our investment portfolios and advisory fees. After meeting our cash operating expenses approximately $10 million, we used $6 million to pay down existing debts, paid $13 million as convertible debt interest, paid preferred dividends of 3.4 million and have maintained $41 million available cash as of June 30, 2009.

Finally, I would like to talk about our REIT taxable income. As a REIT, we are required to make distributions of at least of 90% of our annual REIT taxable income. Many factors affect the determination of REIT taxable income, both in terms of timing of recognition, and estimates of the certain income and expense items. Now, given the volatility of the markets in which we operate it is likely that taxable income will be different from financial reporting under GAAP.

The tax laws also provide certain elective methods, which determine the nature and timing of both income and expense amounts. As a result, we are reporting estimated REIT taxable losses of over $70 million through June 30, 2009. And there could be assurance that our estimate REIT taxable loss will be cyclical of the result expected for the full year. We will continue to monitor events throughout the year to refine our estimate of REIT taxable income, the future events occur.

Future distributions to both preferred and common shareholders are dependant upon the results of this analysis and will be determined at such time. That completes the financial report. I would like to return the call back to Scott.

Scott F. Schaeffer

Thanks Jack. In summary, going forward, we will continue to focus on de-leveraging the company. We will extend rate broker dealing rate securities LOC. We're working on growing Jupiter Community's raised folk service multi-family property management company and we will continue to manage RAIT's commercial real estate loan portfolio to maximize shareholder value.

And with that Michelle, I think, would you please open the line for question.

Question-and-Answer Session


Thank you, ladies and gentlemen. (Operator Instructions). And your first question comes from the line of David Fick of Stifel Nicolaus. Please proceed.

David Fick - Stifel Nicolaus

Good morning. Can you tell us what constituted the big fee jump and other income quarter-over-quarter?

Scott Schaeffer

Sure we've doing a lot of work in restructuring our debt portfolio David and which gives us the opportunity to charge advisory fees to restructure those debt instruments and that is continuing three months throughout the first six months of 2009.

David Fick - Stifel Nicolaus

So, that would be within the CDOs and the managed structures that we are able to charge fees to those structures?

Scott Schaeffer

Yeah, to the issues on those...

David Fick - Stifel Nicolaus

The issues okay. What was the -- can you remind us what the sale price was on the Taberna CDO interests and what the interest specifically we saw was it only the equity of junior branches or whether senior branches in there also?

Scott Schaeffer

We held for the consolidated CDOs, a majority of the equity and BB class of instruments such as reconsolidated those CDOs previously. We have sold all of our preferred shares and significant portion of the BB and other levels of debt instruments sufficient to be consolidated interests. We still have some of the BBB and higher rated securities but they're of the cost in various deals and we basically sell the controlling interest in Taberna III and IV, VI and VII during the quarter for us, a nominal amount.

David Fick - Stifel Nicolaus

Okay. That what's the REITs centered and really is not any value that are -- along those lines, does it make sense to sort of go back to the quarter, old business where you had some strength and sort of try of silo off the structural history and just get rid of all of your non-cash loans CDOs, shrink the balance sheet and go back to straight commercial lending at a time that it looks like there's some attractive opportunities out there?

Jack Salmon

Well, David I think that's what you see us doing. We de-consolidated the majority of the Taberna CDOs. We're focusing our efforts on the commercial real estate platform. We have maintained are, all of our capabilities in commercial real estate through this period. You know from our history that was in it and it continues to be an integrated platform where we sourced, serviced, underwritten, provided due diligence, closed transaction, all in house. We continue to have that platform and we're leveraging that ability but to take advantage of opportunities in the market say.

The other things that we found simplify and also focus on the commercial platform is that we sold the Reg G portfolio, which no longer was needed for re-qualification purposes.

David Fick - Stifel Nicolaus

Okay. You're -- just looking at your tables, your multi family property ownership was up a $182 million year-to-date. I assume that's mostly ROE now. And the question is what will happen with those assets as well as the other ROE you picked up in $33 million of retail property?

Jack Salmon

It is ROEs and we've -- on those assets, we've made the determination that the assets are good asset, in good market that it would be not to the company's benefit to try to sell them at this time in the cycle. So, we have taken ownership, it was part of the reasons that we acquired the interest in Jupiter community. So, that we had in-house management capabilities. They focused on, only on multi family property and we're going to manage them and hope we increase their value. And then, make a determination in the future as the market stabilized whether or not, we wish to refinance or hold them or sell them at that time.

David Fick - Stifel Nicolaus

So Jupiter, is managing all of these assets now?

Scott Schaeffer

Managing the majority of them and then. Our goal is that they will be managing all of them in the near term.

David Fick - Stifel Nicolaus

Okay. And then lastly, your OC and IC test on the commercial real estates CDOs and the European CDS. Can you just fill us in on where you stand at this stage?

