RAIT Financial Trust (NYSE:RAS)
Q3 2009 Earnings Call Transcript
November 4, 2009 10:00 am ET
Andres Viroslav – VP and Director of Corporate Communications
Scott Schaeffer – CEO
Jack Salmon – CFO and Treasurer
Josh Barber – Stifel Nicolaus
Good day, ladies and gentlemen, and welcome to the third quarter 2009 RAIT Financial Trust earnings conference call. My name is Griffin 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 reminder, this conference is being recorded for replay purposes.
I would now like to turn the presentation over to Andres Viroslav, Vice President and Director of Corporate Communications. Please proceed, sir.
Thank you, Griffin, and good morning to everyone. Thank you for joining us today to review RAIT Financial Trust’s third 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 www.raitft.com. There will be a replay on the call available via webcast on our website and 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 52282533.
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 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. 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 measures 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?
Thank you very much, Andres. I thank all of you for joining us this morning as we present RAIT’s third quarter 2009 results.
2009 continues to be a transitional year as we execute changes for our business model and respond to changing market reality. We are building a vertically integrated commercial real estate platform with the capability to originate, invest, manage, service, trade and advise on commercial real estate related assets including loans, securities and property. The platform enables RAIT to provide asset and collateral management services not only to our legacy portfolios, but the new opportunities that exist in the market today.
The market is still credit constrained. Lending activity in the commercial real estate sector has not started in any real sense. Broadly speaking, our borrowers were the commercial real estate sponsors were public REITs continue to experience the dearth of opportunities to increase income, borrow funds were still assets at profitable levels. However, we believe RAIT is poised to take advantage of existing and future income opportunities.
We have announced the expansion of services offered by our broker dealer RAIT Securities, Llc to include fixed income trading and commercial real estate advisory services. We have hired experienced professional with a wide range of contact to drive this business.
During the quarter we launched the commercial real estate advisory business to provide financial institution and institutional investors with portfolio management services. These initiatives build on analogy and experience developed at RAIT during our eleven years of commercial real estate lending. These initiatives will require relatively minimal cash investment on extending our reach within the commercial real estate market and diversifying our revenue streams in the future.
Due to the acquisition of Jupiter Communities, our in-house property manager and our existing rated primary loan servicer we are pursuing ways to leverage our commercial real estate expertise and business relationships into new sources of revenue, which arise from managing $10.3 billion of assets.
The relationships we have formed through managing these assets have enabled Jupiter Communities to continue to grow its units under management and to increase the third-party management relationships. This strategy also enables us to control direct ownership of properties more effectively.
With management workout experience, in-house property management capabilities and our existing long-term liability, we can be patient sellers in order to maximize value on our portfolio of directly owned commercial real estate. Where appropriate, we are actively looking at ways to enhance the performance of this portfolio through government sponsored programs, green initiatives and rent subsidy programs. Our goal is to build a portfolio that outperforms the market, while we monitor the market for opportunities to sell a recent empty property.
During the quarter, we took back four properties totaling $73 million of principal loan value into direct investments from real estate. At the end of the quarter, our investments in real estate totaled $645 million.
On the corporate level, we continue to deleverage the balance sheet, while our business operations evolved. The cumulative effect of previously announced transactions including the sale of the residential mortgage portfolio, the deconsolidation of four Taberna securitizations and the exchange for approximately $98 million of our senior convertible notes for secured debt are fully incorporated in the third quarter financial results.
We believe that one of the benefits of these transformative events will be less volatility in our financial results and more transparency in our financial statements since we disposed assets that require mark-to-market valuation or other temporary impairment unrelated to rate the actual exposure to losses in these assets.
The $0.38 per share GAAP loss is indicative that we have reduced volatility and compares favorably to the $2.82 loss generated during the quarter ended September 30th, 2008, and the $4.43 loss reported for the quarter ended June 30th, 2009.
The primary driver behind our GAAP loss for the third quarter with the previously announced sale of the residential mortgage portfolio, which generated a $62 million GAAP loss, but reduced our outstanding indebtedness by $3.1 billion and generated $15.6 million in cash. This portfolio was not a business driver, but rather a portfolio owned for re-qualification purposes.
And with that overview of activity, I would like to turn the call over to Jack to go through our financial results.
Thank you, Scott. I will discuss the financial results for the third quarter by covering three topics. One, our achievements in managing our debt capital; second, how we are monitoring our credit performance; and third, key trends in measuring our financial results. I would like to cover first our debt transactions.