Scott Schaeffer

Yeah. As I mentioned David, that we are passing all the OC and IC tests on our commercial real estate CDOs. The European CDOs have had credit events and they're still meeting majority of those requirements. But their deconsolidation does have any whatever the fact per say on our financial results at this point. I think the focus is really as you said earlier, on our CRE performance. And we're meeting the interest coverage says pretty helpfully. I think the OC test is monitor it more closely.

David Fick - Stifel Nicolaus

And so, I know it's hard to predict and you probably don't want to take a public stand on this but can you give us any indication of your view of the forward cash flow out of the remaining CDOs?

Scott Schaeffer

It's very hard to predict anything in the future since we monitor these on a month-to-month basis. So your payment cycle will be actually more frequently than that. We're looking at every asset within our portfolio everyday. So

David Fick - Stifel Nicolaus

So, is it fairy to say...

Scott Schaeffer

It's very hard to predict payment performance, given the over all position in the markets.

David Fick - Stifel Nicolaus

Well, assuming a negative overview and I presume, you have to be very cautious here, it's fair to assume that at some point of place CDOs are going to fail these tests and cash flow will be diverted?

Scott Schaeffer

Again that's not a fair assumption. I think these are managed CDOs which gives us the flexibility and moving asset out in order to keep all of these ratios in a positive condition.

David Fick - Stifel Nicolaus

Okay. Now these CDOs are now two to three years old and most of them had five year management capability in terms of replacing collateral, is that correct, so you have a couple of years to do that?

Scott Schaeffer


David Fick - Stifel Nicolaus

On average? Okay. Thank you.

Scott Schaeffer



Your next question comes from the line Leon Cooperman of Omega Advisors. Please proceed.

Leon Cooperman - Omega Advisors

Right. Two questions. I don't know if you will answer the one. In fact the one is partially a statement. Essentially when you did this convertible deal by buying back roughly quarter of the issue, and I should say I understand why it's good for the equity holders and I have no problem with the transaction. But you essentially primed the other 75% of the convertible holders that did not have the opportunity to get access to this transaction.

So I guess the question I would ask you is how confident are you at the end of the day that you have not disadvantaged the existing convert holders, which I guess indirectly a way of asking you, how confident are you that you remain solvent because the convert holder that sold out got in a low 50s for his convert. And it converts are quoted currently in the market somewhere between 26 and 28. And I could it capture very easily if we remain solvent, you pay your coupons and your principle back then we are just fine and we came out very well.

On the other hand, in this insolvency issues since we over collateralized him, he's way ahead of us. So question one, I guess is really since how comfort in meeting overall financial obligations in the future, and remain a going concern. And secondly, with the financial transactions entered into, what kind of free cash flow are we likely to be generating say over the next 12 months. I don't know if my question is possible to answer given all the moving parts? Thank you.

Scott Schaeffer

Well, let me Leon, this is Scott. Let me address the first part of your question which was, and I will just make a statement as you did which was we took advantage of opportunity that presented itself to us. And we thought it was good for the shareholders. We feel that the company is very solvent, and is well-positioned to remain solvent and actually increase our equity going forward.

So I don't have any concern at all about our ability to continue to service the existing recourse debt in total through the remaining term. The capital and debt markets remain somewhat dysfunctional. So, who knows what three years down will bring. But, as far as solvency goes, today and as far as I can see into the future, that's not an issue whatsoever. Now -- and I am sorry, the second part of your question?

Leon Cooperman - Omega Advisors

Yes, with the refinancing, with the financial moves taken place, is there an ability for coming to budget, have a handle on free cash flow going forward, which is what gives you the ability to service your debt and reinvest in the business in and grow it. Or things are so uncertain that it is hard to have a realistic forecast of your free cash flow?

Jack Salmon

This is Jack. We do budget, obviously our operations and cash flow as far into the future as is reasonably possible. I think what we are reporting today is a fairly consistent level of cash flow from the first quarter through the second quarter. The biggest effect on a go forward basis is we will lose about $4.5 million of cash flow from our recent portfolio beginning in July when we sold that portfolio. Our other portfolios are continuing on at the levels we're describing. We're earning management teams on the domestic and European portfolios. And we're earning yields and fees on our commercial portfolio.

So I think the fact that we sold off the Reg G today, basically getting the forward cash flow in one transaction, we'll use that for operating purposes, beginning with the third quarter and to the best of our ability manage cash flow for the long term value shareholders, that's our objective.

Leon Cooperman - Omega Advisors

All right, thank you.


And that concludes the question-and-answer session. I'll now turn it back to Scott Schaeffer for closing remarks.

Scott Schaeffer

Well, thank you for joining us today. And we look forward to speaking with you again in three months to present our third quarter results. Thank you.


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

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