The highlight of the progress we’ve made in de-leveraging the company, our debt-to-equity ratio improved to 3.3 times at September 30, 2009 as compared to 5.4 times at December 31, 2008. Our disposition of the $3.4 billion residential mortgage backed securities portfolio, resulted in a $3.1 billion reduction in debt obligations. Although we recorded a one-time $52 million loss on sales, we avoided the risk of recurring loan losses which reduced net income by $96.5 million for the first six months of 2009.
At the closing, we received $15.6 million of net cash proceeds, an amount that represented the projected net cash flow for the next 9 to 12 months in the portfolio, and we used these proceeds to further reduce our other indebtedness.
During the quarter, we exchanged cash and secured debt of $53 million to retire $98 million of convertible senior notes and $5 million of other securitized debt, thereby recognizing $48 million of gains and cancellations of debt obligations.
Now a key element under the debt exchange was our ability to extend the maturity date on $43 million of the new secured debt to April 2014, that otherwise could have been payable at April 2012. The new debt will generate about $1.4 million in annualized interest savings.
We expect to extend the scheduled maturity date on all of our bank Lines of Credit beyond 2009. We are moving towards final documentation on these credit facilities and expect to complete that in the near future.
Our total recourse debt obligations are $438 million as of September 30, 2009. The scheduled maturities are approximately $49.5 million over the next 12 months and an additional $2 million during the following 12-month period ending September 30, 2001.
As of 9/30/09 there are no bank or secured debt obligations for maturity scheduled between March 2011 and March of 2014. In April 2012, holders of our convertible senior notes have an option to redeem these obligations of which $280.4 million is currently outstanding.
We are in compliance with all of our loan covenants as of September 30, 2009, and we will continue to focus on rates to further reduce our recourse debt obligations in the future by either repayment, re-financing, repurchases, extensions or exchanges.
Turning now to the credit performance in our reserves. As of September 30th, the $246 million of CRE loans are non-accrual status, consisting of 35 loans. This represents 15.6% of the CRE loan portfolio. We had an $85.6 million allowance for loan loss reserves representing approximately 35% coverage of the non-accrual loan balance.
During 2009, we have seen slight improvements in our charge-offs on a quarter-to-quarter basis, and $53 million in quarter one to $42 million in quarter three. The provision for loan losses decreased from $61.6 million in quarter one to $27.5 million during the second quarter, and now down to $18.6 million this quarter.
Although our total NPLs [ph] increased to $246 million at September 30th, we have analyzed the potential impairment and determined the estimated loss exposures are not as severe. We expect to convert some of these loans into own real estate before year end at valuations based upon these reserve levels, which we believe are adequate under the current conditions.
Turning to our CRE CDOs. We are meeting all of the IC and OC tests at the most recent payment cycle. The most stringent OC test was 119% versus a trigger of 116% in CRE 1 and a 118% versus a trigger of 112% in CRE 2. Therefore, we are in compliance with all of those requirements and all of the cash is flowing down to our equity return.
In October, we had $77.6 million of cash available in our CRE CDOs against future funding commitments of $37.5 million, leaving approximately $40 million of capital available to fund new loans. And in our non-CRE portfolios, there were 44 [ph] other securities on a non-accrual status as of September 30th. These securities are reported on a fair value basis of $17.5 million, therefore no reserves are required on these assets.
As Scott mentioned, as of September 30, 2009, we owned 645 million of direct investments in 35 real estate projects, most of them are multi-family type which comprised 70% of that total. These assets are financed by $605 million of debt instruments that have a weighted average cost of capital of 6.03%.
During 2009, we have converted 385 million of CRE loans through investments in real estate, including the four loans that Scott mentioned this quarter. These investments are reported at fair value at the date of the conversion, net of the applicable reserves. The loss severity upon conversion has been running approximately 20% on the loans that we have converted and we factored this into our overall reserve analysis requirements.
Turning to our financial measures for operating results and other key metrics. Our primary operating performance measures include net income and cash flow from operating activities. The total revenue year-to-date was $155.5 million versus a $189.7 million for the first nine months of 2008, or a decrease of about 13%. However, for the three months ended September 30th, total revenue was $43.6 million, including $21.1 million of net interest margin on our portfolios, rental income was $13.8 million on our owned real estate and management and advisory fee income of $8.7 million.
Now in order to compare the total revenue for quarter three to the $60.8 million that was generated in quarter two, we should adjust for the Q2 item that have been excluded approximately $18 million of NIM related to assets that have been sold. This would result in an increase in our pro forma basis in total revenue of about 2% on a comparable quarter-to-quarter run basis.
Net interest margin of $21.1 million has trended down during 2009 following the disposition of the RMBS in Taberna portfolios, coupled with the effect of non-accrual CRE loans and TruPS securities on a non-accrual basis. However, the mark-to-market adjustments on our securities portfolio which are valued at fair value has decreased -- was a decrease this quarter of $3.8 million, compared to $302 million in the third quarter of 2008. This further demonstrates the reduced volatility in our remaining security investments [ph] following the disposition for the four Taberna CDOs at the end of the second quarter.
Given the significant changes in our business, including the sale of the RMBS portfolio, the reductions in our owned Taberna CDOs and the diversion to CRE loans into owned real estate, we determined that presenting adjusted earnings as a supplemental non-GAAP performance measure is not as meaningful in comparison to GAAP net income loss.
In management’s view, the reduced volatility of non-cash items such as the mark-to-market fair value changes and other record selling differences has diminished adjusted earnings, and so it is longer being presented.
Cash flow from operating activities was $28 million for the third quarter and $74.8 million for the nine months year-to-date. Our gross cash flow received from our core CRE portfolio represented approximately 17% of the total for the quarter.
We have maintained adequate cash availability of $39.9 million at September as compared to $40.9 million at June 30, 2009, a decrease of $1 million. Our book value per share was $8.57 at September 30, 2009.
Lastly, I would like to comment on our REIT taxable income. As disclosed in the press release, we generated $44.8 million of REIT taxable income in the third quarter. The estimated results for the nine months year-to-date effectively [ph] taxable loss of approximately $26.2 million. Our Board will assess our REIT taxable income for the full year is driven whether (inaudible) any dividends on our common shares for 2009.
On October 27, we declared the fourth quarter preferred stock dividend on all classes of preferred stock, which is payable on December 31, 2009, the holders of record assets as of December 1, 2009. And that concludes the financial report; I will turn the call back over to Scott.
Thank you, Jack. Griffin, let’s open the call for questions at this time.
(Operator instructions). And your first question comes from the line of David Fick of Stifel Nicolaus.
Josh Barber – Stifel Nicolaus
Good morning. It’s Josh Barber here with Dave. Jack, I was wondering if you can give us an idea what adjusted earnings would have looked like if you would still be using that metric, so that we could look at things at a more apples-to-apples basis?
Well, as I said Josh, we are presenting adjusted earnings and I think the reconciliations we presented previously, you can probably do the math yourself and take a look at it. But we are not -- we are no longer reporting adjusted earnings.
Josh Barber – Stifel Nicolaus
Okay. Can I turn a little bit to your real estate portfolio, I understand that some of those assets are actually still being held in your CDOs, can you break out how much of these $645 million of your real estate interest are in CDOs and outside of the CDOs, and can you give us how much debt is on each of those respectively, please?
Sure. First of all, the $645 million of assets, which are now real estate hard assets are on our balance sheet -- they are on our consolidated balance sheet. You are right in that some of the financing for those assets within our CDOs and some of this is on our balance sheet as well. As I reported, 605 million of total debt is supplied against those assets.
Josh Barber – Stifel Nicolaus
Okay. And how much of the $645 million are in CDOs as opposed to being on the balance sheet -- outside the CDOs with their own mortgage debt?
It’s roughly at 80/20. I have to get a precise number for you Josh, in terms of the assets for the finance internally versus directly on the balance sheet.
Josh Barber – Stifel Nicolaus
Okay. Right. Thanks.
And we have no further questions. I will now turn the call back over to Scott Schaeffer for closing remarks.
Well, thank you. Looking forward, we will continue to focus on de-leveraging the company, fully utilizing rates vertically integrated commercial real estate platform and managing rates commercial real estate portfolio to maximize shareholder value. We thank you for your continued interest and patience during this transition period, and I look forward to speaking with you next quarter and hopefully reporting continued improvement in our earnings and positive results from the initiatives that we discussed. And of course, hopefully, we here in Philadelphia will be celebrating another fully [ph] growth year event. So, thank you.
Thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect.
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